When the French Parliament votes on its budget this month, a new set of proposals to foster the growth of nascent life science ventures looks set to remain low on the list of priorities of national politicians. That is a shame because the proposals offer biotech firms an opportunity to throw off the confiscatory fiscal and social policies that presently render many promising French enterprises stillborn. What's more, the tax breaks and incentives could offer a solution elsewhere in Europe where the fragility of life science ventures in an environment poorly served by risk capital remains a persistent and intractable problem.

At the beginning of January 2004, the French Parliament introduced a tax measure designed to help innovative companies in France. This measure defined young innovative enterprises/companies (YIEs/YICs) as those under 8 years old, with fewer than 250 on the payroll and where at least 15% of their expenditure was on R&D (Nat. Biotechnol. 21, 113–114, 2003). On the basis of feedback from the biotech community, the YIC scheme appears to have been a success. Out of 1,000 ventures participating in the scheme, about a quarter are biotechs.

But it is not enough to encourage young companies to be born; they need to be nurtured into sustainable businesses. And sustainability is at the heart of a new set of measures that was put forward in France earlier this year. The measures are designed to extend many of the incentives available under the YIC scheme to those companies that list on the public market (young innovative listed enterprises or YLEs). For the first 8 years following flotation, these YLEs would receive a reduction in taxes and full relief on 'social costs'—in effect, not paying the state's charge for pensions, health insurance, redundancy—for all employees involved in R&D projects. In France, social costs represent around a whopping 19% of the wages bill. Thus, at a stroke under the YLE proposal, biotech companies could cut employment costs, avoid tax and attract investors.

The problem is that the YLE scheme is currently in political limbo. Despite the support of Dominique de Villepin, the French prime minister, and various relevant ministries (including those for research and small enterprises), it is languishing in the recesses of the Ministry of Finance. The main reason for this appears to be that the Ministry feels that the YLE scheme could work within the unregulated framework of AlterNext—a sort of alter ego subsection of EuroNext stock exchange similar to London's Alternative Investment Market (AiM)—and provide a sufficient source of cash for developing companies. As a result, the Ministry of Finance regards the YLE concept as surplus to requirements.

Yet as those in the industry are well aware, if AlterNext follows the pattern of AiM, most of its listings will provide only small sums of money. In addition, the lighter reporting requirements of AlterNext are typically suited for traditional industries. And they would likely deter rather than encourage unadventurous fund managers to participate in biotech investments. Robert Abbanat, an economist at the MIT Sloan School of Management, who authored a feasibility study for introducing a pan-European market for technology growth companies (http://www.easdaq.be/report.pdf) agrees. He says that biotech companies are more suited to regulated markets because the reporting requirements add a layer of disclosure and transparency that biotech investors desperately need. So AlterNext and its ilk are more likely to provide a substitute for scarce life science venture capital than to provide a panacea for developing French companies. It is also possible that AlterNext-listed companies will be companies that market-savvy venture capitalists have shunned, thereby exacerbating the insecurity of fund managers about biotech.

One issue that is possibly standing in the way of the introduction of the YLE scheme is that it could be perceived as competition infringement by other European states. As it stands, the YIC scheme only pertains to France and this puts it in somewhat dangerous territory—the introduction of even more benefits and sweeteners for French companies under YLE measures could have France's European neighbors crying foul. They could argue that France is in effect providing a direct subsidy and unfair advantage to its high-technology companies—potentially prompting censure by the European Commission.

The obverse of that coin—and a more constructive way of looking at the YIC and YLE schemes—is that the political environment in Europe should actually encourage the adoption of similar measures elsewhere in the European Union (EU). Europe's national politicians, through the EU Council of Ministers, courageously declared in 2000 that Europe should aim to become “the most dynamic and competitive knowledge-based economy in the world.” Specifically they agreed that Europe should increase its R&D spending from around 1.9% of gross domestic product at present to 3% by 2010 ('The Lisbon Agenda'). Progress thus far toward this target is not encouraging, however. From 1999–2003, R&D spending in the EU increased by less than 0.01% of GDP per annum. At this rate, achieving the Lisbon target will take until 2120 rather than 2010. All of which is causing consternation within the European Commission and the Member State governments as they search for ways out of the dilemma.

Politically speaking, the Lisbon targets give Europe's member state governments carte blanche (to coin a French phrase) to do almost anything they can to stimulate industrial R&D. All of which makes it more perplexing that a French administration that is already offering incentives for private equity investors and large corporations to invest in R&D-intensive small/medium-sized enterprises, and that has a research tax credit applied across the board, should now be hesitating about further encouragement for listed firms. At the moment, France is starting to look a significantly more attractive place to start and grow biotech businesses. But some elements of that relative advantage will evaporate if—or more likely when—other EU member states adopt similar measures.