BioWorld International Correspondent

LONDON - The precise extent of the funding gap between the U.S. and Europe has been measured for the first time, and the figures show the average U.S. biotech company raises $91.7 million more than its European counterparts over the 16 years it takes to bring a new drug to market.

As a consequence, European R&D expenditure is $149 million to $161.5 million less per company over those 16 years, and European companies employ fewer staff.

The figures imply that attempts by European governments to foster the development of the industry through technology transfer, seed funding, start-up grants and cluster formation will not work unless the more fundamental questions of financing are resolved, according to Critical I, the independent consultancy that researched the figures for the UK government.

"These findings very much hit the nail on the head in terms of the concerns we have in the sector at this time," said Aisling Burnand, CEO of the UK BioIndustry Association.

The authors said that at the end of 2003, the U.S. and Europe had about 2,000 companies each, but there "the similarities end. European companies attract less money, spend less and generate less income. They hire fewer people and employ proportionately fewer in R&D. The health care companies had 60 percent fewer compounds in development than in the U.S."

Curiously, in the early stages of development, European companies are as good at generating revenues as U.S. companies. But that is a further weakness, because it is merely a reflection of the difficulties of raising money from other sources, said Mike Ward, one of the authors. "They are driven by [the need to have] revenues, which distracts management from looking at where the value can be created," he said.

In the UK, government-sponsored seed funding makes it easy to start-up companies, but those companies can't find the money to move forward. Of the 132 companies set up in the UK between 2000 and 2002, only 49 moved beyond seed funding to raise a first round, and only 17 of those raised more than £1 million (US$1.8 million).

"The government has got a different agenda from the venture capitalists," Ward said. "It likes to see jobs created and companies, but it is hooked on a numbers game, rather than what it takes to build a sustainable industry."

In comparison, backers of U.S. companies are much more disciplined. They start fewer companies but fund them more generously throughout their development life cycle. Public finance is available for younger companies (when the market is open), not because the market is prepared to back riskier companies, but because U.S. companies are more developed at an earlier stage.

The data are derived from company accounts and other primary sources, which the authors claim give insights into capital injections that might otherwise go unnoticed, such as unpublicized milestone payments or employees taking up share options.

Commenting at a BIA-sponsored presentation of the figures, David Oxlade, CEO of Xenova Group plc, of Slough, said UK institutions are running away from UK biotech as fast as they can, while U.S. institutions are trying to get into the UK. "Something is going on; U.S. investors regard the UK as ludicrously undervalued," he said.

Denise Pollard-Knight at Nomura Phase4 Ventures, of London, said that, in part, the funding gap could be explained by the different stages of development of U.S. and European companies.

"We have a mandate to invest in private companies," she said. "But as a later-stage investor, we are looking for products in the clinic, and therefore 70 percent of our money is going to the U.S."

John Aston, chief financial officer of Cambridge Antibody Technology Group plc, of Cambridge, said the practice of drip-feeding funds affects all aspects of operations. "Management operates on the basis that funding won't be available," he said. "This produces a different approach to running a company between the U.S. and Europe."

Pollard-Knight agreed.

"What frustrates us is the amount of money [European] companies are raising - that is, just enough to get by," she said. "Now we won't go into a syndicate with a group of venture capitalists unless they are raising more than $40 million." The aim is to ensure a company has enough money to get to critical mass.

No Comments