The Road to Sustainability in the UK and German Biotechnology Industries

Casper, S. and Kettler, H.

August 2000

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The UK and Germany are the European leaders in biotechnology. They have many more companies and employees in biotechnology, and much greater sums invested in biotechnology research and development (R&D) than anywhere else in Europe. The two countries’ biotechnology sectors display important differences, however. Also, both remain well behind the US, the global leader in terms of number, size, maturity and profitability of biotechnology companies.

This report examines the nature and origin of the differences between the biotechnology industries in the UK and Germany. We find that the differences in growth trajectories, choice of business models and sub-sector areas of specialization between the UK and Germany are linked to the different national institutions that exist. The relevant national institutions are those that support competency building in the areas of technology transfer (i.e. commercialisation), finance and staffing.

While countries can learn from each other’s experiences, where industries are at different growth stages and are surrounded by dissimilar institutional structures, as with biotechnology in the UK and Germany, different national policies will be appropriate in each case.

The biotechnology start-up dynamic in Germany took off almost ten years later than in the UK. At the end of 1998, half of German firms were no more than five years old and 45 percent had ten or fewer employees. In addition to being smaller and younger, German companies have focused on different product sub-sectors than UK companies: over 60 percent of German biotechnology companies operate in platform technology, service and diagnostic areas and only 16 percent are in therapeutics. As of 1999, none of the five public German biotechnology companies had therapeutic products in clinical trials.

The UK, by contrast, has a more mature industry, with a broader range of company sizes, ages and business model categories than in Germany. In 1998, more than 80 percent of UK biopharmaceutical firms had existed for six years or more, and over 40 percent had more than 100 employees. A third of UK biopharmaceutical companies seek to develop therapeutics. As of the end of 1999, the 43 public UK biotechnology companies, as a group, had an estimated 75 medicines in human clinical trials. Only one UK biotechnology company has successfully launched a new medicine onto the market, however, and none of the top companies, ranked by market capitalisation, are yet earning profits.

The risks and costs of bringing new products to market are large. On average it takes 11 years and hundreds of millions of Euros to bring a targeted compound through clinical trials to market. Eighty-two percent of projects that enter clinical trials are terminated before completion. To operate in this uncertain environment, companies look to collaborate with other actors in the R&D network: pharmaceutical companies, other biotechnology companies, universities, and contract research organisations. To innovate and grow, companies must develop competencies to commercialise new technologies, to access external sources of finance, and to recruit and retain capable and experienced research scientists and managers.

The date of entry into an industry affects a company’s choice of competitive strategy and market segment. Thus changes over time in technology, and in the expectations and priorities of finance providers, might be expected to have generated different profiles and trajectories for the biotechnology industries in Germany – developed in the mid 1990s – and the UK – established a decade earlier. However, we argue that the stronger source of differences between the UK and German industries is the difference between the two countries’ respective national institutions that support technology transfer, finance and labour markets for scientists and managers.

Germany’s financial institutions and its laws governing genetic engineering, intellectual property, and employment created longstanding institutional obstacles to the development of high-technology industries and markets for venture capital and entrepreneurial scientists. In the second half of the 1990s, however, the Federal German government took steps to remove some of the obstacles, thereby spurring the development of the biotechnology industry. Policies have been concentrated on providing start-up capital and on orchestrating linkages between university research and technology transfer centres, venture capitalists, and new start-ups. Regional support infrastructures have also been developed such as incubator laboratories, training and recruitment of local experts in patent law, and provision of business development planning and other services. Public money and lower-risk bank finance have backed many of the start-up projects. To secure future funds under such conditions, companies have tended to pursue platform technology strategies that are perhaps less risky and certainly take less time to develop and market than new therapeutics.

From the standpoint of labour, norms which deter quick hires and fires, and poor incentives for risk-taking career moves, make it difficult for German firms to change research trajectories quickly, for example, by closing down some facilities altogether. This, combined with the generally tight German labour markets for experienced managers and technicians in biotechnology, has also contributed to firms choosing the platform technology area. In addition to the lower financial risks involved, if core technologies in this area are more stable, long-term human resource commitments should be easier to sustain.

Using the US as a basis for comparison, the UK has developed broadly similar institutions to support high-risk, therapeutics-dominated corporate strategies. On that basis it has developed Europe’s first and largest biotechnology industry. However, over the past couple of years, the industry has stalled and a critical mass of successful UK biotechnology companies has not yet developed. Clinical trials for some leading products have produced disappointing results and key companies have had problems recruiting and keeping experienced managers. Capital markets have responded positively to recent mergers and news about product developments but new companies continue to report difficulties securing sufficient venture capital to bridge the gap between the early start-up stage and an initial public offering of shares (IPO).

Our research points to a number of weaknesses in the UK incentive network. Key shortages of both finance and expertise appear to exist within university technology transfer offices. While a vibrant venture capital community with access to mature capital markets exists, in recent years the bulk of venture capital has been channelled into less risky investments promising quicker returns, such as management buy-ins/buy-outs rather than early stage investments. Finally, although UK labour markets are largely deregulated and firms can deploy the high-powered incentive structures needed to compete in innovation, there nevertheless appear to be shortages of talented scientists and managers willing to work within promising UK biotechnology firms. As with venture capital, risk aversion could be a factor; top UK researchers relocating to the US could be another.

In the medium-term, German and UK policy makers face different issues. German policy needs to become more diffuse to respond to the increasingly diversified needs of growing companies in a range of product segments. Until now, the German government has focused on the start-up stage and has made sector-specific exemptions to employment and tax laws so as to allow companies to become established. In the future, wider institutional and regulatory reforms may be required for the industry to flourish. In the UK, supply-related factors need to be addressed, especially in making available finance for the stages between start-up and IPO, improving the supply of skilled managers, and increasing resources for the technology transfer offices. In our view, current UK focus on ‘coordination problems’ addressed by cluster policies, must be complemented by attention to these technology transfer, finance and labour supply issues.