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Biotechs and subsidies - a fraught relationship

Written by ALB on in the category VC Views with the tags , , .


The ambition of any CEO heading a biotech start-up is to develop a new product and to reach patients quickly. However, drug development comes with long development timelines, making Biotech a capital-intensive business. Very early, these biotech entrepreneurs are confronted with the need to talk to and convince Venture Capitalists to finance the development of these new inventions, as no-one else wants to invest in these high-risk endeavours. At this moment, attracting grant money can make a big difference to the Biotech company, but also to the ecosystem at large.

It goes without saying that the Belgian funding environment is exceptionally well organized, by both European and international standards. Our in-depth sector expertise, coupled with a deep understanding of the science supporting new innovations, makes the grant application process in Belgium one of the best in the world.

We see an increasing stream of companies trying to profit from these opportunities by moving part, or all, of their business to Belgium. Many successful companies have profited from these schemes in the past and will continue to do so going forward. Changes in the public granting scheme, announced beginning of 2018, have simply added to the excellence of the system: by simplifying the public granting scheme, it has become very clear that the government has recognised the importance of entrepreneurship. A presentation held on February 8th, 2018 by Luc De Buyser, Agency for Innovation and Entrepreneurship (VLAIO), (https://www.youtube.com/watch?v=byxAibIbg_4) clearly highlighted the intention of the Flemish government to support early-stage companies and projects, enabling these new ventures to positively impact the Flemish economy.

Not all sunshine and roses

Although the Belgian grant system is clearly superb, biotech companies still need to overcome significant barriers to gain access to available funding. Obtaining a grant is most vital at the early stages of a Biotechs existence, when other funding is not (yet) available. This is the moment when such grants could have its biggest impact not only for the Biotech company itself, but also the entire biotech ecosystem in the region.

We should strive to align the evaluation criteria for public funding with the market practise in biotech and the needs of a young biotech company navigating through the most difficult phase of their life. - Christina Takke, V-BioVentures
 

Being in the business of identifying and investing in early-stage biotech companies, we have seen many successful applications for grant funding. Unfortunately, we have also seen many grant applications get declined, for reasons that are not linked to the quality of the projects but are of more administrative nature:  the three main reasons we have chosen to outline below:

1) We see the interesting aspects of your invention or plan, but there is no evidence of sufficient FTE growth.

2) Your company might be bought in a few years and, therefore, your long-term contribution to the ecosystem could be jeopardised.

3) We see that your net assets have dropped to 50% of your share capital and, therefore, we consider your company as a company in distress.

Three suggestions of reasoning we believe can be used to overcome these issues are:

1) Especially in Europe, money to finance such businesses is still very scarce. Entrepreneurs have to keep a fine balance between fixed and variable cost in their business plans. Many companies have to stay lean and mean and outsource many of the tasks in the early years; they are only able to slowly increase the fixed cost by enlarging the R&D team if and when the future looks more predictable (if this can be said at all in Biotech). A business model built on a very capital efficient strategy, comprising a larger number of outsourced activities, indeed results in a lower number of internal FTEs. However, the outsourcing models might in the end increase the number of employees at such service providers and still have a beneficial effect on the larger ecosystem.

2) A potential acquisition of a company or program, by a partner with larger financial resources, is in many cases an essential step to product approval and market launch. It is therefore essential to making our innovation available to the patient. Furthermore, acquisitions free up talent and generate wealth that can be deployed again in the ecosystem to accelerate further economic growth, which is of prime interest of the governmental granting bodies.

3) Many biotech companies, especially successful ones, have strong ties to reputed research institutes; they will access the innovation by acquiring intellectual property through the sale of equity. This, together with the milestone-based financing of young companies, puts pressure on the net asset to share capital ratio, but does not necessarily mean that the company is in distress.

If you want to grow flowers, you have to plants seeds

At V-Bio, we believe that there are many elements that have to come together if we are to maintain and strengthen the biotech ecosystem in Belgium. In one of our earlier publications (LINK: Acquisitions of Biotech companies: a good or a bad thing?), we addressed the question: what are the downstream effects to the ecosystem of a biotech acquisition? In a capital-intensive environment, such as biotech drug development, grant financing alone will probably never be sufficient to make a measurable contribution to the ecosystem. However, in combination with funding from sector savvy investors, grants for young biotech companies can have a significant impact.

Efforts to develop and apply sector specific evaluation criteria for public grant funding, might help to better select eligible biotech companies for approval. Christina Takke, Managing Partner of V-Bio Ventures, is of the opinion that: “We should strive to align the evaluation criteria for public funding with the market practise in biotech and the needs of a young biotech company navigating through the most difficult phase of their life.”

While the immediate impact of a young biotech might not be overwhelming, the long-term positive impacts of such endeavours have been demonstrated in Belgium time and time again. For patients, the healthcare system, and for the creation of wealth and capital flow to the region, we feel that biotech start-ups should be maximally supported.

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