BIO Deutschland Calls for Better Conditions in its Answer to an EU Consultation
In its response to a consultation paper on “state subsidies to promote access to venture capital for small and medium-sized companies (SMEs)”, which it submitted on 5 October 2012, BIO Deutschland called on the EU to improve the current conditions for financing innovations.
Innovative biotechnology companies rely on venture capital to a greater extent than firms in other sectors. In 2011, venture capital investments fell to €72 million in Germany, that is, by 77 per cent compared with 2010. “In general, the more innovative and ground-breaking the potential of a sector’s products, the longer the development periods and the loss phase. It is thus all the more likely that access to debt capital will be blocked. This means that private equity is the only source of finance,” explained Dirk Honold, Chairman of BIO Deutschland’s Working Group on Finance and Taxation. “It is vital that investments in SMEs be made more attractive to private equity investors in order to ensure a constant flow of innovations,” he added.
For example, the German Corporation Tax Act (Section 8c) stipulates that the loss carry-forward accumulated from research and development costs is partially or totally lost if the investment structure is changed by 25 per cent within a five-year period. However, financing rounds currently only cover two or at most three years. This means that entrepreneurs and investors have to factor in the likelihood that investments in research and development (R&D) will not be exempt from tax and cannot be offset against profits. As a result, companies financed by private equity would decline significantly in value and would no longer appeal to institutional and private investors.
As it is, the minimum taxation laid down in the Income Tax Act (Section 10d) does not permit an unlimited loss carry-forward. Biotechnology companies in particular, which experience sporadic peaks in revenue because they receive milestone payments from industry partners or have to fund their R&D by occasionally selling licences, have to dig deep – often endangering their own survival – to be able to pay their taxes.
Furthermore, there is a danger that German legislation on implementing the Alternative Investment Funds Managers Directive, which the Federal Ministry of Finance has now presented as a bill, will ban closed-ended alternative investment funds (AIF) from investing directly in innovative SMEs in the future. This would affect private investors such as MIG Verwaltungs AG, whose funds have been one of the most important sources of capital for the biotechnology sector for several years. The new law would not only block private investors’ access to promising investments, but would also reduce the range and number of potential sources of private equity investments in innovative SMEs.
Basel III and Solvency II have made loans and private equity/venture capital (VC) more expensive. The planned increase of equity capital ratios for banks and savings banks will place a disproportionate burden on loans to SMEs. Moreover, the more stringent capital adequacy requirement for VC under Solvency II will reduce the amount of loans available and make them more expensive.
Peter Heinrich, Chairman of the Board of BIO Deutschland, said: “It is incomprehensible that not only is there a lack of support for SMEs’ enormous innovative power and economic potential, but further legislation is also blocking such firms’ growth. The biotech industry therefore calls on the European Commission to focus more intently on SMEs, which account for 99 per cent of all companies in Europe, and to improve the conditions for funding innovations by SMEs via private investments.”
BIO Deutschland’s statement on the EU consultation is available in German at: www.biodeutschland.org/files/tlf_content/positionspapiere/2012/121005_BIO_Deutschland_Germany_State_Aid_final.pdf