Time to Reconsider

The clock is ticking and it has become evident that EU pharma legislation will not pass before the EU parliament elections in June. That could be considered good and bad news. Uncertainty will continue, which will make it harder for investors to gauge the future impact of the legislation on current and potential portfolio companies. It is also likely to impact raising capital for new VC funds in the EU.

There is also now more time to consider the impact of the proposed legislation and hopefully improve upon it. A recent study conducted by Charles Rivers Associates, published by EuropaBio, and supported by the Life Sciences Acceleration Alliance, “Impact of the General Pharmaceutical Legislation on the EU innovation ecosystem and biotechnology companies,” does just that.

Key findings from the study:

  • Reducing incentives and certainty for early programmes is a barrier to the delivery of innovative medicines through biotechnology.
  • Small innovators are at greatest risk and with them the EU’s engine for novel medicines.
  • Rare disease goals are less likely to be met, especially through advanced therapies, impacting clinical trials and treatment options for patients.
  • EU biotechnology companies are strongly inter-dependent for successful development of medicines. Proposed changes negatively impact partnerships and Europe’s healthcare autonomy.
  • The EU must reprioritise biotechnology innovation and competitiveness and grow its significant life sciences sector.

The report highlights the risk that reduced baseline incentives (less market exclusivity and periods of data protection) will push innovators to seek other markets, technologies, and disease areas. This impacts the flow of innovation through the EU’s own research pipeline and reduces the viability of bringing a biotechnology therapy into Europe from other regions.

This presents the risk that the rare disease pipeline will become substantially weakened, as smaller innovators become most significantly impacted. These companies provide the greatest contribution to early-stage programmes and are drivers of innovation for these disease areas.

Despite the strategic recognition of the importance of biotechnology for the EU’s economy and security, the proposed EU pharma legislation will weaken the region’s competitiveness and attractiveness for investors and for the sector.  Global companies and investors will re-evaluate the EU as a region in which to develop or launch innovative therapies.

 

Europe Succeeds When Innovation Can Grow

Increasing baseline incentives and certainty for innovative biotechnology will secure more funding for more companies in the early-stage life sciences ecosystem. The EU has higher regulatory barriers than other markets, fewer sources of capital for VCs, and less liquid capital markets. As a result, there are fewer opportunities to go public in the EU and if companies do go public, it is at a lower valuation, which returns less capital for investing in future innovations. Young biopharma companies in the EU are facing challenging markets and a weaker investment landscape compared to other global regions.

Removing the seven-year time limit for Orphan Designation, increasing Orphan Market Exclusivity and avoiding definitions that restrict research, would give Europe the advantage needed to enable innovators in rare diseases to develop breakthrough medicines for patients, and focus clinical trials in Europe.

We agree with EuropaBio that the EU pharma legislation must enable risk-taking small biotechnology companies to thrive and attract investment without restriction. The EU needs to empower small and growing biotechnology innovators rather than restrict them. We need increased baselines for incentives, no restrictions on the viability of early programme innovation through definitions of a poorly defined High Unmet Medical Need, and elimination of late programme modulation linked to unachievable conditions.

Europe has historically competed globally with the US and China regarding angel investment, early funding, and early-stage partnerships as a share of their investment ecosystem. However, there is growing concern regarding the availability of funding in the EU for late-stage clinical development where VCs play an important role. VC investments in biopharmaceuticals have shown a recent global decline, with European funding decreasing to a greater extent than funding in the US and China. This is not new, but the concern is that the situation is getting worse.

 

US Optimism Less Evident in Europe

At the JP Morgan conference in San Francisco early this year, the sentiment was that things were getting better – that the tough last two years were behind us. This assessment is based on the US and global markets, but unfortunately not applicable to the investment climate for the life sciences sector in the EU.

When comparing the first quarter of 2023 to the same period in 2021 of global VC deals in life sciences, there is a striking 70 percent decline especially for series B and C funding, where the VC sector is smaller, less mature, and more fragmented. Adjusting to differences in the size of the economy, there is an approximate eightfold difference between the availability of VC funding in Europe and the US. Comparing deal value in 2022, the sum of deals originating from VCs based in the UK and Switzerland are equivalent to ~82 percent of the EU 27 member states total value. While declining, the amount of VC investment drawn by the US is still notably higher, both in absolute terms – with the US figure over three times that of the EU – and as a relative change from pre-pandemic investment. In addition, the EU also lags behind the US with regard to the number of deals completed, with a threefold difference.

The disparities between the EU, and other key regions are partly explained by the concentration and the geography of investment. Unlike the more consolidated VC hubs in the US – particularly in Silicon Valley or the Boston area – funding, exit opportunities, and the options to go public are significantly more fragmented in the EU. Additionally, it is important to separate investment in the EU from that in non-EU European countries, as a substantial proportion of European investment lies outside the EU. The result of this is a ‘Death Valley’ in Europe for emerging and small biotech companies and the risk that they will move out of Europe to ensure they receive sufficient funding. Between 2017 and 2021, the number of new companies established in the US was double that of Europe.

The proposed EU pharma legislation is an opportunity to bring the legal framework up to date, to do better in driving innovation, and provide better access for patients to innovative medicines in the EU.  After 20 years the overhaul is overdue, but it is very important to get it right. As it is, the proposal is burdened with conflicting goals, vague language, hard-to-meet conditions, and near-impossible requirements that will not help anyone – not patients, nor the EU economy, and not the industry. With the delay caused by the upcoming elections there is time to improve the legislation, design it to attract more risk capital, reduce uncertainty and increase incentives, which are vital to driving innovation in life sciences in the EU.