Science, the State and the City – An interview with Geoffrey Owen and Michael Hopkins about biotech sector in Europe

Sir Geoffrey Owen is a business historian, former Editor of the Financial Times, and Senior Fellow at the London School Economics, Michael Hopkins is a Senior Lecturer and Director of Research for the Science Policy Research Unit at the University of Sussex, their recent book Science, the State and the City, published by Oxford University press in 2016, provides the most recent and detailed history of UK biotech industry, with comparison to the US.

---

Question: Why did the biotech sector in Europe not evolve as in the United States, where several successful biotech start-ups grew big on the back of innovation?

Answer: One of the key breakthroughs in biotechnology was the development of recombinant DNA technology, which made it possible to remove and insert genes, facilitating the genetic modification of organisms. Invented in 1973 by Boyer and Cohen in California, recombinant DNA technology was the basis for the creation of Genentech, one of the first and for several years the most successful of the pioneering US biotechnology firms. As the commercial potential of recombinant DNA became more widely appreciated, other firms were started, many of which, like Genentech, were jointly founded by academic scientists and venture capitalists.

By the early 1980s several of these firms had brought drugs to the market (often in partnership with one of the established pharmaceutical companies), and the emerging biotech sector was attracting enthusiastic support from investors. For the most part the first biotech-derived drugs were genetically engineered versions of known proteins such as insulin and human growth hormone, and they were quickly approved by US regulators. These early successes boosted the confidence of investors and encouraged more scientists and entrepreneurs to enter the sector. While some of the first-generation firms, including Genentech, were later acquired by pharmaceutical companies, others, such as Amgen and Biogen, have remained independent and are now classified as “big biotechs” commanding market valuations comparable with established large pharmaceutical firms; following the success of these firms, wave after wave of new firms emerged, seeking to exploit emerging biotech-related opportunities.

Several European biotech firms were founded in the 1980s (some of them with government support), but they missed out on the first wave of biotech-derived drugs – sometimes described as low-hanging fruit – and partly for that reason they scored fewer early successes than US firms. But the difference between the US and Europe was more than a matter of timing. When biotechnology came on the scene European countries lacked some of the institutional support that enabled US biotech firms to get started and grow. A major weakness was the lack of venture capital. In the US a sizeable venture capital industry had taken shape in the 1960s and 1970s, linked to semiconductors and other branches of electronics, and the leading firms had acquired skills in financing and mentoring high-risk entrepreneurial ventures which could be applied to biotechnology. These venture capitalists could exit their investments through a stock market, NASDAQ, which was an attractive home for early-stage firms; there was no counterpart to NASDAQ in Europe.

These and other institutional weaknesses took a long time to correct – some of them are still uncorrected – and this is part of the reason for Europe’s lag in biotechnology.

Q: What explains the innovation success in the US biotech sector?

A: The US has an extraordinarily productive innovation ecosystem in the life sciences. It is made up of several interacting elements, some of which were in place before biotechnology came on the scene.

First, the massive support from the Federal government for basic health-related research has helped to create strong bioscience departments in US universities. These universities have made major contributions to the science on which biotechnology is based, and they have been an important source of trained manpower for the pharmaceutical and biotechnology industries.

Second, the US has developed an effective system of technology transfer, involving close links between academic scientists, entrepreneurs and investors; much of this talent is concentrated in the two great biotech clusters of Boston and San Francisco. University/industry links have traditionally been closer in the US than in Europe, but the technology transfer system was given a boost by the Bayh-Dole Act of 1980, which allowed universities to commercialise discoveries coming out of publicly funded research.

The third element is a financial system which, as previously noted, is well equipped to support and sustain high-risk entrepreneurial firms. In biotechnology, the success of the sector in the 1980s and 1990s helped to create an investment community that acquired a deep understanding of the science and, as the sector grew in size, an ability to assess the quality of early-stage firms. Venture capital firms that specialise in biotechnology have been strongly supported by institutional investors, especially the pension funds.

Fourth, US biotech firms have been operating under a supportive intellectual property regime which has served as a powerful incentive for the search for innovative medicines. For example in 1980, at the dawn of the industry, the Supreme Court’s ruling in the Chakrabarty case allowed genetically engineered organisms to be patented.

Fifth, the US market for drugs is not only much larger than that of any other country, but is also exceptionally receptive to innovative drugs. This reflects in part the absence of European-style price controls; if they can develop genuinely innovative drugs which meet an unmet medical need, manufacturers are able to charge high prices and, for as long as the patent remains in force, generate high profits.

Finally, the US has a large and successful pharmaceutical industry, which has been a source of capital and skills for biotech firms. Although most of the leading pharmaceutical companies were sceptical about biotechnology at the start, they came to recognise the need to integrate the new techniques into their R & D programmes, through licensing deals, partnerships and acquisitions.

Q: What could Europe do to improve its “eco-system” for innovation?

A: In seeking to strengthen its innovation ecosystem in biotechnology, Europe is at a disadvantage vis-a-vis the scale of the US in two respects.

First, it does not have an integrated market in medicines. Although several steps have been taken in recent years to create such a market – for example in regulation, through the establishment of the European Medicines Agency, and in the rules governing intellectual property – individual countries operate their own pricing and reimbursement systems, which make the launch of new drugs slower and more cumbersome in Europe than in the US.

Second, the US government supports biomedical research in universities on a scale which dwarfs what is available in Europe, taking into account both national research spending and the funds supplied from the European Commission through the successive Framework programmes and now Horizon 2020. It is the fruits of this research which underlie industry interest in new technologies and the skilled people trained in research-intensive universities that are needed to staff the firms that exploit these technologies.

It may be that in this particular area, European countries do not wish to over allocate resources in an attempt to catch up, but the lesson for the future is that the US has succeeded by making such large-scale commitments to the sector over long periods of time.

The two other areas where progress could be made with less cost to governments in Europe are in the transfer of technology from academia into business and in the supply of funds for biotech firms.

On the first, over the last few years the bureaucratic and other obstacles which have discouraged movement between academia and business have been significantly reduced, but labour mobility is still far less than in the US, as is the acceptability of academics moving easily between universities and industry. Removing barriers such as recruitment and promotion policies that focus too much on publications may be one way forward.

On finance, there has been an encouraging increase in the number of European investment funds with an interest in biotechnology and of grant funding schemes (like the Biomedical Catalyst in the UK). Governments, universities and charities such as the Wellcome Trust have all been active in supporting such initiatives. What has been missing is a commitment to biotechnology on the part of large institutional investors; this is one of the reasons why, despite some improvement in 2014 and 2015, the IPO market for biotech is much less active in Europe than in the US. It remains to be seen whether a system of incentives could or should be used to encourage investors to support more high-tech firms.

It is important to note that what Europe still lacks, and a factor that has driven a virtuous cycle of investment and firm growth in the USA, is a series of highly profitable biotech-based blockbuster drugs invented in and brought to market by European firms. It is this factor that would do most to reignite enthusiasm across the innovation ecosystem – as the old adage goes “success breeds success”.