Access to Finance

A CONSTRAINED CAPITAL ENVIRONMENT

The financial crisis is affecting high-tech small and medium enterprises (SMEs), startups in particular, as they are confronted with three types of risk: technological risk, resulting from the explorative nature of R&D and production of high-tech goods; market risk, as a result of the uncertainty in the high-tech product market; and financial risk, as high-tech innovation usually requires huge investment. However, most high-tech startups lack long-term investment capability. The risks for biotech SMEs are concentrated at the sector and operational levels. Even before the financial crisis, funding for biotech SMEs was different from other industries, and the risks they face reflect unique challenges and circumstances. In this high-risk environment, investors have historically had to develop different metrics in valuing biotech companies. A specific characteristic of the biotech industry is the long and costly development process. While larger biotech firms already have products on the market, young and innovative biotech SMEs need significant funding to develop a product before generating significant potential for commercialisation, and this funding – through risk capital – has proved insufficient, especially in times of economic and financial crisis.

European biotech companies are facing a critical financial shortfall that could have profound consequences for the future of Europe’s knowledge-based economy in terms of both the drug development pipeline and job creation. Almost three-quarters of the UK’s 295 drug development SMEs, for example, are experiencing difficulties raising funds due to a closed IPO window, a huge reduction of available venture capital, and a significant increase in credit spreads due to the worldwide economic downturn. For this reason, a paper has been tabled, proposing five measures to overcome the financing problems that European biotech SMEs are facing as a result of the financial crisis, and to improve the situation of innovative drug developers (1).