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US Life-Sci VCs Make More Bets Overseas, Say EU Bio Clusters, Tech Rival Those in US

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A growing number of US venture capitalists that traditionally bet on life-science startups are investing in companies based overseas, particularly those based in Europe and Asia, and believe that bio clusters and biotechnologies there are quickly becoming the equal of those in the US, according to a survey released last week by Deloitte and the National Venture Capital Association.
 
The survey found the percentage of US-based bio-backing VC shops currently investing outside the country rose between 2006 and 2007, from 46 percent to 57 percent.
 
“What we were trying to show is that basically technology is not 100 percent the province of the United States, that technology expertise is now a global issue, not just a US issue,” Mark Heesen, NVCA’s president, told BRN. “From a competitiveness angle, it is critical for America to wake up and understand that there are other countries that are very, very good at specific technologies.”
 
The report, the 2008 Global Venture Capital Survey, is the first by NVCA and Deloitte to ask VCs to identify specific countries outside the US where they believe the best technology existed.
 
Heesen said the results reflected both the successes of European and Asian countries in building their tech sectors — as well as perceived US shortcomings.
 
“Part of it is [that] this country’s education system, K[indergarten] through 12[th grades], is not up to par in many people’s views,” Heesen said. “Our university system is still the best in the world, by far. So the idea that we continue to educate people [from other countries] and send them back to their home lands to be competition to us, you just kind of have to scratch your head and wonder why.”
 
Heesen said the results of the survey, released June 3, reveal the countries that VCs believe have “the best” biopharma and medical device technology. It also recorded results for four other technology disciplines: telecommunications; semiconductors including electronics; software; and alternative or “clean” energy.
 
According to the survey, the US maintained its standing among VCs surveyed as having the best biopharma and medical device technologies: 85 percent of responding VCs picked the US as their primary choice in which to invest and 9 percent chose it as their secondary choice.
 
Following the US in biopharma, the survey found, were the UK with a 31-percent combined primary and secondary score; Switzerland with 18 percent; Germany with 15 percent; and France with 10 percent.
 
The UK’s showing, Heesen said, reflects the strength of an established biocluster: “Cambridge certainly has been the Boston or San Diego of the UK,” he said. According to the Eastern Region Biotech Initiative, a regional life-science group that includes Cambridge, the university city is home to over 185 biotech companies, 20 percent of the world's Nobel Prize winners in medicine and chemistry, and a quarter of the public biotechs in Europe.
 
Another UK life-science region has been Scotland, where next year the nation’s economic-development agency Scottish Enterprise and Alexandria Real Estate Equities plan to break ground on the first phase of the Edinburgh BioQuarter, a 1.4 million-square-foot, 100-acre life-science campus [BRN, Feb. 19].
 
But a report last year cautioned that Scotland must address its dearth of worker talent and venture capital if it is to fulfill its goal of becoming a biotech powerhouse by 2020 [BRN, June 4, 2007].
 
Last week, the Dublin, Ireland-based contract research organization ICON expanded into Scotland by opening a facility in Edinburgh that created 60 jobs. In return for the jobs, ICON will receive £100,000 ($197,000) from Scottish Enterprise.
 

“It is critical for America to wake up and understand that there are other countries that are very, very good at specific technologies.”

Life-science leaders in Scotland and the rest of the UK say their cluster is likely to grow further if the British House of Commons follows the lead of the House of Lords and passes the The Human Fertilization and Embryology Bill, which would explicitly allow research using “hybrid" human-animal embryos.
 
On May 20, the Commons surmounted key hurdles to that end by rejecting amendments that would have banned the use of hybrid embryos and hybrids consisting of 50 percent animal DNA.
 
By comparison, Germany and Switzerland have grown their biopharma clusters by building upon the scientific and business legacies of home-grown pharmaceutical giants, Heesen said. Over time, several executives from Germany’s Bayer and Merck, or Swiss-based Novartis or Roche, have gone on to start their own companies on the Continent, he said.
 
Germany has also nurtured life-science businesses and research institutions within regional clusters, especially in Bavaria in the south, which includes Munich, and neighboring Baden-Württemberg, which includes Heidelberg. According to a report released May 19 by Germany’s Federal Ministry of Education and Research, the nation’s life-science industry finished last year with a 14-percent revenue gain, growing to more than €2 billion ($3.2 billion), while state spending on R&D grew 8 percent to crack the €1 billion mark for the first time.
 
Also, while Germany surveyed as Europe’s number-one in medical devices, and the UK in biopharma, Heesen said it remains to be seen whether both countries can replicate what to date has been a key US advantage in those and other tech sectors.
 
“There is definitely a reason to look at the UK and Germany and say, ‘There are very proficient individuals here who know the biopharmaceutical arena.’ The question is whether they can take that technology knowledge that they have and actually create an entrepreneurial environment with that technical knowledge,” Heesen said.
 
Countries that scored highest were those best able to combine technological prowess with a favorable environment for entrepreneurs. “Particularly in Europe, there are very difficult labor laws to deal with [and] high tax rates,” Heesen said. The survey “is kind of a wake-up call in that regard: You have to have both the technology and the ability to create companies in your country, or else that technology is going to leave your country.”
 
For instance, the business environment in France reflects several factors that have discouraged life-science investment, including difficult labor laws and high taxes, Heesen said. Last month its pharmaceutical industry group, Les Entreprises du Médicament, or LEEM, warned that the nation could lose up to 32,000 pharma jobs — representing 28 percent of the industry’s current work force — by 2015 if government and industry fail to develop sub-clusters based on life-science specialties and address a host of other challenges [BRN, May 27].
 
The development of those clusters can help France create and lure more businesses and retain existing ones, Heesen said, adding, “It’s just a question of how long it’s going to take.”
 
The only Asian or Middle Eastern countries to appear in the top five turned up in the medical device survey. Germany placed second with a 39-percent primary and secondary score, followed by the UK with 20 percent, Israel with 14 percent, and Japan with 10 percent.
 
European countries dominated the VC survey despite the investment carried out by several Asian countries in developing mega-campuses for life-science employers such as Singapore’s Biopolis and Chinese campuses like Shanghai’s Science City and Zhongguancun Life Science Park [BRN, April 28].
 
“China continues to be a hard country in which to invest,” Heesen said. “You compare that to the United States, which continues to be a relatively easy country to do business in, except for the litigation exposure, and some would say the tax treatment.
 
“When you look at governmental policy, it’s also important to also mention with that cultural and legal frameworks; it’s much easier for US-based venture capitalists to work in the UK or in Canada, simply because the cultures are more similar — the legal systems, we understand better. The tax systems, we understand better,” Heesen said.
 
“We’re closer from a time difference as well, as compared with India or China, which are still struggling to come up with policies that help both their indigenous population as well as the investors from outside their country make money, and hopefully continue to reinvest that money in their country,” Heesen added.
 
Yet Asia remains a strong potential future center for the life sciences, he added, given the aggressiveness by China and South Korea in constructing wet labs.
 
“One big discovery by one of these countries is going to be felt around the world,” Heesen said. “They understand they are lagging in this area, and they’re trying to catch up. The idea that governmental officials understand that this is an important area for investment, and their willingness to act on that realization, is important.”
 
Speaking with BRN earlier this year, David Gollaher, president and CEO of the 250-member California Healthcare Institute, noted one difference between European and Asian life-science giants that may explain the survey finding that European nations are more likely to be top of mind with VCs: Life-science companies based in Asia are less likely to have research and development facilities in the US [BRN, Feb. 4].
 
According to Deloitte and NVCA, 398 VCs took part in the survey, of which 41 percent or 163 came from the US. Twenty percent, or 80 respondents, came from Asia and the Pacific; 19 percent, or 76, from Europe outside the UK; 10 percent, or 40, from North and South America outside the US; 6 percent, or 24, from the UK; and 4 percent, or 16, from Israel.
 
Survey respondents were general partners at VC firms with assets under management ranging from less than $100 million to greater than $1 billion, Deloitte and NVCA said.

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