According to the Life Science Report Austria, Austrian biotech companies recorded a turnover of USD 379.3 million in 2017, with USD 206.3 million – or 54.6% – flowing into research and development.
Companies in this sector found increased interest from venture capitalists, which meant an increase in financing via venture capital or private equity to USD 166.8 million – three times the amount of the previous year. A strong intellectual property environment, a well-developed and well-funded healthcare system, established local players, and a growing international profile are making Austria a market worth keeping an eye on.
Austrian companies and start-ups in the life sciences sector form a dynamic, rapidly evolving environment for research, making Vienna a CEE biotech hotspot. Although the outlook is positive and promising, the sector still faces some difficulties. The sector, as profitable as it is, is known for both enormously high research costs and time-consuming development processes, which require lots of funding from the very first stage. This proves to be a hurdle for many innovative young start-ups currently fighting for a spot in the market with multinational conglomerates. Most start-ups expect to be bought out “midterm” by larger market players and often fail in the process. Opportunity lies, however, in structured advice and financing plans set up from the beginning with business angels and other advisors. In Austria, there are some hubs supporting young entrepreneurs, including AWS or INiTS, which take on intermediary roles.
There are also quite a number of private equity investments in the sector, but there is much more capital and a lot of dry powder that could be utilized. However, this sector is not necessarily the ideal environment for private equity due to its long product cycles, which do not comply with the desired exit horizon of three to five years (with some exceptions in the generics market). Private equity investors have a crucial role in bringing the life science sector to the next level – not only because they have the necessary expertise, but also because they already have well-established, professional teams to facilitate investment processes smoothly. Besides, the kind of problems there sometimes are with large strategic investors in the post-merger integration of young companies when it comes to raising synergies are rare in this context, because private equity companies mostly see themselves in the role of financiers and often have no interest in creating synergies.
The vehicle of choice often is a limited liability company (in German, a “Gesellschaft mit beschrankter Haftung, GmbH“) since it allows direct shareholder influence and has limited corporate governance requirements. A stock company (an “Aktiengesellschaft, AG“) might, however, be interesting if the business is considering a multinational structure and is thinking of bringing a large number of partners or shareholders on board. In addition, with an AG one always has the possibility of listing on the stock exchange, and the assignment of shares is easier than with a GmbH, which requires a notarial act for each transfer.
With the current pace of development in the life science sector, an upswing in the market is inevitable, and with it, the time to ignite the long-awaited dry powder by private equity investors.
By Rainer Kaspar, Partner, PHH Rechtsanwalte