New Models in Biopharmaceutical Risk Sharing

By Patricia Van Arnum - DCAT Editorial Director

June 24, 2014

The European Investment Bank is teaming with the Belgian biopharmaceutical company UCB in a new model for financing research and innovation projects in the European Union.

Research and development (R&D) represent the lifeblood of the pharmaceutical/biopharmaceutical industry, and particularly for small- to medium-sized companies, the challenge resides not only in product innovation itself but also in financing R&D. A new partnership between the European Investment Bank (EIB), the financing institution of the European Union (EU), and the Belgian biopharmaceutical company UCB, is forwarding a new instrument, risk-sharing co-development funding, as a means to improve companies' access to financing for research and innovation (R&I) projects in the EU. The program is part of the implementation strategy of Horizon 2020, the new EU research program for 2014-2020, which has allocated nearly EUR 80 billion ($109 billion) over seven years to improve the European competitiveness.

Earlier this month, EIB signed an agreement with UCB to provide "at-risk co-development funding" of up to EUR 75 million ($102 million) for the development of select UCB compounds. The EIB will receive milestone payments if and when predefined milestone events are successfully achieved. UCB and the EIB will, as partners, periodically review the stages of development and the milestones of the programs being accelerated by the co-development funding and by the EIB actively participating in the development of the programs. The partnership agreement between the EIB and UCB is the first "risk-sharing" transaction signed under the new InnovFin EU Finance for Innovators program set up jointly by the European Commission (EC) and the EIB Group. InnovFin Large Projects are specifically dedicated to improving access to financing for R&I projects in the EU.

"The operation showcases the direct intervention and risk-taking capacity of the EIB and its role in supporting key R&D activities," said Pim van Ballekom, vice president of the EIB, in a press statement. "We are aiming to pave the way and demonstrate that innovative financial instruments, such as risk sharing co-development funding, can make a difference in boosting research and innovation in Europe; and this is of the utmost importance for the future of Europe."

The EC and EIB launched InnoFin-EU Finance for Innovators, a set of EU financial and advisory services, earlier this month. Over the next seven years, it is expected that the InnovFin-EU Finance for Innovators products will make available more than EUR 24 billion ($33 billion) of financing for R&I by small, medium, and large companies and the promoters of research infrastructures. This financing is expected to support up to EUR 48 billion ($65 billion) of final R&I investments. InnovFin–EU Finance for Innovators consists of a range of tailored products ranging from guarantees for financial intermediaries to direct loans to enterprises as well as advisory services to support R&I projects in the EU and countries associated to Horizon 2020, the financial instrument implementing the Innovation Union, a Europe 2020 flagship initiative aimed at securing Europe's global competitiveness.

InnovFin guarantees and loans will be backed by funds set aside under Horizon 2020 and by the EIB Group for the purpose of supporting R&I activities, which by nature are riskier and harder to appraise than traditional investments. All are demand-driven instruments, with no prior allocations between sectors, countries, or regions. These debt instruments will be complemented in the near future by a suite of equity instruments managed by the EIF. InnovFin builds on the Risk-Sharing Finance Facility developed under the seventh EU framework program for research and technological development (FP7), which financed 114 R&I projects valued at EUR 11.3 billion ($15.4 billion) and in addition provided loan guarantees worth more than EUR 1.4 billion ($1.9 billion).

InnovFin Large Projects aims to improve access to risk finance for R&I projects emanating from larger firms; universities and public research organizations; R&I infrastructures (including innovation-enabling infrastructures); public-private partnerships; and special-purpose vehicles or projects (including those promoting first-of-a-kind, commercial-scale industrial demonstration projects). Firms and other entities located in EU member states and associated countries will be eligible as final beneficiaries. Loans from EUR 25 million ($34 million) to EUR 300 million ($408 million) will be delivered directly by the EIB.

InnovFin MidCap Guarantee provides guarantees and counter-guarantees on debt financing of up to EUR 50 million ($68 million) to improve access to finance for innovative midcaps (up to 3,000 employees) which are not eligible under the InnovFin small and medium enterprises (SME) guarantee. This will be rolled out through financial intermediaries, such as banks and other financial institutions. Under InnovFin MidCap Guarantee, financial intermediaries will be guaranteed against a portion of their potential losses by the EIB. InnovFin MidCap Guarantee further offers guarantees or contingent loans of between EUR 7.5 million ($10.2 million) and EUR 25 million ($34 million) to improve access to finance for innovative larger midcaps (up to 3000 employees). This facility is implemented by the EIB and is to be delivered through financial intermediaries, such as banks and financial institutions, in EU member states and associated countries. Under this facility, financial intermediaries will be guaranteed against a portion of their potential losses by the EIB, which will also offer counter-guarantees to guarantee institutions.

InnovFin SME Guarantee provides guarantees and counter-guarantees on debt financing of between EUR 25,000 ($34,024) and EUR 7.5 million ($10.2 million), in order to improve access to loan finance for innovative small and medium-sized enterprises and small midcaps (up to 499 employees). This facility is implemented by the EIF and will be rolled out through financial intermediaries, such as banks and other financial institutions, in EU member states and associated countries. Under this facility, financial intermediaries will be guaranteed by the EIF against a proportion of their losses incurred on the debt financing covered under the facility.

InnovFin Advisory aims to improve the bankability and investment-readiness of large projects that need substantial, long-term investments. It will also provide advice to improve the conditions for access to risk finance for R&I. It builds on a successful pilot operated under the Risk-Sharing Finance Facility in FP7. The main clients foreseen are promoters of large R&I projects that meet Horizon 2020's Societal Challenges, which reflects the policy priorities of the Europe 2020 strategy, which includes health, demographic changes, and wellbeing as one priority. During the first two years of Horizon 2020 (Work Program for 2014/15), the EU will invest some EUR 1.2 billion ($1.6 billion) in this health challenge.