Germany is falling dangerously behind in the race to establish biotech clusters

Germany is in serious danger of losing out in the battle for inward investment, particularly in the growth sector of biotechnology and pharmaceuticals, despite the hype surrounding recent successes in those fields. This was the stark message delivered in Berlin last week by Prof. Dr. Bert Rürup, chief economist of publisher Handelsblatt and the President of the Handelsblatt Research Institute.

Prof. Rürup had earlier given the keynote speech at Handelsblatt's own well-attended annual flagship real estate forum, "Wirtschaftsfaktor Real Estate" in Berlin's Hotel de Rome. In that speech he warned about Germany's demographic time bomb, which will tick even louder when the "baby-boomers" all become pensioners from 2024 onwards, the drain on the most qualified workers into the Anglosphere, and the coming tensions between China, its junior partner Russia, and the USA.

But another of his key themes is Germany as a location for inward investment into the biotech and pharmaceutical industries.

The Russian invasion of Ukraine has had a major impact on the willingness of investors to plough money into homegrown biotechs, in favour of investment in US companies, he said. Germany, once the pharmacy of the world, was now in danger of losing out in the race for biotech locations.

The US is increasingly seen as a safer haven for inward biotech investment, he warned, helped also by the strong interest rate hikes by the US Fed which has caused the euro to lose nearly 15% of its value since the Russians invaded Ukraine in February.

Prof. Rürup pointed to a structural problem that has been underway for some time - namely, that German investors have been unable to find enough attractive opportunities in their home market and capital is now flowing abroad. In biotech, for example, German venture capital investors in 2015 still invested the same amount of venture capital in German as in US biotechs. In 2022, by contrast, five times more money will have flowed to US companies than to German ones.

Even BioNTech, the Mainz-based company whose vaccine played a big role in dampening down the COVID-19 pandemic, chose to float in New York in 2019 rather than Frankfurt. Not surprisingly. In the USA, about 30 times more money is invested in biotech start-ups than in Germany. Since 2010, more than 500 medical US biotech companies have gone public, compared to about a dozen in Germany.

This all matters, including to real estate investors. The growth prospects for biotech companies are good, with more and more people in the industrial countries suffering from chronic diseases, and hardly a therapeutic area that biotechnology could not advance. The share of biotechnological preparations in the total market for prescription drugs is growing - from 20% ten years ago, it is now estimated at a third, and rising. Biotech is simply one of the technologies confidently expected to propel scientific - as well as economic - growth this century.

Germany's performance has not been negligible, Prof. Rürup reminded us. Turnover in German biotech companies increased by 80% between 2015 and 2020, with more than a billion euros flowing into the sector every year. Four so-called "unicorns" have been created since 2010, companies whose value is put at more than a billion US dollars. This performance is not to be sniffed at.

But nor is it a situation for Germany to rest on its laurels. The biotech segment in Germany is still small compared to the US or the UK. The ten most valuable biotech start-ups in the US, for example, are worth a combined 38 billion US dollars, while the British top ten are worth five billion - the Germans are worth less than three billion.

And despite the success of BioNTech, crucially it was the co-operation with US company Pfizer which brought the vaccine to market maturity and to production in commercial quantities. The German government has recognised this, and is investing to strengthen the country as a biotech location, helping to cover all stages of the value chain - not only basic research and development of innovative products, but also commercial and production activities.

Prof. Rürup highlighted three necessary conditions for Germany to make itself attractive as a biotech investment location. First, young companies must find it easier to access capital to finance their growth phases. Secondly, the working conditions for researchers must improve. And finally, the research infrastructure, for example suitable laboratory and office buildings, must be expanded and made available to emerging companies.

This will have significant implications for investors looking at opportunities in the life-sciences sector, one of the favoured real estate categories for growth in the coming years, according to several studies (including some covered earlier by REFIRE).

Prof. Rürup's conditions will require changes in the German investment environment. For example, the lack of a real capital market tradition in Germany has prevented the emergence of sufficient private investors willing to take real risks. German state support programmes must act more boldly to overcome this, for example by making it easier for life insurance companies to invest in start-ups by providing state risk coverage, he suggests.

As it stands, nearly all young German biotech companies have received capital from one of the large funding programmes, such as the High-Tech-Gründerfonds, an early-stage investor run jointly by the Federal Ministry of Economics, the state development bank KfW, and companies from industry and SMEs. Prof. Rürup is urging the involvement of more European funding projects, such as the health arm of the European Institute of Innovation and Technology (EIT Health), the Eurostars-SME programme and the European Innovation Council of the European Union.

Another factor he points to is the working conditions of scientists, many of whom would relish combining an academic career with an entrepreneurial one, perhaps even creating their own start-up. But, unlike in the US, switching between academia and the corporate world is not very common in Germany.

Prof. Rürup's own work with the Handelsblatt Research Institute has shown how important the development of regional clusters is in developing a successful location policy. In short, when companies, research institutions and universities from one sector gather in one place - in a cluster - they all benefit from each other.

The big biotech boom regions in the US - Massachusetts, the Bay Area, and New York - have shown the importance of physical proximity of institutions and personnel to promote real cluster benefits, even in the internet age. Germany does have promising biotech centres, in Berlin and Munich for example; these and others need to grow, through suitable research infrastructure. Tailor-made real estate offerings - combining laboratory and office space under one roof, for example - are a location advantage. In the USA, more than 20 billion US dollars were invested in these so-called lab offices in 2021; in Germany, it was around one billion euros in the same period.

Germany must proactively press ahead with establishing more such clusters if it does not want to fall irreversibly behind in the global competition for attractive biotech locations, said the Prof. Certainly, Germany still has first-class researchers and institutions, but it needs to build more strongly on these scientific traditions. Otherwise, Germany's reputation as the pharmacy of the world will become a dim and distant memory, he warned. Strong words.