What is lacking in the financing of biotechs in Germany?
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.
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.
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.