Why isn't Europe working?

European biotech is a hot topic among investors. They have supported as many start-ups as in the US but have seen far from equivalent returns. If there are as many companies why isn’t the sector as vibrant as in the US?
 
John Hodgson, a partner at Critical I, a biotechnology consultancy, and author of a study for EuropaBio on the sector, spoke to Thomas Lau, the news editor at Science|Business, about what is wrong with the biotech industry in Europe.

After a funding drought there were more IPOs and fund raisings in 2005 in Europe. Is that sustainable in 2006 and beyond?

You can certainly look at the pick-up in the IPO market and be happy about it. It has contributed to a recycling of venture capital and a better feeling amongst public investors. But we yet to see the market for secondary offerings develop in Europe.

My prediction is that Europe will continue to form lots of new companies. After all, it’s an explicit government policy in most European countries because they want to encourage development in their bioscience sector.  But the question is whether that  is a worthwhile and sensible thing to do?”

So if starting new companies isn’t the answer, what should Europe do to compete with the US?

There needs to be more cross-border collaboration. Governments should not adopt a “national biotech sector mindset” but should encourage cross border collaboration and M&A activities. European companies should be looking across European to acquire and bundle IP.

You point out in your study that Europe creates more start-ups than the US. To what extent is this the result of pressure from the Lisbon strategy?

I think the Lisbon strategy can be used as a political statement that justifies backing start-up companies. But if you are serious about trying to reach the Lisbon targets you need to do more just starting new companies.

In fact you should consider whether it makes any sense at all to keep starting new companies and whether you wouldn’t actually do more in terms of Lisbon target if you were to license out your intellectual property to already existing companies who have got  experience that you don’t.

If you took the project to another company you don’t have to employ a CEO, or COO, or create any of the associated infrastructure. The project could be worked on 100 per cent by R&D. In other words, there is an efficiency problem.

So what kind of companies does Europe need?

Europe needs companies that employ people, companies that make money, companies that invest in R&D. Instead we have a higher proportion of young companies, two thirds employ less than 20 people and most have never made any money.

The problem is that the number of companies has become the measure of success. What sounds better, “we have a new company, or we have 10 new companies?” Universities and institutes are rewarded for spinning out companies, they are being encouraged to do it. But the amount of seed money available from universities or governments is not enough to support onward development after the start-up phase.

It might fund the company for a couple of years, then it needs to raise more money. Where the money is going to come from? It’s not going to come from government. Venture capitalists certainly aren’t in a position to put $10 million into every company that needs it to get to the next stage of development.  Yet in country after country it’s the same pattern because starting companies is a political acceptable thing to do.

Counting companies has become the way to show - within the 4 or 5 year term of political office - you are achieving something and moving the economy forward. But are you really moving forward?’