French Biotech: In Pursuit of Funding
by Coeli Carr
July 2008
With government funding in limited supply, biotech companies in France have developed strategies to build financial muscle and ensure their economic vision for the future.
Photography by Jerome Gallard/Getty Images
When Philippe Pouletty arrived in the United States in 1986 as a newly minted medical doctor, the French native’s immediate goal was to complete a post-doctoral fellowship in molecular biology from Stanford University.
Fate had much more in store for him.
After completing his research, Pouletty “invented a few things,” as he modestly puts it, and filed a genetics-related patent that’s still a revenue generator at Stanford. In 1989, he founded SangStat, a company with a focus on organ transplant therapeutics, and took it public in 1993.
By the time he returned to Paris in 2000, Pouletty, who had the hands-on experience of growing his own company, realized he had amassed a wealth of knowledge about how the U.S. biotech sector works. He had seen the value of high-quality research conducted at top universities. He had observed first-hand that the entire finance chain—from seed money, to venture capital, to public and secondary offerings—was fueled by cash coming mainly from pension funds. And he was certain that helping young companies get on their feet was an extremely effective strategy to generate overall economic growth.
In 2001, Pouletty’s strong personal commitment led him to the position of chairman at France Biotech, the country’s entrepreneurial organization of biotech companies. The following year, SangStat was sold to Genzyme for US$600 million. Pouletty’s windfall would be his country’s gain.
“I decided,” says Pouletty of his pro bono work, “to spend a third of my time lobbying the government to help make changes in the industry.” His early efforts were fruitful. He militated for improvement in academic research to better attract internationally known scientists to France. He helped create Agence Nationale pour la Recherche — he compares it to the National Science Foundation or National Institute of Health in the United States — which funds research based on proposals from scientists.
Making biotech comprehensible to government ministers may have been Pouletty’s most critical mission, as it was a clarion call for funding. “I explained to them that biotech was capital intensive, that it’s slow in its research and development process and typically won’t have a product on the market for 10 years,” he says. But where would the infusions of cash to keep these companies on track during the long gestational decade come from?
The Financial State of French Biotech
Pouletty puts the number of French biotech companies at about 200. Between 100 and 150 have several employees; about 50 more one-person companies are also in play. All of them are hungry for funding.
In 2007, investments into French biotech companies totaled about €650 million (US$1 billion), a sharp increase over investments made in 2006 says Pouletty. About €150 million came from venture capital invested in private rounds, with €500 million raised in IPOs and secondary offerings. Fewer than 50 companies raised 80 percent of that €650 million, which is normal, he notes. “The bigger, more mature companies will raise more than the smaller ones. If you’re starting out, the government will fund you. But after that, you’re on your own.”
Indeed, the French government does provide financial assistance, including loans and subsidies to new companies. And in 2004, Pouletty and France Biotech presented the president of France with an idea to create the status of Jeune Entreprise Innovante (Young Innovative Company). That status exempts a designated company fewer than eight years old from social costs and taxes, so it can use funding for operational needs, such as research and hiring. And in 2005, the government created more “clusters” throughout the country—69 in all, six of them with global reach—where scientists, academicians, investors and CEOs could gather and discuss new projects. The French government also provides a financial conduit to biotech companies through a program of tax incentives.
Government Approach to Venture Capital
French biotech company founders and chief officers almost all agree that their companies need more money than the government can initially provide. “Government money is enough for start-ups that are looking for one or two million euros but, if you are a mature company, you’re looking to close a round of 15 million euros,” says Stefan Fischer, CEO of Mutabilis, a Paris-based biotech company created in 2001 that develops new antibiotics. “For that kind of money, you need to look for several investors.” And French biotech companies are always looking. “Companies at our stage normally get funded for not more than two years,” he says, noting that venture capitalists are unwilling to fund a company for eight or nine years.
Half of the venture capital raised in France comes from institutional investors. The other half comes from money raised through tax incentives, Pouletty says. In 1997, the government created Fonds Commun de Placement pour l’Innovation (FCPI), or Venture Funds for Innovation, which would be funded by citizens. “About 20 of these funds exist throughout France and, although none of them are solely biotech-focused, about 10 invest in the industry,” Pouletty says. Taxpayers can invest a minimum of €24,000 into an FCPI of their choice, and they get a 25 percent income tax reduction, with a €6,000 maximum reduction. All gains made on these investments are capital gains-free.
Since 1997, “the amounts going into these funds have doubled every year, because everyone knows it’s a very good way to decrease income tax,” Pouletty says. In 2007, the program raised €1 billion. Professional venture capitalists, investors or fund managers can create FCPIs, with appropriate government approval. Pouletty, through his own firm, Truffle Capital, manages venture capital totaling €350 million, with about half that amount resting in FCPIs.
In early 2008, the government took it up a notch. France’s wealth tax requires people with net assets of €700,000 to pay taxes—up to 2 percent annually—on those assets. Through this new program, people can invest in an FCPI of their choice and have their wealth tax reduced by half the amount of their investment, with a reduction cap of €50,000. “This will allow thousands of taxpayers to pay no wealth tax, and also allow them to invest into venture capital with the expectation of tax-free capital gains,” Pouletty says. Although only between 5 and 10 percent of French taxpayers pay wealth tax, the amount of tax generated is large, as much as €3 billion. “So, we expect the new plan to raise €500 million in 2008 and at least €1 billion in 2009,” he says.
But because not all FCPIs are focused on biotech, many biotech companies still need to scramble for the cash infusions that are critical to their survival.
Securing Capital to Advance Science
Dr. André Choulika, whose publicly traded €60-million company, Cellectis, licenses DNA-modification technology and has developed 17 products, says companies have no choice but to seek out funding on their own. On starting his Paris-based company in 2000, he received an award of €450,000 from the government that recognized Cellectis’ business model and advances in technology. “The government never gives you millions when you’re starting out and, if they give you a subsidy, they often ask for matching funds in the form of capital,” he says. Later in 2000, he raised €4 million in private funding on his own.
The problem, Choulika says, is France is not capital intensive. And, because the country doesn’t have a large number of venture capitalists, competing for available funds is tough. “Venture capitalists don’t want duplicate specialties or conflicts of interest in their portfolio, so many worthy companies can’t get money,” Choulika says.
Another wrinkle is the current global economy. “At the moment, it’s difficult to raise money,” Fischer says. “The credit crunch has affected those venture capitalists whose hopes of bringing their projects to the IPO stage were dashed last year.”
Experience Counts
Often funding goes to those who are most experienced at knowing where to look. With a background in finance and an ability to drive deals with big pharma, Fischer says he was brought on as CEO of Mutabilis in late 2007 to secure funding and thereby take the company to the next stage. He’s now trying to get new investors on board and close the next finance round by the end of 2008.
Not every venture capital company has access to large amounts of money, Fischer says, which is why he targets venture capitalists with new funds. These investors typically can afford to provide a longer period of time to let a company grow. He has also contacted venture capital companies throughout Europe and the United States, including the venture funds associated with big U.S. pharma companies. And, he advises, “If you want to raise money nowadays, you also have to look outside France. Persistence helps.”
“In fundraising, you need to be obstinate,” says Dr. Dominique Costantini, a physician with a specialty in immunology who took her 11-year-old company, BioAlliance Pharma, public in 2005. At the beginning stages, Costantini sought funding outside France, knowing that would act as leverage when she approached French funders. Between 1999 and 2005, she raised a total of €27 million for Paris-based BioAlliance, which is now valued at nearly €80 million. Having worked for 16 years in the pharmaceutical industry before founding her company, Costantini knew how to fast-track product development. “But not every company has that know-how,” she says, which is why many biotech companies partner with big pharma, who can, among other things, help assemble large numbers of patients for clinical trials. “You can’t do that in a small company,” she says.
Costantini sees forming alliances with pharmaceutical companies as a practical strategy and viable business model. “Owners of small biotech companies must ask themselves what sort of ability and experience launching a product they have,” she says, adding that funders, eager for a realistic and precise time frames, will also want to know the answers to these questions.
Transgene, a publicly traded, more mature biotech company valued at €250 million that develops immuno-therapeutic products, brought on Philippe Archinard as CEO in 2005, when the company had only six months of cash. With eight years of experience in biotech, including a stint as chief officer, Archinard helped with the refinancing. In past years, he has raised more than €150 million through secondary offerings.
“I talk to these people not as a scientist, but tell them the biotech story in financial terms, in figures, and try to explain the business model,” he says. “If I managed to do a decent job, maybe it was because I was better at explaining,” says Archinard, who says that he once had to relay the facts “from A to Z” to a fund manager.
The Venture Capital Mind-set
It’s not only the lack of sufficient biotech venture capital that concerns the industry, however. For many, it’s the mind-set of the venture capitalists who currently control the purse strings. “Too many VCs from France are managed by purely financial people who have little experience in industry, drug and product development and manufacturing, and managing a company,” Pouletty says. “In France, as in the rest of Europe, more people with industry experience are needed in venture capital.” This type of change doesn’t happen overnight.
“You can’t invent yourself as a venture capitalist,” Choulika says, “you become one. After you gain entrepreneurial experience, create a successful biotech company and achieve financial success, you can use your own money to start a venture capital fund based on your own credibility.”
Archinard takes it a step further. “We’re suffering from a lack of sophisticated analysts,” he says.
Expanding the Profile
For Transgene’s Archinard, the biotech sector in France could use a few good liaisons—stock analysts to tell fund managers and private investors that a certain company is a good investment opportunity. In the United States, he says, fund managers would have no problems seeing the value in such investments. However, he continues, in France, fund managers often don’t have a clue, primarily because there are so few biotech companies that are publicly traded. “In France, we don’t have the Amgens and the Genentechs,” he says. “You need the middleman between the company—telling the story—and the people with the money but who don’t have the medical or scientific capacity to understand the company’s potential.” It’s like a chicken-and-egg scenario, Archinard says. “There are no analysts because there are so few companies, and there are so few companies because there are no analysts. And there’s no return on investment because there are so few companies.”
With more cash invested in bigger companies and with more IPOs, more investment banks will need to hire analysts to cover biotech stocks, Pouletty says.
But Archinard says that what’s also needed is expertise in investor relations and public relations—already fully used in the United States—to be able to reach the right people.
Mutabilis’ Fischer, whose significant experience securing international funding makes it somewhat easier for him to raise his company’s profile, agrees there’s a need.
“To make companies more recognizable, you need to go outside France, and recognition outside France is due partly to public relations,” says Fischer, who advises his colleagues to make room for these services in their budget. Fischer followed his own advice. He recently hired Caroline Carmagnol, CEO of Alize Public Relations, a French-American agency specializing in biotech and health care, and the publicist for France Biotech.
Many French biotech professionals agree that these companies need a bigger dose of exposure to help develop their brands and secure needed funding. “We need well-targeted publicity to attract investors,” Pouletty says.
“Privately owned biotech firms are only just starting to wake up to the need for public relations, especially when they’re looking to raise equity,” says Carmagnol. “These companies’ ability to gain a high profile with the financial and venture capital community—during their seed capital phase and subsequent rounds of financing—will enable them to fund their development for the years ahead.”
Not surprisingly, lack of financial resources makes it impossible for many start-ups to afford these services. Just as problematic, however, is the fact that the public relations industry is poorly understood in France. “The French often associate these services exclusively with press relations—to be used sporadically—rather than with the entire corporate relations toolbox that includes marketing, events planning and promotion and financial communications,” Carmagnol says.
What Lies Ahead
Choulika often likes to quote Emil Roux, Louis Pasteur’s successor at Institut Pasteur. “Emil Roux said ‘a good researcher was a researcher with an empty belly,’” Choulika says. It’s not difficult to see the analogy. These days French biotech is also hungry—extremely hungry—for cash. Some in the sector see a possible thinning out in the near future.
“With many venture companies becoming more restrictive with money, the industry may see more bankruptcies and mergers,” says Fischer, who also notes the global financial crisis as a strong factor in funding problems. “Companies need to have more critical mass and better portfolios—not just a single drug—to attract venture capital.”
Lucas d’Orgeval, a partner at law firm Reed Smith, in Paris, says that venture capital in France is completing funding rounds in start-ups, which are higher than ever before, and that the finance rounds in biotech have been larger than in any other start-up sector. However, because of the crisis in financial markets, he believes venture-capital funding will decrease in 2008 or, more likely, in 2009.
For others in the industry, everything’s on course. “French biotech is still in its teenagehood,” Choulika says. “But it needs to go into adulthood, like in the United States. It’ll probably take time, because of the current lack of capital intensity. But it’s a very interesting turf to look at.”
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