In the late 1990s, the UK Department of Trade and Industry began a program to boost highly skilled employment by financing biotechnology incubators. At the launch of the Biotechnology Mentoring and Incubator (BMI) Challenge, the United Kingdom could boast just two incubators, and as a part of the challenge the DTI awarded €4.9 million to 13 companies. The money went to incubators that provided lab space and equipment and also to organizations that provided just mentoring and management advice.
Today the United Kingdom has 22 incubators, including eight of the original BMI candidates. The DTI estimates that these eight have catalyzed 137 firms, or slightly more than 40% of 330 UK biotechnology companies. The businesses hatched in DTI-funded incubators employ 903 people, and they have raised more than €307 million in external funding.
The numbers sound seductive. But today, after a long dry venture capital investment cycle, particularly in Europe, financiers and even government biotechnology promoters approach both the biotechnology marketplace and the incubator concept a little more skeptically. "Making public money available can lull the academics into a false sense of security," says William Powlett Smith, head of Ernst & Young's UK health sciences group.
Indeed, biotech revenues have not kept pace with the rapid growth in UK companies. According to a 2004 Ernst & Young analysis of the biotechnology industry in Europe, UK biotech revenues fell 20.8%, from €2.9 billion to €2.4 billion. "Whilst the UK remains the dominant player in the European scene, this is not much consolation for the UK's position globally, which, like the rest of Europe's, looks vulnerable," Powlett Smith says in a news release.
As early as 2003, a House of Commons Trade and Industry Select Committee report, warned against rapid proliferation of companies. "There is ... a very real danger of making it too easy to start new firms," the report says.1"Germany would appear to be a good example of this. Not only have too many companies been formed for the private capital sector to sustain, but companies have been formed that probably should not have been, with technology [having] little commercial viability, and without the levels of necessary management expertise in place."
In 1996, the German government launched the BioRegio Competition to encourage the growth of regional biotechnology clusters. That program and others have helped Germany open the highest number of biotechnology companies in Europe. Although Germany is spinning off a plethora of small companies, these are not translating into commercial products, according to Ernst & Young. Of 350 biotech companies in Germany, only 24 are public and only two pipeline products are in Phase III clinical trials.
UK companies now report at least 194 drugs in the pipeline, according to a November 2003 report by the Bioscience Innovation and Growth Team (BIGT), a collaboration of the DTI, Department of Health, and Bioindustry Association.2 That report outlines the government's ambitious plan for biotechnology development as a source of future revenue and high-tech employment. But even as it touts the industry, the team cautions against building too much too soon. The United Kingdom needs to be wary of generating too many small companies with no viable long-term strategies, the report concludes. "Most of the responsibility for achieving [this] lies with industry," say the authors. "Companies need to choose the best technologies to focus on, pursue viable business strategies, and manage investors' expectations."
SOLUTIONS FOR SCIENTISTS
Financial experts worry that the ambitious government sponsoring of biotechs can allow weak businesses to thrive, at least initially; however, incubators can be helpful to scientists who believe they have products but don't have the financial acumen to bring them to market. Because incubators offer lab space and often shared equipment, they can reduce the initial startup costs at a stage when it can be difficult to attract outside funding.
Rod Richards, founder of Microscience, says getting room to work is the most important step for a young company. "When it comes down to it, it is the space and the ability to run your business in a discreet area without having somebody munching away at their sandwich next to you over a Bunsen burner," adds Richards. His company is an Imperial College London spinoff that develops vaccines and immunotherapies.
Andrew Muncey, CFO of Lorantis, which incubated at Babraham Bioscience Technologies in Cambridge, says that the main advantage of the incubator was that "rent was competitive and definitely more flexible [than] elsewhere. They were prepared to take a fairly short-term commitment, six months or a year's notice. This was much better for us than having to take on a building with a 10- to 15-year lease."
Deirdre Gillespie, CEO of Oxxon Therapeutics, incubated at Oxfordshire BiotechNet, also cites leasing arrangements as the attraction of incubator space. "We simply didn't have the money, and our future wasn't sure enough to sign a three-year lease on the science park," she says. "And the incubator provides a flexible one-stop shop while you're setting up." Lorantis also profited from the use of large equipment that they could buy on time or lease.
For Lionel Milgrom, founder of PhotoBiotics, working with an incubator helped him make a personal transformation. "I ain't no business man," says Milgrom, whose company is a spinoff from Imperial College London. "I'm a scientist and they're turning me into a business man." He describes the experience as "being held by the hand" and says that it has been essential to setting up his business.
Richards would have welcomed a "neat little business mentoring package" from Imperial had it been available when he started out in 1997. His venture capital funding came from Merlin Biosciences; after he secured the package from them he says he was left to "beg, steal, and borrow facilities from Imperial."
THE ART OF SELECTION
A 2002 report by The Brookings Institution examined biotechnology companies throughout the United States.3 The report concluded that these startups do well where there is a strong financial infrastructure and venture capital is plentiful, which is a still unmet goal in Britain, according to financial experts.
But incubators can do more to vet their companies, Powlett Smith says, and ensure that the business models work and the technologies are at least scientifically sound. He says that the Begbroke Science Park's stringent admissions procedure has helped create successful companies such as Oxford Gene Technology and Prolysis.
David Hardman, CEO of the Babraham incubator, also reckons that being picky has meant that all five of the incubator's graduates are still going strong. The incubator's entry policy requires that ventures "be developing technology deriving from the genomics cascade as it relates to human healthcare and pharmaceutical applications," according to its Web site. However, the incubator now plans to take on some higher risk companies, Hardman says.
Alex Pavlou, biotech analyst at Datamonitor, London, says that business experts at incubators can't always know which companies will succeed. "I don't think we can predict how successful an idea is going to be," he says. "Some very good ideas can end up very badly and vice versa. I think we should support everybody who wants to create a company."
Ray Oakey of the Manchester Business School expresses skepticism. "My basic view is that incubators are not all that important," he says, adding that venture capital companies also have to do a better job of vetting companies. "The important thing is to get the funding to the firms that are most deserving of it. The general evidence is that that's not happening."