By Ludger Wess

Special To BioWorld Financial Watch

HAMBURG, Germany — Between its innovative mechanisms to encourage biotechnology startups and its equally unique programs for supporting viable biotechnology clusters around universities and pharmaceutical centers, Germany has successfully launched its own biotechnology industry in just three short years. Germany has successfully initiated a tremendous "founding wave" within the life sciences community here, resulting in a veritable explosion in the establishment of new biotech companies since 1995.

Germany's efforts to become a world player in biotechnology and to close the leadership gap between itself and the U.S. and U.K. are not only attracting entrepreneurs from within, however; increasingly, foreign companies are standing in line to take advantage of Germany's biotech potential — both scientific and financial.

This interest from abroad has become evident over the last eight months, as U.S. biotech companies Ribozyme Pharmaceuticals Inc. and Exelixis Pharmaceuticals Inc. announced their plans to establish start-up companies on German soil.

From all reports within the German scientific and investment community, the rush to Germany has barely begun. According to Berlin's International Investment Council, at least 20 more U.S.-based biotech companies are already in the advanced stages of setting up branches or whole new operations in Germany. What, specifically, has led to this current wave?

The biotech boom got started in 1995 when Germany's federal Ministry for Education and Research (Bundesministerium für Bildung und Forschung; BMBF) announced a contest, named BioRegio, designed to encourage biotechnology research and development at the regional level. Research institutions and companies as well as investors and local governments were invited to propose regional development strategies based on an assessment of the biotechnology potential in their area.

Seventeen regions submitted entries; though only three each received DM50 million from BioRegio to realize their projects, all soon flowered. In every participating region, local networks were joined by major pharmaceutical companies, banking houses and business consulting firms that provided additional sponsorship and expertise. Venture capital companies rushed in and governments of the 16 federal states set up separate funding programs and incentives, so that several seed funds were established and hundreds of projects launched.

Since then, the number of entrepreneurial biotech companies in Germany has more than doubled each year. According to the First German Biotechnology Report, published in May by Stuttgart consulting firm Schitag, Ernst & Young, there were about 170 biotech firms in Germany in 1997. These companies employ 4,000 people, roughly half in research and development, and reach a turnover of DM577 million annually. In contrast, according to the report, there were 1,036 biotech companies in Europe at the end of 1997 (up 45 percent since 1996) and 1,274 firms in the U.S. (down 1 percent from the previous year). The European companies as a whole employed 39,000 individuals and had a turnover of DM5,369 million, while the U.S. companies employed 140,000 people and had a turnover of DM31,489 million.

In addition, more than 260 mid-sized companies in Germany, employing a total of about 7,200 people, provide biotechnology products and services as part of their business activities. Their turnover in the biotechnology sector reaches DM870 million.

Sources Of Capital

The rapid growth of the biotechnology sector in Germany has, of course, been fueled by large capital infusions. In 1996, biotech investors poured DM75 million into German companies; by 1997, that number had increased 120 percent, to DM165 million, and is expected to reach DM424 million in 1998 (an increase of 157 percent). "Biotechnology in Germany is no longer the Sleeping Beauty," states the Ernst & Young report. "A growing number of entrepreneurs have recognized the advantages of using venture capital."

An attractive feature of the German investment landscape is Technologie-Beteiligungs-Gesellschaft (TBG), the biggest German co-investor in participatory financing. TBG usually matches the capital provided by a lead investor, and participates either as a dormant or open-end equity holder. Invested capital bears a fixed interest rate; in addition, a profit-linked interest and an opt-out fee have to be paid, but both are waived if the business goes bankrupt. TBG is a 100 percent subsidiary of the Bonn-based German Equalization Bank, which in turn is an instrument of the federal Ministry for Economy, which dispenses money mostly from the European Recovery Program ("Marshall Plan"). Several federal states have set up programs to double the TBG money so that venture capital can be tripled easily: one part from the venture capital company, one from TBG and the third from state funds.

U.S. Firms Go German

The TBG investment model has been attractive to privately held Exelixis, of Cambridge, Mass., which announced in December 1997 that it was co-founding a new German biotechnology company, Artemis Pharmaceuticals AG, of Cologne. Artemis, a developmental biology company, aims to identify and validate novel drug screening targets in model vertebrate systems, while Exelixis — itself a startup — follows the same goal using complementary model systems, e.g., flies and nematodes.

Artemis was founded to capitalize on the research of German Nobel Laureate Christiane Nüsslein-Volhard, of the Max Planck Institute for Developmental Biology, in Tübingen, and Klaus Rajewsky, of Cologne University, both leading experts in zebrafish and mouse developmental genetics. For George Scangos, CEO and president of Exelixis, the alliance of the two companies not only established "a broad array of model genetic systems unequaled in the industry," but signaled "the increasing maturation of the European biotechnology community."

Apart from the know-how and research skills, for every Deutsche mark invested in Artemis, the German government will invest DM3 in non-equity money under the terms of its regular programs to develop the German biotech industry and the special funding Cologne receives as a BioRegio winning region.

The unique combination of private capital, government funds and research institutions has been decisive, too, for Ribozyme Pharmaceuticals Inc. (RPI), of Boulder, Colo. "By the time we added it all up, it began to get pretty interesting," said Ralph Christoffersen, Ribozyme's CEO. In June, Ribozyme (NASDAQ:RZYM) announced the formation of Atugen Biotechnology GmbH, in Berlin, a US$50 million target validation company. Scientifically, Ribozyme was attracted by the newly founded RNA network of Berlin, which intends to coordinate efforts to develop the vast therapeutic and diagnostic potential of RNA molecules.

In addition, Atugen will acquire Transgenics Berlin-Buch GmbH, a Berlin-based company designing transgenic animals, and has plans to cooperate with Clondiag Chiptechnologies, of Jena, in developing biochips.

Apparently, all of Germany's BioRegios have devised creative means and incentives for attracting foreign investments. For instance, Landesinitiative BioGenTec NRW, of Cologne, a biotechnology development organization, has initiated discussions with the state of North Carolina and several regions in Canada concerning possible collaborations and alliances. And BioInitiative Nord, of Kiel, has already initiated special efforts to attract foreign investors that include setting up road shows, appointing special task forces and approaching companies with a matching profile. "Many foreign companies are looking for a new stimulus [research and development; local partners] and new money," Michaela Henningsen, CEO of BioInitiative Nord, told BioWorld Financial Watch. "About two-thirds of those we are in touch with are from the U.S."

BioRegio Jena, too, is approaching companies directly to invite them to the region; it even presented itself at the BIO '98 exhibition in New York this year. Jena is famous for its long tradition of developing scientific instruments and has successfully expanded these skills into the biotechnology field, states Ralf Kindervater, general manager of BioStart GmbH, a biobusiness development organization in the region. "Now, at least four U.S. companies from the bioinstrument sector are looking at Jena to establish their European centers here. The businesses range from medical techniques to clear-cut biotechnology applications," he said.

Munich has taken a different approach. "Instead of direct acquisition, we have tried to attract foreign venture capital companies," said Ronald Mertz, responsible for biotechnology in the Ministry of Economy of the federal state of Bavaria. "Meanwhile, eight foreign venture capital companies founded subsidiaries in Munich." In fact, 45 percent of the venture capital invested in the German biotech sector is to the benefit of Bavaria.

Market Opportunities, Agreements Sought

Investment experts and company managers unanimously are convinced that this is a growing trend. "Currently, all major U.S. biotech companies are looking for a base in Europe," Isabelle Canu, of Berlin-based International Investment Council (IIC), told BioWorld Financial Watch. IIC was set up recently to assist companies around the world in identifying the ideal business location in the New Länder. "They used to go to the U.K., mostly to Scotland, but now Germany is much more in their focus than ever. I know of at least 20 who are definitely considering going to Germany," Canu said.

Companies are looking for new market opportunities and cooperative agreements, hoping for synergistic effects from partnerships with research institutions, small startups and big pharmaceutical houses alike.

Germany is already one of the world's most important markets for pharmaceuticals. It is not only the biggest exporter of pharmaceuticals and the third-largest national market in the world, but it is also one of the least regulated. Germany offers easy access to the European market through Europe-wide registration of new pharmaceuticals. On average, clinical trials in Germany, especially in the eastern parts, cost less than half the U.S. price, and permits for Phase I and Phase II clinical trials are easier to obtain. In some regions — Berlin, Jena and Halle-Leipzig — close ties already have been established among research institutions, biotechnology companies and clinics, making it easier to conduct and coordinate clinical trial programs.

According to IIC, the German market for biotechnology therapeutic products will rise to more than US$10 billion for vaccines and more than US$8 billion for recombinant drugs and antibodies by 2005, with biotech's portion of the pharmaceutical prescriptions increasing from 17 percent to 24 percent.

All this adds up to an attractive investment environment. "For a biotechnology investment, there is no other country in the world I would prefer to Germany today," states Helmut Schühsler, managing partner of TVM Techno Venture Management GmbH, of Munich.

Volker Schlüter, project leader of biotechnology at the consulting company Arthur D. Little, of Wiesbaden, is convinced that Germany's biotechnology has a rock-solid base: "There is a vast research potential not nearly absorbed yet, and the innovative potential is sound. In the U.S., business expectancies are often based more on fantasy; in Germany, more on security. It is a different culture: German researchers are more conservative and reluctant in regard to the commercial potential of their discoveries."

Others are not that optimistic. Michael Steinmetz, managing director of MPM Asset Management, based in Boston, agrees that the German market is very interesting: "There is a great financial backing by the state, and surely the U.S. market has come to a stand-still at the moment. But some of the startups have a very narrow technological base. I fear the money is spent a bit carelessly at the moment." Tom Geimer, of venture capital company Apax & Partners, of Munich, is cautious, too. "Currently, it is a great atmosphere, new companies shooting up like mushrooms everywhere. But some good children have to come out of the marriage, and I am skeptical about that. Some are overestimating themselves, and investors have to be careful to fund companies, not projects. Three years down the line is the telling date. I am not negative, but Germany has to learn from the U.S. experience. U.S. companies can contribute to success if they bring to Germany a dedication to the market and a sense for reality."

Sustaining The Momentum

While very pleased with the development of the German biotechnology sector, the German federal Research Ministry is carrying on to secure its success. "Just counting companies would be very shortsighted. For the minister, the keyword is 'sustainable development,'" Ekkehard Warmuth, head of the biotechnology department at BMBF, told BioWorld Financial Watch. "Seed financing is easy now, but financing second rounds and further growth is still a problem."

In fact, about 6 percent of the biotech companies founded recently have already vanished. Still, this is far below the average 16 percent of companies going bankrupt in other areas. "This may be due to good counseling the regions have established," Warmuth presumes. "With only eight of 20 projects leading to a startup, I would say that this is not rash or careless founding."

Nonetheless, Warmuth said that many biotech company founders still lack the business and management expertise required to start up a new company and steer it through the first troublesome years. He added that the new biotech firms still haven't formed enough collaborations with big pharmaceutical companies, either.

Therefore, the ministry plans new incentives to fund alliances of big pharmaceutical companies, research institutions and small biotech companies. Management deficiencies shall be addressed through a "business 'angels' network," which is just getting started. Startups can approach this network for advice and mentors.

Apax & Partners' Geimer disagrees with the view that German startups lack experienced management. "There are some companies doing very well, and their managers have developed into very good business people. I see many potential CFOs and CEOs who will grow to excellent managers," Geimer told BioWorld Financial Watch.