3 questions to smart minds

What is lacking in the financing of biotechs in Germany?

For this 3 questions to Dr. Christina Eschenfelder

RITTERSHAUS Attor­neys at Law in Mannheim
16. Septem­ber 2020

Tübin­­gen-based biotech company Cure­Vac has raised a total amount of appro­xi­m­ately $640 million (€560 million) in a private finan­cing round in 2020. Parti­ci­pants include the German govern­ment through the Kredit­an­stalt für Wieder­auf­bau (KfW), the British group Glax­oS­mit­h­Kline (GSK) and the Qatar sove­reign wealth fund (QIA). A finan­cing round of this size is a major excep­tion in the history of German biotech compa­nies. When the decis­ion to go public is pending, these compa­nies almost exclu­si­vely decide to list in the USA. Why are biotech inves­tors so scarce in Germany and the regu­la­tory envi­ron­ment so unat­trac­tive for biotech companies? 

For this 3 ques­ti­ons to Dr. Chris­tina Eschen­fel­der, Part­ner at RITTERSHAUS Attor­neys at Law in Mannheim

1. How do biotech compa­nies obtain finan­cing in the current environment?

Biotech is a risky and capi­tal-inten­sive segment. In view of the considera­ble “burn rates” asso­cia­ted with the exten­sive rese­arch and deve­lo­p­ment projects in the biotech sector, the compa­nies are depen­dent on a steady inflow of capi­tal. This applies in parti­cu­lar to those compa­nies that do not yet have their own products on the market. The imple­men­ta­tion of recur­ring rounds of finan­cing, initi­ally private, is ther­e­fore manda­tory. In view of the exis­ting uncer­tain­ties as to whether, for exam­ple. drug candi­da­tes prove suita­ble at all in the course of their deve­lo­p­ment and test cycle, the money inves­ted is ulti­m­ately risk capi­tal; this may be the case even if a company has alre­ady been opera­ting for some time, has an estab­lished name and seve­ral hundred employees. In Germany, the group of well-known biotech inves­tors is ther­e­fore limi­ted to insti­tu­ti­ons or wealthy fami­lies who have a special perso­nal entre­pre­neu­rial inte­rest in the success of biotech­no­logy, inclu­ding phil­an­thro­pic inte­rests, such as Diet­mar Hopp. In our expe­ri­ence, invest­ments are made much more frequently by stra­te­gic inves­tors and finan­cial inves­tors from over­seas, espe­ci­ally from the North Ameri­can region. The number of inves­tors from the Middle East and China is also increasing.

2. With fewer biotech inves­tors in this coun­try, what are the chal­lenges for biotech compa­nies? Why do we only see IPOs in the USA?

In Germany, indus­try-rela­ted inves­tors and inves­tors willing to bear the invest­ment risk typi­cally asso­cia­ted with biotech­no­logy are signi­fi­cantly under­re­pre­sen­ted. As a result, the commit­ment of inves­tors in the field of future tech­no­lo­gies, espe­ci­ally in biotech, is unfort­u­na­tely negli­gi­ble compared to econo­mic perfor­mance. In the U.S., where the willing­ness to invest in risky indus­tries is certainly more prono­un­ced anyway, one sees, for exam­ple, signi­fi­cant invest­ments in biotech­no­logy compa­nies by pension funds or so-called cross-over inves­tors with indus­try-speci­fic back­grounds. This does not exist in Germany. — Unfort­u­na­tely, these struc­tu­ral loca­tion disad­van­ta­ges cannot be chan­ged noti­ce­ably in the short term. For biotech compa­nies in this coun­try, raising capi­tal is ther­e­fore likely to remain a parti­cu­lar chall­enge. Since many biotech compa­nies are inter­na­tio­nally orien­ted at an early stage, this loca­tion disad­van­tage can be neutra­li­zed to a certain extent if connec­tions to the inter­na­tio­nal inves­tor commu­nity are estab­lished from the beginning.

One possi­ble access to the capi­tal market is, of course, the IPO of a company. Howe­ver, we have not seen any biotech compa­nies dare to go public in Germany in recent years. This may be due to the fact that many German banks lack the accom­pany­ing indus­try exper­tise: In order to evaluate a biotech company with all its upsi­des and down­si­des, an analy­sis depart­ment with the corre­spon­ding indus­try know­ledge is indis­pensable. And analyst coverage after an IPO is a very crucial aspect for compa­nies. German banks in parti­cu­lar have not even included biotech stocks in their consul­ting and analy­sis port­fo­lios or have redu­ced exis­ting capa­ci­ties. This also has a direct impact on the capi­tal market envi­ron­ment: The IPO of a biotech company in Germany is alre­ady made more diffi­cult by the fact that compe­tent support by dome­stic syndi­cate banks can hardly take place. For this reason, inter­na­tio­nally renow­ned loca­ti­ons of tech­no­logy exch­an­ges such as New York or Hong Kong are being targe­ted for IPOs. At these stock exch­an­ges, the banks are posi­tio­ned accor­din­gly and can promote the successful IPO of a biotech company not least via a suffi­ci­ent number of inter­na­tio­nal inves­tors through their networks. Irre­spec­tive of this, German stock corpo­ra­tion law is cumber­some by inter­na­tio­nal compa­ri­son for listed compa­nies and does not offer flexi­bi­lity compa­ra­ble to other foreign corpo­rate forms, for exam­ple with regard to short-term finan­cing requi­re­ments, the utiliza­tion of autho­ri­zed capi­tal or the exclu­sion of subscrip­tion rights. A Dutch N.V. is ther­e­fore frequently used as the stock exch­ange vehicle, acting as the parent company of the German AG.

3. How could circum­s­tances in Germany be improved?

It would certainly help if German stock corpo­ra­tion law gran­ted compa­nies grea­ter flexi­bi­lity with regard to capi­tal-raising measu­res. This applies in parti­cu­lar to the ability to respond to finan­cing oppor­tu­ni­ties and needs at short notice. So far, raising capi­tal, even when using exis­ting autho­ri­zed capi­tal, has been much more protra­c­ted than is the case, for exam­ple, with the Dutch N.V., the equi­va­lent of the German AG. Unlike the German AG, the Dutch N.V. is reco­gni­zed by inter­na­tio­nal inves­tors as a suita­ble foreign stock exch­ange vehicle. If there were to be noti­ceable regu­la­tory relief, this could possi­bly also contri­bute to a rethink on the part of inves­tors and make biotech­no­logy invest­ments more attrac­tive in Germany as well.

Dr. Chris­tina Eschen­fel­der studied in Würz­burg, Geneva and Heidel­berg and has been a part­ner at Ritters­haus Rechts­an­wälte Part­ner­schafts­ge­sell­schaft mbB since 2012. She advi­ses listed and unlis­ted compa­nies as well as their super­vi­sory and manage­ment bodies prima­rily on stock corpo­ra­tion and corpo­rate law as well as on corpo­rate gover­nance issues. Chris­tina Eschen­fel­der assists inves­tors and compa­nies in finan­cing proces­ses and advi­ses natio­nally and inter­na­tio­nally opera­ting compa­nies in struc­tu­ring and restruc­tu­ring as well as in the area of mergers & acqui­si­ti­ons.

Dr. Moritz Weber studied in Heidel­berg and Leuven and has been a part­ner at Ritters­haus Rechts­an­wälte Part­ner­schafts­ge­sell­schaft mbB since 2016. He advi­ses on dome­stic and cross-border corpo­rate tran­sac­tions as well as on gene­ral corpo­rate and commer­cial law from an opera­tio­nal and stra­te­gic perspec­tive. Moritz Weber has exten­sive expe­ri­ence in advi­sing stra­te­gic inves­tors as well as private equity funds and venture capi­tal investors.

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