January 1, 2006 (Vol. 26, No. 1)

Incentives for Young, R&D-Focused Firms May Be Bellwether for Rest of Europe

In a letter dated November 7, 2005, the biotechnology association, France Biotech (Paris) prompted the French Prime Minister and other ministers, senators, and deputies, for enactment of its finance proposal for the listing of young innovative companies, known in France as “statut Jeune Entreprise Innovante Cotee” (JEIC).

It reiterated its request for approval of the JEIC measure, designed to provide fiscal stimulus to R&D-propelled companies seeking late-stage rounds of financing. This measure is of particular importance to burgeoning biotechs, often needing E5070 million to fund clinical trials and/or product development.

The letter was signed by 73 leaders of the French biotech industry, primarily company executives and venture capitalists. France Biotech submitted a related letter regarding JEIC to the French government in September.

While the French Ministry of Economics and Finance, headed by Thierry Breton, estimates that the Alternext market, the segment of the Euronext dedicated to SMEs (small- to medium-sized enterprise), is a sufficient vehicle for young innovative companies, which may not be the case for biotechs. “The Alternext market is not yet capable of generating the funds required for a successful biotech IPO,” said Phillipe Archinard, CEO of Transgene (www.transgene.fr).

If passed into law, this measure would benefit investors of French companies with JEI status. While JEI status is not exclusive to biotech companies, the JEIC measure would apply to approximately 150 JEI biotech firms. To qualify for the proposed JEIC measure, a company must spend at least 10% of its expenditures on R&D, among other requirements . A prototypical JEIC biotech has a Phase III candidate and plans its market launch within four years of floatation.

The November letter also called for the creation and funding of a European Institute of Technology within the vicinity of Paris, E1 billion in funding for the National Agency for Research that was newly created in June 2004, in part to promote the development of biotechnology and bio-nanotechnology, and financial regulations for another newly created entity, the Agency for Industrial Innovation.

In this last measure, France Biotech urged that the agency apply at least 40% of its funds to SME programs or consortiums. These programs were created, in part, to spur development of novel French biotechnologies and promote technology transfer to industry.

Clinical Trials and IPOs

While bioMerieux (www.biomerieux. com) is a mature biotech, it has the distinction of being the only French biotech company to launch an IPO on the Euronext in 2004. The company raised E24 million in its IPO offering. The company has nearly 5,500 employees in over 30 countries.

In November, Exonhit Therapeutics’ (www.exonhit.com) IPO raised E3.8 million by issuing 1.3 million shares on the Alternext. Investor participation was higher than expected. Alternext floats range between E414 million.

BioAlliance (www.bioalliancepharma. com) has three trial candidates. In November, the company took the first step to initiate an IPO on the Euronext by filing a Document de Base with the French Autorite des Marches Financiers.

French companies have turned to the NASDAQ for financing. Flamel Technologies (www.flamel-tecnologies.fr) raised E53 million on the NASDAQ. In October, IDM (www.idm.biotech.com) merged with Epimmune. IDM shareholders emerged with 80% of the new company and gained a listing on the NASDAQ.

In comparison to French IPOs, German biopharma Jerini (www.jerini.com) recently raised E49.6 million on the Frankfurt exchange. Jerini has a promising candidate in Phase III. “One French IPO of this magnitude would certainly be welcome, but what is truly important is when the French market can support six or more IPOs per year,” noted Dr. Pouletty.

The French Biotech Sector

France is home to the third largest biotech sector in Europe. Critical I published a comparative biotechnology report in April. “Historically in the 197080s, some French biotech companies were grown with the notion of feeding them as merger and acquisition targets to big pharma,” according to author, John Hodgson, Ph.D., director and co-founder of Critical I. “Now French biotech start-ups are launched with the intention of reaching maturity.”

The French biotech sector grew even in the wake of the 2001 dot-com debacle. Irrespective of the ripple that hit Europe, 56% of French biotech companies increased their employee headcounts in 20022003, the highest in Europe and in the U.S. Also, French biotechs experienced fewer restructuring activities than the U.K. or Germany.

Roughly one-third of French biotechs are young start-ups founded within the past five years. A typical start-up has a research budget of only E13 million, three-fold less than their American counterparts. Venture capitalists investing in French biotechs invested fewer euros per company to more companies. In 2004, venture capital accounted for E242 million, or 90%, of the E268 million-total equity invested in over 100 French biotech companies. Through mid-November 2005, venture capital accounted for E128 million, or 100% of the total equity invested.

A select group of French start-ups have attracted American-sized rounds of early financing. In November, Fovea Pharmaceuticals (www.sofinnova.com) completed E20.5 million-Series A financing to develop new drugs for retinal diseases. This internationally funded round was led by Sofinnova Partners. “It is important for French biotech companies that are interested in attracting significant international funds to do so early, since it establishes a relationship between investors and management. This is more likely to induce subsequent rounds of international financing,” explained Denis Lucquin, general partner.

The second third of French biotechs are mid-aged firms, 68 years old, with research budgets of E23 million. The funding gap, or the difference between French and American biotechs, broadens primarily due to the relative abundance of American IPOs. Few French biotech companies received funding from institutional investors, debt financing, or the financial markets. In fact, under 10 French biotech companies are publicly-traded compared to nearly 50 in the U.K. and over 300 in the U.S.

France has only two sizable clusters for fostering biotechnology, Paris and Grenoble-Lyon. The JEIC measure was drafted to ameliorate the dearth of French IPOs.

For the remaining third of older biotech companies, nine or more years, the funding gap is more pronounced. In contrast to U.S. firms, some late rounds of financing come from venture capitalists. This financing comes when most American VCs have made their exit. This trend may likely be attributed to an anemic national market in what has been described as a lack of appetite from individual/institutional investors.

A weak demand in the national financial market has a depressing effect on the valuations of French biotech companies, which in turn lowers the value of M&A and other deal making with industry partners. A financial structure, even at a late stage, has a recursive effect upon the entire chain of equity. A 2004 feasibility study on a Pan-European Market for Technology Growth Companies by Robert Abbas at M.I.T. described this phenomenon. French biotechs lacking sufficient access to late-stages of capital will be burdened from the onset, debasing their true potential.

As of November, over 100 French biotech companies collectively had 41 candidates in Phase I trials, 38 in Phase II, and 7 in Phase III. As French companies advance its drug pipelines, this investment will beckon additional funding, including IPOs.

Clinical Trials and IPOs

While bioMerieux (www.biomerieux. com) is a mature biotech, it has the distinction of being the only French biotech company to launch an IPO on the Euronext in 2004. The company raised E24 million in its IPO offering. The company has nearly 5,500 employees in over 30 countries.

In November, Exonhit Therapeutics’ (www.exonhit.com) IPO raised E3.8 million by issuing 1.3 million shares on the Alternext. Investor participation was higher than expected. Alternext floats range between E414 million.

BioAlliance (www.bioalliancepharma. com) has three trial candidates. In November, the company took the first step to initiate an IPO on the Euronext by filing a Document de Base with the French Autorite des Marches Financiers.

French companies have turned to the NASDAQ for financing. Flamel Technologies (www.flamel-tecnologies.fr) raised E53 million on the NASDAQ. In October, IDM (www.idm.biotech.com) merged with Epimmune. IDM shareholders emerged with 80% of the new company and gained a listing on the NASDAQ.

In comparison to French IPOs, German biopharma Jerini (www.jerini.com) recently raised E49.6 million on the Frankfurt exchange. Jerini has a promising candidate in Phase III. “One French IPO of this magnitude would certainly be welcome, but what is truly important is when the French market can support six or more IPOs per year,” noted Dr. Pouletty.

JEI Statute

In order to qualify for JEI Statute, a French company must be:

Eight years old or less

spend at least 15% of their total annual expenditures on R&D

employ fewer than 250 people

earn less than E40 million in annual revenues or maintain a total balance sheet of less than E27 million

In one year after the enactment of the JEI statute, nearly 1,000 French companies from various fields applied, and of these, about 150 biotechs received JEI status. These JEI companies were 100% exempt from contributing to the French social system for R&D employees, including health programs, unemployment insurance, pension funds, and other benefits. Roughly 5,000 R&D employees qualified.

Novexel (www.novexel.com), a spin-out venture from Aventis (www.sanofi-aventis.us), settled in France due, in part, to JEI. The company raised E40 million in a series A round. Furthermore, the company was able to attract foreign investors who were first-time French biotech investors.

JEI status afforded one biotech with 39 R&D employees, a 17% saving or E9,000 per employee, a total savings of E350,000. As a result, the company hired eight FTEs. The company accelerated its R&D programs with its JEI savings.

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