German dramatist Friedrich Hebbel once said, “‘if’ is the most German word of them all.” If the conditions had been right, if the situation had been different, an attempt would have been made. The Germans swear by safety; nothing is done without thorough scrutinisation. This idiosyncracy is what made the German economy blossom – now, however, it has become the reason why innovative people are emigrating, as can be seen within the biotech industry. Germany may be fostering domestic scientific knowledge as well as solid research, but developing solid foundations into successful companies in fact requires risk propensity, capital and entrepreneurial spirit. Founders are more likely to find this triad of prerequisites outside of Germany – especially in the USA. By Isabella Bauer
Only 28% of German biotech entrepreneurs considered the political climate within Germany’s biotech industry to have been positive in 2018, with another 28% seeing an improvement over the year preceding it, according to Bio Deutschland figures. Peter Heinrich, chairman of the sector association’s executive board, sees a connection between popular sentiment and the political development – after turbulent times following the Bundestag elections, the situation is now simmering down. “This goes to show that companies require a stable framework in order to be able to plan properly,” says Heinrich. German politicians are endeavouring to create this framework – through the “Biotechnologie Agenda”, for example. Christian Hirte, parliamentary state secretary at the Federal Ministry for Economic Affairs and Energy and member of the Christian Democratic Union (CDU), says, “Biotechnology is one of the key technologies. Peter Altmaier, Federal Minister for Economic Affairs and Energy, explicitly stated that it is a ‘game changer technology’ and that Germany must absolutely become one of the leading countries in this area. The agenda is being developed at full speed.”
Exceptional financing solely responsible for volume increases
That is good news – Germany is hardly a leader in this industry at the moment, which becomes especially apparent when looking at financing figures. At first glance, the 2018 figures look rather pleasing: German biotech companies managed to collect EUR 369 m in venture capital; in comparison to merely EUR 236 m in 2017. However, this increase largely stemmed from a single company, namely BioNTech, who raised EUR 225 m in January 2018. Biotech companies made EUR 693 m through stock exchanges, with Qiagen‘s EUR 445 m bringing the largest contribution to this figure. Heinrich is aware of these exceptional investments, and postulates: “We direly need a better capital market ecosystem in Germany so as to facilitate access to capital for all companies.”
2018 – Only one IPO in Germany
Especially when compared to their international counterparts, these figures no longer look so great. Biotech companies in the USA attained USD 11.3 bn in venture capital; capital increases via stock exchanges exceeded USD 20 bn for the first time in history, according to EY’s biotech report 2018. Furthermore, Germany saw exactly one IPO; the USA, 29. This means that German companies take their IPOs to the USA. MorphoSys, a rare beacon of entrepreneurial light in the local biotech industry, achieved a dual listing on Nasdaq in April, its IPO being the largest to date of a German biotech company in the USA.
Tax reliefs as possible measures
Venture capital and the capital market – Dr Siegfried Bialojan, Head of EY‘s life science centre, concurs that these are key to Germany‘s biotech industry. “Germany‘s promotion of research, driven by politicians through numerous programmes, is ample and extensive,” he says, adding that this results in significant potential. A lack of financing, according to him, is the reason why attempts at translating this potential into innovation on the market have been unsuccessful. “We are aware of this problem, but we continue to lack viable solutions.” Bialojan suggests the creation of a better framework for investors in a form similar to gearing incentives, where the interest paid on a loan is normally tax-deductible. “No such incentive exists for equity stakes.” Bialojan goes on to explain that there is already a trend towards overly cautious and risk-averse investing, and that it is being reinforced by a lack of stimuli. “Venture capital investors bear the full risk that comes with their investments. Instead of being rewarded for successfully investing, however, they are punished by being forced to pay taxes on their profit.” Suspending the collection of capital gains taxes or flat-rate taxes under certain conditions, he adds, could be a viable way to boost Germany‘s venture capital culture.
“The powers that be” cannot simply order more venture capital
Dr Claus Kremoser, CEO of Phenex Pharmaceuticals and member of Bio Deutschland’s executive board, shares a similar view on the matter: “Other than Creathor and Wellington, I do not see any real investors in Germany. That is just sad,” he says, adding that family offices and other investors need to be prepared to invest larger sums of equity into the biotech industry for more funds to be created. “And this will only happen if investors see lucrative exit opportunities.” According to Kremoser, politicians need to come up with a clear strategy to build a “capital market food chain”, from seed investors to crossover funds at stock exchanges. After all, he adds, the powers that be cannot just order more venture capital. Kremoser believes that concrete action is required: “One interesting potential measure would be to make returns on capital investments in biotech companies tax-free under pre-defined conditions.” Two experts, one opinion. Some politicians do not quite agree, however. Hirte admits that there is room for improvement on the German venture capital market, as compared with its international counterparts: “We need to improve in this department,” he concedes. His proposed solution, however, is quite different: “The newly founded ‘KfW-Beteiligungsgesellschaft’ will provide innovative companies with EUR 2 bn. Furthermore, we are planning to set up more financing companies, e.g. in the form of a tech growth fund.”
The capital market: Another “patient”
Whether or not these ideas bear fruit, another “patient” is in dire need of attention – the capital market. “During the last few years, there was some hope of setting up Euronext as a pan-European stock exchange. At the moment, however, this project is rather regressive,” says Bialojan, further stating that biotech companies are again increasingly eyeing Nasdaq, “because there they can find investors who have an actual understanding of this industry, and the markets they need.” The government cannot afford to allow this jumping-ship phenomenon to go on, he claims: “You cannot just idly watch as companies that were fed German aid money end up creating value elsewhere.” Bialojan reiterates that Germany’s capital markets ecosystem is suffering from a lack of investor incentives; in addition, he has spotted a cultural problem: “Germany‘s equity culture is generally underdeveloped. We need to initiate and establish a debate on this matter among the public.”
“We lack business programmes”
Kremoser has furthermore identified a “mindset problem”, and not just in terms of any sort of generally positive stance towards stock exchange listings: “Innovation does not exclusively stem from springboard innovation agencies which have Nobel Prize laureates carefully sorting out what they consider to be brilliant ideas. That is utter nonsense.” He claims that instead, economic thinking is required: “We need people who say, ‘I like this idea because it is profitable.’” This is more prevalent in the USA, he says, adding that investors and pharmaceutical corporations act more aggressively there. Bialojan furthermore points towards the country’s successful incubators and company builders, stating that in the USA, founders have the environment and infrastructure necessary to focus on their business idea exclusively. “Meanwhile, Germany is focusing on the funding environment, which is typical. We lack business programmes.”
Conclusion
Kremoser and Bialojan agree that it is clear what the German government and parliament need to do: boost venture capital and the capital market by creating tax incentives, thereby rewarding risk propensity; as well as promoting entrepreneurial spirit so as to convert innovation potential into economic strength. Kremoser states: “The system is sufficiently dynamic. We are every bit as intelligent as the Americans, and we have a sufficient amount of private capital – it is just not put to use. If proper measures are taken, we could create thriving environments within five years.” There it is again, the most German word of them all, “if”.
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