Venture Capital Funding for Biotech Pharmaceutical Companies in an Integrated Financial Services Market: Regulatory Diversity within the EC

Abstract

Biotechnology is one of the key emerging technologies and exemplifies the major problems of innovative industrial activity in Europe. Europe lags behind the US in most indicators of economic performance in biotechnology, one major problem being the availability of venture capital. Access to finance proves crucial for an optimal economic performance of biotech firms. However, information asymmetries between new biotech firms and potential investors lead to financing constraints in debt and equity markets. This is where venture capital funds have to overcome problems that markets fail to solve. As far as the European approach to financing small and medium-sized enterprises in the biotechnology field is concerned, attempts are illustrated to mimic allocative effects of capital markets in support of venture capital in Europe. Strategies of down-side protection, upside leverage, and support for the fund's operating costs on the basis of various programs, such as the Innovation and Technology Equity Capital (I-Tec) scheme, SOFARIS in France, and Beteiligungskapital fur Technologieunternehmen (BTU) in Germany are discussed, their weakness being that they simply replace the allocative effects of capital markets by lowering the cost of capital, instead of implementing market mechanisms. In contrast, a different approach is taken in the framework of the Risk Capital Action Plan initiated by the special Lisbon European Council in March 2000, aiming at the creation of Europe-wide integrated capital markets. It is shown how an internal market for risk capital presupposes undistorted competition between offerees for risk capital. Therefore, the "single passport" for issuers to facilitate companies raising cross-border capital as a means to implement such a system of undistorted competition on the basis of Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) seems to lay the basis for such competition. This holds in particular true after the latest amendment of this directive, including management companies in its framework of the "single passport". At the same time, a line has to be drawn between the necessary Europe-wide harmonization in the field of investor protection, such as disclosure rules, ensued by the principle of mutual recognition for financial service providers, and interjurisdictional diversity in the field of company laws. This line-drawing problem can be paralleled to a certain degree to the development of the US securities regulation arising from the promoter problem under English law in the late nineteenth century. Overall, harmonization should only go as far as the economic policy agreed upon by the Member States to constitute an internal market reaches. This policy might at times be corrected by market forces imposing more stringent disclosure standards. Only under such conditions can Europe-wide access to capital markets, be ensured, being complemented by interjurisdictional diversity in the provision of company laws. In sum, only on the basis of this regulatory interplay can innovation as exemplified by biotech pharmaceutical companies take hold.