Europe needs to “catch up” and develop policies and funding streams to support small and medium size enterprises (SMEs) working in the biopharmaceutical sector.  

New research published today argues that dedicated strategies are needed to help emerging companies succeed in the EU. A lack of dedicated EU funding and investment means that SMEs – companies often working at the very cutting edge of medical research – are increasingly looking to more supportive environments outside of Europe. 

Analysis from the SME landscape in Europe, by Charles River Associates for EFPIA concurs with President von der Leyen’s commitment in her political guidelines in July to boost the EU life science sector during the next mandate, and is also supported by the Draghi’s report on the future of European competitiveness published early September. 

The challenges for SMEs in Europe 

SMEs face huge challenges in securing financial investment and support. Raising capital through private and public funding is critical, with recent cost estimates for developing a new drug ranging from $314 million (290million Euros) to $2.8 billion (2.6billion Euros) and up to $6billion (5.5billion Euros) for conditions like Alzheimer’s. Previous research shows that between 2018 and 2020 just a quarter of new biotechs originated in Europe, compared to 65% originated in the US. 

The availability of capital in Europe is a major challenge, spanning limited private funding levels such as obtaining venture capital (VCs) in earlier stages of development to accessing public funding through stock market listing in later stages. Despite signs of expansion in VC activity, risk aversity from large institutional investors, such as pension funds, contributes to a lack of cash. Additionally, the Euronext – the European Stock Market infrastructure – does not offer the same benefits and incentives as the Nasdaq in the US – leaving European SMEs with fewer avenues to access funds.  

The report makes three main recommendations which can help retain and grow Europe’s SME footprint: 

• Pension funds reform: Increase private investor liquidity for higher risk investments. To enhance the prominence of institutional investors such as pension funds, pan-EU and country-specific regulatory bodies should revise their frameworks to increase flexibility of pension funds in favour of venture capital (VC) and SME investment. This would boost sector growth, as well as potentially offer higher returns for pension funds as they invest into high-risk high-reward assets.  

As of 2022, the total assets of European pension funds amounted to €3.136 trillion, however, only 0.01% of total assets under management of European pension funds was invested into VC. This percentage is even smaller for direct investment into SMEs. In the US, pension funds occupy over 25% of firm types investing in early-stage funds. 

• A cost of raising capital index: Centralised trading platforms such as the Euronext need to be enhanced and used more widely to attract more domestic and international investors, in order to compete against the US Nasdaq. Understanding the cost of raising capital (both tangible and intangible) in Euronext compared to Nasdaq by developing an index would show EU decision makers that Euronext is not optimal and a barrier to the development of European SMEs. 

Private capital for drug development can be raised in a number of ways: Attracting venture capital or private equity investment, out-licensing drug candidates, bank loans or listing on the stock markets through an Initial Public Offering (IPO). European SMEs face a challenging decision of which stock exchange to float on as the US has historically had a greater level of IPO activity and created more success stories building investor confidence as compared to Europe which has a fragmented market and underperforms in terms of valuations and degree of activity. Between 2015-2020, Euronext hosted just 20 flotations compared to the Nasdaq’s 261 flotations of research stage biotech companies. 

• Establishing a guarantee fund: To ensure that there is a large and sustainable life science investment pool, a €1 billion guarantee fund for limited partners could be set up. It would allow us to soften hurdles rates and minimize losses through risk sharing between partners. A lower hurdle rate would grant a larger sharing pool of returns on investments, and therefore would motivate investors to underwrite fund shares for receiving a larger portion of the interest. 

Previous data for EFPIA shows that Europe has lost a quarter of its share of global investment in the past 20 years. Proposals from the European Commission as part of the revision of the Pharmaceutical Legislation will disproportionally impact Europe’s SMEs; nine out of ten SME research and development projects between now and 2040 could become unviable if they go ahead in their current form. Coupled with funding and investment issues, EFPIA believes that the current trend of smaller companies leaving Europe for more ambitious and supportive ecosystems in the US and Asia – and the exodus of associated skills and jobs with them – can only worsen without action.  

Amer Jaber, Chair of the EFPIA SME Working Group, said: “In the EU we have a situation where researchers can publish a brilliant academic paper but fail to turn the research into entrepreneurial biotech startups because there is not enough support. It’s imperative that we support these innovators and increase access to various funding to encourage pioneering and bold research. The current situation is severely impacting innovation and the competitiveness of the sector in Europe.” 

Nathalie Moll, Director General, EFPIA, said: “SMEs are critical to the future of European life sciences and patients, as they often carry out research and development in areas of unmet medical needs, or tackle major health crises, including pandemics. We need policymakers to get behind an ambitious strategic vision for the competitiveness of the life science sector in Europe, as described in the Draghi report to develop policies that will support and grow innovative biotech SMEs throughout the EU.”