The road to smart, sustainable SMEs

As European SME week gets underway, Tom Saylor, Chair of EuropaBio’s SME Platform argues Europe’s ‘Innovation Engine’ needs sustained fuel injection.

Small and Medium sized Enterprises (SMEs) are the driving force behind many significant breakthroughs in biotechnology. They employ some of the most gifted, visionary pioneers in the field and make a significant contribution to the EU’s competitiveness. They are also one of the key pillars of the knowledge-based economy, upon which future high value growth in Europe depends.

But even before the global financial crisis, access to funding for biotech SMEs was difficult, reflecting the risks and costs involved in development, and the long haul from initial investment through to a commercial product.

While Europe has fostered more biotech companies than the US, far fewer become self-sustaining, or reach the stage where the value of their research is captured in Europe.  Many promising companies fail not because the science is no good, but due to lack of finance.

The shock waves caused by recent economic instability have only served to compound these historical problems.

Indeed, institutional investors are more reluctant that ever to embark on high risk investments. While we see seeds of recovery, the conclusion is clear:  Europe is not sustaining the companies that should be arising from its strong scientific and management base.

Lack of development finance

While commercial banks are usually an important source of loans and credits for smaller firms, commercial lending has never played a significant role in funding biotechnology, and venture capital remains the main source of growth finance for biotechs. US venture capitalists generate significantly more value from their investments than their European counterparts, and this is affecting the ability to raise risk capital in Europe, and the overall funding for early stage companies.

And although European grants and financial institutions, such as the European Investment Bank (EIB), represent a very large pool of finance and this has been used to leverage private risk capital through grants and loans, the effectiveness of existing institutions and programmes remains very limited, certainly for the biotech sector.

Five measures to help

1. EuropaBio, which represents 1,800 SMEs, proposes improving access to the EIB’s Risk Sharing Finance Facility (RSFF) for biotechs. RSFF is intended to improve access to debt financing for private companies or public institutions active in research, technology development and technology demonstrators, and for other investments in innovation.

RSFF loans or guarantees can involve higher risks than typically accepted by the EIB and many other financial institutions. The RSFF is cited in the EU’s European Economic Recovery Plan as one of the instruments to stimulate investment in R&D and innovation.

However, it has proved very difficult for biotechs to benefit from this instrument. One reason is that beneficiaries need to demonstrate they can generate sufficient free cash-flow to cover loan interest payments, capital reimbursements and/or other charges. It is rare for a development-stage biotech to have much in the way of turnover and this is something they are unable to do.

And while biotechs can demonstrate that risks decline as products progress through development, the long development times and nature of how returns are realised disqualify even validated projects from RSFF funding.

2. Support for the venture capital market for biotech. In the short-term, creation of an investment vehicle at the EIB could generate increased risk capital to co-invest with VCs.

3. Member States should make maximum use of temporary state aid measures to support access to finance in the current financial and economic crisis. The capital intensive nature of biotech research and the recent economic volatility has disproportionately affected the sector.

Within these temporary state aid measures, Member States may grant, under certain conditions and until the end of 2010, subsidised loans and loan guarantees at a reduced premium.  In addition, direct aid of up to €500,000 per company for the next two years could be provided to help ease financial strain.  Risk capital aid of up to € 2.5 million per SME per year (instead of the current €1.5 million) could also be an option in cases where at least 30 per cent (instead of the current 50 per cent) of the investment comes from private investors.

4. Establish EU grants for translational research and clinical proof-of-concept studies, to help biotech SMEs through the 10-15 year long drug-development process. Public funding often stops at the pre-competitive level, when in the medical area especially, there is need for translational research, to shorten the time taken to advance fundamental research into practical applications. In addition to reducing risk and lowering the barriers to investment, translational research improves interaction, communication and coherence of objectives between academics and industry.

5. Biotech SMEs should be helped to access funding under the European Commission’s Seventh European Framework Programme for Research (FP7).  In a recent report the Commission acknowledged the EU has fallen short of the 15 per cent target for SME participation. More flexibility and less stringent criteria for applying for FP7 grants, (such as the minimum number of Member States that must be involved, the participation of large companies and SMEs, and so on) would encourage SMEs to participate.

Furthermore, there is a need for more calls to be directed to SMEs, with a better level of funding, so there is no need to get large companies to support a project. This will smooth consortium negotiations, especially in respect to intellectual property rights, and reduce bureaucracy, which is often prohibitively resource-intensive for SMEs.

FP7 could also play a valuable role in temporarily filling the gap between pre-competitive research and commercialisation of the end-product. SMEs should be able to benefit from specific grants that could take the form of a research project designed to improve existing products or processes, or a demonstration project designed to prove the viability of new technologies, in order to prepare for commercialisation.

To capture the value of the investment and support the development of new businesses, FP7 could also be adapted, with a scheme that ensures that the transition of successful projects to the next module is more automatic. In this way FP7 could provide a launch pad for successful businesses.

To maintain and expand the leadership of which European biotech is clearly capable requires urgent action to create a climate that supports innovation in healthcare and biotechnology. EuropaBio calls for a programme that maximises the use of existing institutions and instruments, builds a supportive policy framework, and for coordination of the national initiatives to ensure that Europe remains at the forefront of this important economic sector.

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