It was only a few years ago that biotechnology in Spain finally awakened from its deep sleep, and the sector is now taking off. To continue along the path of growth, the few companies currently in the sector will have to confront a series of challenges, according to Isidre March Chordà of the University of Valencia, and Ramón Seoane Trigo of IDICHUS, the Foundation for the Research, Development and Innovation of the University Hospital Complex of Santiago de Compostela, authors of a new report entitled, “The Business Models in Spanish Biotechnology Companies.”


Among the important factors currently in short supply in this sector, the authors emphasize, are the shortage of entrepreneurial spirit in the research community; the lack of concentration of knowledge and the dominance of companies that offer technology services based on a model of incremental innovation. Cooperation between scientists and technologists is still at an embryonic level. Finally, the authors point to a shortage of funding for sustaining new business projects created in medium and long-term research and development programs.


March and Seoane reveal the other side of the coin as well, outlining some strengths and opportunities in the sector. First of all, Spain ranks fourth when it comes to publishing scientific articles about biotechnology. Second, some research centers in Spain, such as the CSIC, the largest public research body in Spain, are acting as engines of knowledge and are attracting scientific talent. In addition, some healthcare research institutions are operating under the auspices of various hospitals. Beyond that, networks of cooperative research have been created that link centers and companies in the bio sector. One such institution, the Foundation for the Development of Genomic and Proteomic Research, is developing research in genetics and biotechnology. The infrastructure for supporting research in this sector has also expanded. Finally, over the past three years, companies in the sector are being established at an accelerated pace.


In 2004, total investment in the sector reached 542.7 million euros, and there is “steady and significant growth,” notes the study. However, one of the greatest handicaps is the absence of success stories about companies that have already launched new pharmaceuticals that are making an impact on the market. According to the study, the company that has the greatest chance to become a leader in this sector is Pharmamar, a subsidiary of the Zeltia group. Pharmacar has several candidates now in the clinical phase of product testing.


The worst factor is the shortage of risk capital and seed capital, which makes it hard to establish new companies. Between 2000 and 2002, a total of 13 risk-capital companies were created in the biotech sector in Spain, involving a total investment of only 18.76 million euros ($24.4 million). The figure represents barely 0.533% of total investment in risk capital [in all sectors] in Spain during that period. Between 2003 and 2005, the situation improved, however, as the number of companies in the sector expanded to between 15 and 20. However, the study emphasizes that the size of the average investment in biotechnology remains quite modest, from between 800,000 euros and 5.5 million. The average investment in Spain is 1.44 million euros, which is quite a bit lower than the European average of 13 million euros, and the average figure of 17 million euros in the U.S., according to the FGE, Spain’s genome foundation.


Choosing a Business Model

The current take-off phase is crucial for most companies, because they must now choose between various business models. These models, note the authors, “are especially useful for understanding the functioning and expectations of companies in leading sectors, including biotechnology.”


March and Seoane studied the business models applied in this sector in Spain and Canada, a leading country [for biotech], and analyzed two different business models that could be applied to biotechnology in Spain. From that starting point, the authors formulated two contrasting concepts that form the fundamental focus of their study.


In Spain’s biotech sector, they write, “the dominant business model is clearly oriented toward providing services and key support mechanisms for development; it is aimed at market niches and guided by an incremental plan for innovation.” However, there is a second approach that is based on a more radical model, and it is being used by a handful of companies. “A small number of companies have staked a claim for a range of bio-pharmaceuticals and for the development of key assets for future pharmaceuticals that could have a great market potential.”


The study measures the extent to which these two models have been implemented in Spain, using a database of about 97 companies. Although the companies are scattered through Spain, there was a strong emphasis on the Madrid metropolitan area, where there were 27 companies, and on Barcelona province, where there were 15 companies. The data from the study revealed that “the activities that dominated [in those companies] were aimed at developing methods for genetic and DNA diagnostics. Only a few companies focused on research projects for discovering and obtaining new molecules and new therapies. Those kinds of activities involve a more intensive and lasting effort at R&D.”


The companies in the study were classified this way:

  • 85 companies exclusively applied the first model, aiming at incremental innovation.
  • 5 companies exclusively applied the second model, aiming at developing new biopharmaceuticals, and
  • 7 companies were predominantly [but not exclusively] focused on the second model.


Of the 12 companies that applied the second model either totally or partially, not one company has yet to launch a new product on the market. These companies will not do so for another five or six years. The authors also draw conclusions about the entrepreneurial characteristics of the companies in the survey. First, the model that a company chooses is not a determining factor when it comes to getting financing from risk capital. Second, companies that pursue the second model are more likely to belong to a [large] group of companies.


Far from the Market’s “Core”

The study then draws two fundamental conclusions. “Without doubt, Spain’s biotech sector is dominated by a business model aimed at providing services and developing instruments for support. This model creates R&D programs that are less intensive, and its priority is to create products and services, and get short-term results.”


This explains why Spanish companies have lagged behind when it comes to generating discoveries “that have a global impact, and which advance the frontiers of technology.” As 2006 began, the Spanish biotech sector was falling behind the so-called “core” of the market, which focuses on the “development of new therapies for future pharmaceuticals through [development of] new molecules, enzymes, pharmacogenomics, genetic therapy and cellular therapy.” In Spain, note the authors, “the few companies that pursue this second model are all in its initial stage or, at best, in the critical second stage of pre-clinical and clinical tests.”


Nevertheless, since 2001, some companies have been created that are pursuing business plans that more closely resemble the models that prevail in the U.S. and Canada. These companies are involved in human health and in using biotech to discover new therapies. In part, their creation has been promoted by the promising results in companies that have a strong scientific base, such as the Zeltia group (in which Pharmacar is in the lead). Other factors are new initiatives for public and financial support [of biotech], such as the Neotec program of CTDI (Spain’s Center of Technological Industrial Development) and Genoma Espana, [a foundation that promotes the development of genomics and proteomics].


On the other hand, the very fact that a mere 12 companies (or 12.4% of the sampling) pursue the second model “confirms that [only] a minimum number of companies have the capacity to acquire a niche on the international level in the difficult terrain of biopharmacy, which is the core that will guide the biotech sector in the future.” Without doubt, note the authors, Spanish companies have approached the industry in a way that is quite different from the American model. Even those companies that come closest to fulfilling the second model are lagging behind their American counterparts, especially when it comes to the number of patents, [the volume of] risk capital, and the volume of investment.


The authors justify the preponderance of this low-risk business model, which provides fewer probabilities for making [a large] profit, by citing the shortage of capital for undertaking projects that require long-term investments in costly research and development projects. In Spain, “most companies have to deal with a key factor that determines their strategy and business model; that is, the need for generating their own cash flow to finance their later efforts at R&D.” To obtain this funding, companies have opted to develop technological capabilities that enable them to offer specialized services to such customers as pharmaceutical companies, hospitals and research centers.


The overwhelming dominance of the first business model is reflected in the emergence of companies that offer specialized services for diagnostics and DNA analysis. However, the second business model is beginning to take off in Spain, reflecting rising confidence in the chances of succeeding over the long haul. It is sustained by a change in the environment and by the creation of such initiatives as technology springboards (support organizations aimed at promoting the creation of technology-based or knowledge-based companies). “bio-incubators” and competitions in the sector.


Despite such progress, March and Seoane conclude that the sector must still overcome an important challenge before a larger number of Spanish companies pursue the second business model. That key challenge, they note, is “the availability of investors who are ready to inject capital into companies that offer a return on their capital that is both uncertain and comes far in the future.”