Rainer Westermann, chairman of the Life Sciences Acceleration Alliance e.V. (LSAA), which lobbies on behalf of European venture capitalists in the life sciences space, critiques the draft EU Pharma Regulation from a VC perspective, arguing that the continent’s status as a medical innovation hub is at risk if the EU Commission continues to fail to recognize the importance of incentives to secure capital in the early stages of drug research and development.
Many have commented on the proposed EU pharma legislation. In fact, there is hardly anyone who has not said something, and more often than not, these comments are critical. Of course, policy makers focus on visionary goals that are important to the EU, which include ensuring all patients across the EU have timely and equitable access to safe, effective, and affordable medicines, as well as enhancing the security of supply and ensuring medicines are available to patients, regardless of where they live in the EU. Further goals focus on making medicines more environmentally sustainable, addressing antimicrobial resistance (AMR), and addressing the presence of pharmaceuticals in the environment through a One Health approach. It’s hard to argue with these.
However, there is also this goal: Continue to offer an attractive and innovation-friendly environment for research, development, and production of medicines in Europe. Pardon me? That one must have gotten lost in the drafting of the legislation. There is not much in the proposed legislation that supports this goal. In addition, there is an unspoken goal to reduce healthcare costs across Europe and reduce the associated financial burdens on governments. And this goal unjustly takes priority, impeding the other goals.
The EU Commission seems to believe its proposed legislation will encourage and drive investment. On the contrary, it is reducing existing incentives for the development of new drugs. The proposal completely neglects that factors other than this legislation influence the attractiveness of the EU as an investment location for life sciences. There are many other factors that hinder innovation, slow down investment and thus prevent the re-emergence of an entire economic sector.
The EU Commission seems to believe its proposed legislation will encourage and drive investment. On the contrary, it is reducing existing incentives for the development of new drugs
What is forgotten is that there are already too few funding sources for venture capital in the EU. There is also a lack of liquidity in European capital markets, and there are too many regulatory burdens that deter investors and cause startups to leave. The conditions and lack of clarity in the proposed legislation to earn back incentives increase uncertainty for investors. Lowering the period of market exclusivity for new drugs and introducing conditional incentives decreases attractiveness for investors. Especially when incentives are subject to conditions that are not yet well defined – for example for orphan drugs, “unmet medical needs” and “high unmet medical needs”. Additional costly regulatory burdens, such as conducting comparative clinical trials or filing for additional indications, make it even less attractive to invest in innovative therapies. Capital is very sensitive to changes in the risk profile for investments and, in case of doubt, flows into areas that are more attractive for investors.
At the Life Sciences Acceleration Alliance, we consider the current draft of the new EU legislation a missed opportunity. Let us be clear: launching a new pharmaceutical legislation in the EU after 20 years is overdue and is a very important project. Sending it on its way with conflicting goals, vague language, hard to meet conditions, and near-impossible requirements (simultaneous launch in 27 member states) will not help anyone – not patients, nor the EU economy, nor the industry – and will not attract more risk capital, which is vital to drive innovation in life sciences.
In the current draft legislation, the Commission fails to recognize the importance of incentives to secure capital in the early stages of drug research and development. Whether it’s cancer therapies, new antibiotics to combat rising resistances, or treatments for rare diseases, the need for funding is immense. Covid 19 gave just a glimpse of how important venture capital is for life sciences research. BioNTech, through venture capital based on some of the largest VC rounds in European biotech history, was very quickly able to develop the first fully approved COVID-19 vaccine.
Without venture capital, Europe will be left behind
The proposed legislation provides for two additional years of market exclusivity for new drugs launched simultaneously in all 27 member states. It is meant to ensure fair and equal accessibility to innovative treatments for all patients across the EU. In fact, no one getting new medicine is also a fair and equal outcome, but this cannot be the objective. This condition also prevents young, smaller companies from successively going into business across multiple markets. It is no longer possible to start with a home market or two and grow from there. Licensing to several other companies is also no longer possible under the current draft law. In practice, this leaves licensing to a few large market players only. This in turn depresses the prices of these licenses for innovative therapies and hinders the development opportunities of young companies. And then, where will the BioNTechs of the future come from? Moreover, the simultaneous launch in 27 countries is not only cost-intensive, but also associated with additional risks in implementation. Health is still the responsibility of each member state.
Made with Visme Infographic Maker
European competitiveness is weakened
The new regulation at EU level, as found in the current draft, endangers overall European competitiveness. The venture capital industry in the EU is currently already much smaller compared to the USA, and it is also concentrated in just a few EU member states. Reducing market exclusivity to six years and generally returning four years (six years in exceptional cases) under certain conditions is counterproductive in this regard. Vaguely defined unmet medical needs, the requirement to launch a new therapy in all 27 member states at the same time and to conduct additional comparative clinical trials or to file additional indications for a drug (See Article 81 of the proposed directive) are poison for venture capitalists. Accordingly, the EU’s goal should be to focus all its efforts on keeping up with other leading economies and to extend its commitment equally to all its member states. It would make more sense to improve conditions for venture capital to support research and development of young life science companies to develop, and ultimately see them grow successfully in the EU.
A recent LSAA study shows that while venture capital investment is an essential part of the life science innovation ecosystem, the capital landscape in Europe is comparatively weak. Venture capitalists in Europe raise three to four times less capital than venture capitalists in the United States. U.S. biotechnology companies invested eleven times more in R&D than EU companies in 2020. Additionally, China also has grown into a serious competitor for investment. Average funding rounds in China are currently two to three times higher per round than in Europe. This could lead to a further exodus of capital from Europe to regions that offer better access. Unfortunately, there is no provision for strengthening incentives in the proposed legislation. It also lacks a real-life assessment of the economic consequences – especially for early-stage life sciences companies, which will be particularly hard hit by the shortage of venture capital.
Reduce uncertainty – strengthen incentives
Those who want to attract venture capital and foster a mutually beneficial ecosystem must offer more incentives – more, not less. If you want to see outstanding companies in the EU, creating jobs and paying taxes here, you need to remove hurdles and reduce uncertainty for investors. The EU must guarantee existing protection periods and introduce new incentives. The same applies with regard to therapies for rare diseases, whose market protection is to drop from ten to nine years (See Article 71 of the proposed regulation).
