Proclaiming America No. 1 may seem like Olympics-related jingoism. Or perhaps it’s arrogant foreign policy. But for life sciences venture capitalists, U.S. dominance is simply fact.
It’s no secret that the United States leads the world in life science investments by a wide margin. The first half of 2004 saw U.S.-based life science companies take in $3.6 billion in venture capital funding, more than 70% of the worldwide total, according to the MoneyTree survey by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ), and the National Venture Capital Association.
The closest competitor for venture dollars in the sector is Germany, with only $432 million (or about 8% of the total) in that same period, followed by the UK and Canada, with $346 million (7%) and $186 million (3.6%) respectively, according to Thomson.
However, the rest of the world is not sitting still. Though Europe and Canada have seemingly little chance of eclipsing U.S. totals, they’re relentlessly pitching themselves as an advantageous place for life sciences. Biotech hotspots are sprouting throughout Europe and Canada, where educated workforces and government incentives are readily available.
Canada’s Cost Advantage
Consider Canada. Canadian universities are providing more and more biotech research and Quebec has become a renowned biotech hub. More than 400 U.S. companies have established facilities in the province, and U.S. investors account for two-thirds of Quebec’s foreign investors. The region takes in about one-third of all Canadian venture capital disbursements.
But it’s not by accident. Part of the reason why Canada has become so hot is because its government provides a tax credit to companies conducting research and development. And even without the tax credit, R&D costs are much lower than they are in the U.S. Canadian R&D tax breaks are known to be generous. For example, a Quebec-based company can earn tax breaks from both the Quebec and Canadian governments for up to 40% of workers’ salaries and 100% of expenses.
Robin Louis, president of Ventures West Management and current president of the Canadian Venture Capital Association, concedes that similar to Europe, the Canadian venture industry is still in its nascent stages and without the depth of entrepreneurial management that the U.S. enjoys. However, Louis points out that life sciences, as a percentage of overall investments, has remained steady in Canada, unlike its neighbor to the south, where investors have been fickle historically toward this sector. Today, as a percentage of all deal volume, life sciences comprise about 30% of investing in Canada, roughly the same volume as in the U.S.
Meanwhile, on the other side of the Atlantic Ocean, Europe is competing fiercely for investment dollars. Venture capitalists in the Netherlands’ Limburg region, for example, have put together a network of life sciences entrepreneurs, research facilities, academic institutions and researchers to promote investment in the area. Casper Bruens, an executive officer with DSM Corporate Venturing, the VC arm of DSM Computer, has spearheaded the effort. The network includes a corporate campus used for research with affiliations to DSM and local universities.
“Venture capital was the missing link in the whole package,” says Bruens, who also serves as an investment director with Limburg Ventures, a venture fund that funds area startups. The private venture fund is a $30 million fund that seeks to partner with other European and American venture capitalists. So far Limburg Ventures has done two deals.
In some cases, venture investors are leveraging advantages of being overseas without pouring money into overseas companies. Free trade and prevailing outsourcing and offshoring practices are making cross-border companies more prevalent in VC portfolios. After all, if software and IT service companies are shipping functions overseas, there’s little to stop life sciences companies from doing it as well.
“I favor a hybrid model where the entrepreneurs are in the U.S. and the technology and labs are in another place,” says Robert Nelson, a managing director with ARCH Venture Partners. ARCH has invested in companies with facilities in China and Taiwan, two locations where the firm has concentrated on developing ties. Nelson says that part of the reason his firm has avoided investing overseas is because of the difficulty in finding skilled entrepreneurs overseas, something that the United States still has in spades.
Barr Dolan, a general partner of Charter Venture Capital, is looking to save his portfolio companies money by conducting more clinical trials in China and India. “Our interest is trying to find some compounds where you can do a clinical trial effectively,” says Dolan. “That allows you to trial out more compounds. If you have human data that say a compound is safe, you have a lot of value. When we can find more effective ways to do that, more drugs equals more money. You have to find ways to get that valuable human data in cost-effective ways.”
Dolan says that costs of conducting clinical trials in the United States can run between $5,000 and $10,000 per patient. The Food and Drug Administration (FDA) oversees these trials no matter where they are conducted, so there is no worry about quality, Dolan adds. He says Charter already has one portfolio company with clinical facilities in Mexico.
How much savings a company derives from overseas outsourcing depends on a number of factors, such as the type of work being done and the country in question. Europe, while not presenting the kinds of cost benefits that make Canada, Mexico or Asia appealing to outsourcers, has some other advantages, such as an abundance of research universities and educated workers, and fewer restrictions and less political posturing on stem cell research than the U.S.
There are other factors at play as well. Take, for instance, NightHawk Radiology. Nighthawk operates a facility in Sydney, Australia, but provides X-ray reading and diagnostic services for U.S. hospitals and clinics day or night. The company, which brought certified American radiologists down under while keeping its corporate headquarters in Coeur D’Alene, Idaho, raised $25 million from Summit Partners earlier this year.
Venture capitalists see these overseas efforts as welcome signs of a mature, global life sciences market. While keeping their eyes overseas, life science VCs aren’t looking to send the bulk of their capital offshore any time soon. “But there’s no reason you can’t be successful over there,” says Harry Rein, a general partner with Foundation Medical Partners and longtime life sciences venture investor. All of Foundation’s portfolio companies are based in the U.S.
Still, despite the growth of life sciences outside of the United States, Rein does not think that American VCs will start rushing to get deals done elsewhere to take advantage of lower costs or tax incentives overseas. “This is a business where you still need to be fairly close to the company,” Rein says.