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Sweden: strong and growing

Sweden's biotechnology industry goes from strength to strength as a result of its hardy venture capital community. Thomas Lindgren of Ernst & Young examines the influences behind Sweden's emergence as one of the most successful biotechnology regions in Europe.

Access to capital

The biotechnology industry in Sweden is strong and still growing, thanks to a robust venture capital (VC) community: on a per-capita basis, the concentration of biotech companies here may be the largest of any country in Europe.

Historically, much of Sweden's biotechnology research and development has been conducted by big pharmaceutical companies and academic institutions. But with venture capitalists funding the start-up of so many small biotech firms, the emphasis has shifted. These smaller firms are now the major sources of biotech R&D.
 
A venture capital boom

Growth in Sweden's expanding entrepreneurial sector has been met with increases in VC financing, and an increase in the number of VC firms. During the 1990s, the number of venture capital firms increased sharply - from about 25 firms ten years ago to more than 140 today, including several that focus solely on the life sciences. The amount of venture capital available in general grew from SKr20bn to SKr100bn, and the amount of those funds dedicated to life sciences has grown dramatically as well. Only in the last 12 months, we have seen the creation of at least five VC funds focused on biotechnology with SKr3 to 5bn in allocated capital. During 2000 approximately Skr4bn of VC financing was invested in the sector.

A flurry of successful IPOs and secondary offerings in the first half of 2000 left some companies with three to four years' worth of cash on hand. Now with this funding these firms are focusing on product development. At the same time, we have companies with only six to 12 months' worth of cash - they are struggling to raise more. So we have the full range of situations and plenty of available financing for those firms deemed worthy of it.

Government Support

A laissez-faire approach

Scandinavian governments have been supportive of the biotechnology industry and generally take a hands-off approach by keeping regulation to a minimum. When industry issues require government involvement, the intervention tends to be pragmatic and nonbureaucratic.

Constructive engagement

Government initiatives in Scandinavia range from providing seed money for start-ups to funding construction of science parks. Sweden offers seed capital grants and consulting support to the biotech sector. In addition, Sweden has a very high quality public university system, which has strengthened the industry by providing superior life sciences education, fostering entrepreneurship, and conducting research and development.
 
Access to data critical to success

The government also has centralised health care, which has fostered the establishment of a highly reliable system of medical records in hospitals. Access to good records is essential to the success of many life sciences initiatives. Companies working with hospitals to conduct R&D have a great advantage because of the availability of these records.
One negative aspect of government that affects owners and employees in all industries is the high taxes on salaries and capital income. This is a particular obstacle in efforts to recruit top talent from abroad.

Public support

Like most Europeans, Swedes are a bit hesitant about genetic modification of foods. However, an effort is under way to increase public understanding of the technology and to examine the possibilities and risks.

Human Resources

A small pool of top talent. Sweden's university system has supplied the biotech industry with a highly skilled workforce, but finding qualified people to fill upper management positions is a problem, largely because of the industry's rapid growth. However, some of the big pharmaceuticals, such as Pharmacia and Astra, have merged or relocated their headquarters outside the country, leaving behind a cadre of managers to head operations in the growing life sciences sector. These days, it seems that a former Astra or Pharmacia manager is heading almost every biotech company in Sweden.

The university-entrepreneurship connection

The university system also helps fill the skilled management vacuum via the ‘teachers exception' - an arrangement that protects the commercial rights of academic researchers to any discoveries they make (unless the discoverer has made some other arrangement with the university). This protection has created a positive working relationship among researchers and the industry, and has fostered a spirit of entrepreneurship - university researchers are often inclined to patent their discoveries and start their own biotech business. As these endeavours find success, others - researchers and students alike - are encouraged to follow suit.

The entrepreneurial spirit among university students is new and represents a dramatic change from ten or 15 years ago, when most students planned to work for a big company after graduation. Today, the majority - particularly those studying economics and business administration - report that they plan to start companies of their own.

The Global Marketplace

Sweden understands the importance and power of the global marketplace. Because it is a small country with a small domestic market, Sweden's companies have long been forced to take their products abroad. All the giant Swedish companies, such as Erickson, Astra, and Pharmacia, are successful international businesses adept at global marketing. Biotech managers who have been drawn from the big pharmas understand international business development and have contacts worldwide. They bring these critical assets to the start-up, thus greatly improving its chances of success.

Sweden's Biotechnology Market at a Glance

Number of companies

Sweden has approximately 170 public and private biotech companies.

Geographic distribution

Stockholm and Uppsala, which are only 70 kilometres apart, combine to form Sweden's major biotechnology region. Half of Sweden's biotech firms are located here, along with a large cluster of life sciences resources. Uppsala, the former headquarters for Pharmacia, has two leading universities that conduct a great deal of biotech R&D.

The cities of Malmoe and Lund form the second major life sciences region. These cities are located in Skane, in the southern part of the country, and are home to about 20 percent of Sweden's biotech businesses. Skane is very close to Copenhagen, Denmark, which also has numerous biotech firms. In fact, the Skane/Copenhagen area has the third largest concentration of life sciences companies in all of Europe.

The Gothenburg region follows Skane in terms of numbers of biotechs - accounting for about 15 percent of the country's total count of firms.

Product development

Currently, public Swedish companies have 18 to 20 products in preclinical and clinical trials. At the same time, companies are producing instruments and systems for DNA sequencing.

Much of this activity is being conducted in an evolving business structure, which is reshaping Sweden's traditional development-to-market process. Ten years ago, business plans for life sciences companies typically had the goal of developing into fully integrated entities, handling everything from R&D and clinical trials to manufacturing and marketing. This model was used even by companies that had a single product or very limited portfolio. However, now we're seeing business plans based on an outsourcing model - companies focus on what they do best and establish partnerships with other companies to handle clinical trials or marketing or whatever processes they lack expertise in.

Typically, smaller biotech firms develop strategic alliances with large pharmaceuticals. Under these arrangements, the biotech develops the product and the pharmas license it for clinical trial, manufacture, and marketing. Pharmacia and Astra are always looking for new products and have found this outsourcing arrangement to be a good one for supplementing their internal R&D activities. The public market seems to view this arrangement more favourably as well: investors have become wary of single-product companies that pursue the fully integrated approach, believing that those that choose to outsource, at least the manufacturing or marketing process, have a greater chance of successfully going public.

However, for some firms, going public is not the goal. We have several VC companies that are comfortable giving such firms capital and allowing them to develop competence in the marketplace, with the idea of profiting from their eventual sale or the licensing of their products to the big pharmaceuticals.

Copyright © 2002 Ernst & Young

Thomas Lindgren is a senior manager with Ernst & Young in Sweden.

Ernst & Young, one of the world's leading professional services organizations, helps companies across the globe to identify and capitalize on business opportunities. For more information, please visit www.ey.com