Biotech investments in Germany 'could prove to be a treasure trove'

Germany is the world’s leading medical biotech nation behind the US measured by scientific research, but the commercialisation of research could be improved.

Germany developed biotech clusters which have grown into leading research and development (R&D) hubs. Each region specialises in certain fields and there is healthy collaboration between companies, universities and R&D institutes.

According to economic development agency Germany Trade & Invest, Germany’s 660 biotech companies generated a record revenue of €4.9 billion in 2019 and spent almost €1.8bn on R&D. 

The opportunities extend beyond coronavirus vaccines. Scientific and technological breakthroughs are on the horizon in areas such as targeted protein degradation, cell antigene therapies to customise drugs and monoclonal antibodies being modified in new ways.

The tense relationship between the USA and China puts more focus on the European market for Chinese investors. China is stepping up its efforts to improve its own technologies and research. Chinese investors and companies are likely to increasingly invest in western companies in order to have access to their technology and know how and to be able to produce similar products in China. It is also likely that Chinese companies will conclude more licensing agreements to produce EU products in China, instead of importing them.

But Europe and Germany have not translated scientific breakthroughs into business success. The US originates about three times as many patents for new medicines as Europe does and China about nine times as many.

To tackle this problem the EU has developed a pharma strategy designed to build on the collaborations seen during the coronavirus crisis. The new strategy seeks to ensure the quality and safety of medicines, foster patient access to innovative and affordable medicines, and support the competitiveness and innovative capacity of the EU’s pharmaceutical industry.

The European Investment Fund (EIF) already invests in biotech. In Germany the federal government has set up a €10bn future fund to support venture capital investments. The measures are expected to attract another €20bn from the private sector. The public funds are to flow primarily into the existing funding pots of the EIF and Kreditanstalt für Wiederaufbau (KfW), which in turn provide the capital as venture capital.

€1bn of funding is to be provided for large financing rounds for start-ups at a later stage via the KfW Capital fund, which may have an impact on biotech start-ups, as they often face challenges in attracting late-stage financing. In addition, a Deeptech Future Fund is to be set up with the specific aim of funding breakthrough technologies, such as artificial intelligence and biotech.

Lack of venture capital for German biotech

Biotech start-up activity in Germany has slowed in recent years. More than a third of European biotech start-ups are in the UK. German early-stage biotech companies find it harder to raise capital than those in the UK and in the US – proportionately fewer investments are made into young German biotech companies, and those investments which are made are significantly smaller.

Both in Europe and Germany the amount of money available from venture capital increases annually and biotech university spin-offs, for example, receive relatively good seed capital. But there is a lack of capital for the long run, for laboratories and clinical trials.

Especially compared to the US the late stage financing gap in Germany is large and growing. In particular in late stage financing rounds or on public markets US biotech companies raise much larger amounts. With a view to public markets, Nasdaq offers attention and access to large institutional investors with liquidity that is not available elsewhere. In the US large institutional investors such as funds, pension funds and endowment funds invest in biotech.

Unlike in Germany, the pension system in the US is not organised as a pay-as-you-go system. German insurance companies, which are looking for investment opportunities in view of low interest rates and rather expensive real estate and shares in the capital market, are subject to very strict equity requirements when it comes to risky investments.

Advantages of investments in German biotech companies

The recent success of German biotech companies may change the appetite for investing and shift the focus from the risks of a biotech investment towards the opportunities. After all, only few countries have a research landscape as broad as Germany's, a result of state funding for basic scientific research on a large scale.

Germany's biotech clusters create a variety of opportunities to transfer innovation into products, which should be attractive for investors, particularly since the EU is harmonised from a regulatory point of view and is one of the most important markets in the world. To succeed, biotech companies need to manage the transition from basic research to medicine development and turn it into a business model. The often-crucial transition from the laboratory to the clinic can be supported with more capital from investors.

Big pharma companies should also consider opportunities for strategic investment or takeovers of biotech companies, allowing them to take advantage of developments at an early stage.

German high quality science can be purchased with considerable discounts compared to the US, pre-money valuations in Europe are often about 20%-30% lower than they are in the US. Structural costs are lower, for example salaries are lower for high qualified professionals. Looking at the US capital market at a later stage remains an option.