Business in France: CARMAT - Case Study Example

Business in France: CARMAT The French biological technology CARMAT was in the press recently (Jolly, because it made its first public offering of shares on the NYSE Euronext stockmarket in Paris in the summer of 2010. The focus on the general press was on the innovative new product that this French biotech company is in the process of bringing to the market: an entirely artificial heart which could, in the future, be a permanent replacement for the human heart. At present the only options on the market worldwide are human heart transplants, artificial parts transplants such as valves, animal parts, and a few artificial devices which are not licensed for permanent insertion, but only as a last resort of patients who are not suitable for other treatments. The prototype heart produced by CARMAT is made of synthetic, animal and electronic parts and is projected to cost about the same as a conventional heart transplant costs today. Jolly’s New York Times article cites many other players in this hi-tech arena who are working hard in laboratories across the world to be the first to overcome the technical problems and pricing hurdles that have so far kept artificial hearts out of reach. American companies SynCardia in Tucson, Abiomed in Danvers, Mass. and others, along with teams in Aachen, Germany and elsewhere are pursuing various different technologies with similar aims in mind. An announcement in October 2010 that a teenage boy has been given a permanent mechanical heart claims to be a world first, but in fact the profile of the case suggests that he is actually in the category of patients not eligible for standard transplants, since he suffers from a medical condition that would rule out conventional surgery. The goal of a viable product for universal use is therefore still outstanding. All of these major biotech ventures are have high research and development costs and long transition phases from prototype to viable product because of understandably strict regulations on new techniques designed for human subjects. Innovations are forthcoming in the universities and medical schools but there are usually big challenges in finding sufficient funding to bring them to the market. In recent years there has been a focus on research and development of scientific products in Europe and there are signs that economic turbulence has in fact intensified these trends. This has not happened overnight, but is the result of two decades of slow but steady progress in the world rankings: ““While it might come as a surprise to most Americans, Europe surpassed the United States in the mid-1990s as the largest producer of scientific literature” (Rifkin, 2004, p. 46). The OECD also notes that France in particular has been allocating above average amounts of funding to Research and development: “With 2.1% of its GDP on R&D in 2005, France ranks among the most intensive spenders in the EU (1.8%) after the Nordic countries (between 2.5 and 3.9%), Germany (2.5%) and Austria (2.4%), and just ahead of the United Kingdom (1.8%). (OECD, 2008). The OECD records in France and cites a ratio of government funded research as 37.6% in France, 30.5% in Germany and 35.4% in the EU overall. Biotechnology, and Information technology, are their areas of greatest strength and they excel also at transnational collaboration. French government investment is concentrated more on large firms than on small and medium ones. Government support, then, appears to be one reason why France is forging ahead on the artificial heart transplant front. The initial ideas for the CARMAT company were provided by the renowned heart specialist Alain Carpentier, Emeritus Professor at the Pierre et Marie Curie University in Paris, and Professor also at the Sinai Medical School in New York. He has a very successful track record in designing artificial organ and won various prizes for his work on new kinds of heart valve, including the 2007 Albert Lasker Award. The project to build the prototype heart was conceived in collaboration with Matra, a subsidiary of EADS (the European Aeronautic Defence and Space Company) which builds the European jet liner Airbus, and a number of military products including guided missiles. At the point when significant cash injection was needed to start trials of the product, CARMAT obtained venture capital from the Truffle firm. In most countries this would be a fairly normal start-up scenario. In 2008/9 in France, however, the government took decisive action to kick start the French economy which was facing serious challenges because of the world recession. President Sarkozy restructured government departments set up by former President Chirac and created a new state innovation agency called “Oséo”. The agency’s website explains that it has a mission to assist business innovation and that it works “sous la tutelle” [under guardianship] of the French ministry of the economy, industry and employment, and the ministry of higher education and research. The European Union has oversight of all government aid to industry, and has a brief to prevent unfair subsidies which would undermine fair competition across national borders. When this agency awarded a 33 million euros to CARMAT in June 2009, this was the biggest single amount it had ever dispensed. Approval was sought from and granted by the EU. Significantly, the Oséo website cites EU Commissioner for Competition Neelie Kroes Grâce à ce programme particulièrement novateur, lEurope pourrait disposer dici quelques années dun cœur artificiel implantable, qui améliorera significativement lespérance et la qualité de vie de milliers de patients . Je suis ravie de pouvoir approuver une aide qui permettra le développement dun tel projet, dont les effets positifs seront de loin supérieurs aux éventuelles distorsions de concurrence induites par l’aide. » [Thanks to this particularly innovative program, Europe will, in a few years from now, be in possession of an artificial heart which can be inserted in the body and can give hope and a significantly longer life to thousands of patients. I am delighted to be able to approve the provision of assistance which will enable the development of a project like this, whose positive benefits will far outweigh any distortions to competitiveness which may occur.] What this story demonstrates is the ability of the French to marshal their own state funds for the benefit of private industry, and then to achieve ratification of this practice at international level, despite open acknowledgement that such a maneuver is against the spirit and the letter of European competition laws. The story of French government support for CARMAT continues even beyond this level of start up funding. At the end of 2009 CARMAT posted a significant ongoing loss, since the product was still nowhere near ready for commercial marketing and it decided to proceed to a stock market flotation in order to raise more cash. This was a brave decision because of the credit crunch: turbulent markets worldwide made conditions for new stock market launches rather risky and Europe saw very few large scale flotations in 2009. The OECD compares France with other counties, notably Germany which does not allow tax relief for research and development actitvities, and states that in 2008 in France “R & D is largely funded by government and benefits from generous forms of tax relief.” The Sarkozy innovation regime enhanced this still further, so that when the CARMAT public shares were offered, they came with special tax benefits for residents of France. The situation now is that CARMAT enjoys enviable backing from a mix of private, public and venture capital sources, giving it the best possible chance to survive development phases and reach the point where it can start trading a highly lucrative and world-beating new product. The CARMAT website explains the financial arrangements underpinning the company in the weeks after the flotation of summer 2010: Données boursières Place de cotation : Alternext de NYSE Euronext Paris Nombre d’actions : 3 827 861 Répartition du capital : The picture of ownership after the sales flotation. Source: http://www.carmatsas.com/investisseurs/bourse/?page_id=2658 The public shares were fixed at a starting price of 18.75 euros and the flotation can be regarded as a success, judging by the performance of the first few weeks: Historic chart of CARMAT shares on the NYSE Euronext market: Source: http://www.euronext.com/trader/summarizedmarket/stocks-4377-FR.html?isinCode=FR0010907956&selectedMep=1 It is clear from this example hat the state supports investment in French industry. Many of the incentives applicable to the CARMART case are also extended to other companies and other investors. The flow of foreign investment in 2008 amounted to some 114 billion euros, which is the second destination in the world for foreign investments. The Malaysian French Embassy website reports that investment is largely European and centred on the region around Paris. The US is the largest foreign investor, with 16.7% of total foreign investment in France, but the list then switches to European neighbours: Sweden, Germany, the UK, the Netherlands and Italy. The process for investing in France involves very little regulation, with a few thresholds for reporting large movements and access to the same tax benefits open to local investors. So long as the Sarkozy regime continues to operate these expensive but effective policies, the outlook for foreign investors looks good. There are, however, political risk factors both inside France and at EU level which could over time represent more of a risk. References CARMAT SAS Company Website. Retrieved from: http://www.carmatsas.com/?lang=fr&pro=1 French Embassy Website (Malaysia) Retrieved from: http://www.ambafrance-my.org/spip.php?article1111 Jolly, David. “An Artificial Heart Its Makers Say Could Be a Standard Replacement” New York Times July 13 2010, Retrieved from: http://www.nytimes.com/2010/07/14/business/global/14heart.html?_r=1&scp=21&sq=french&st=Search Marshall, Jane. “France: Millions in funding for artificial heart” University World News 85 19th July 2009. Retrieved from: http://www.universityworldnews.com/article.php?story=20090717090117822 OECD “Science, Industry and Technology Scoreboard 2007: Briefing Note on France” 2008. Retrieved from: http://www.oecd.org/dataoecd/28/23/39880873.pdf OSEO Website: http://www.oseo.fr/ Rifkin, Jeremy. The European Dream: How Europe’s Vision of the Future is Quietly Eclipsing the American Dream. Cambridge: Polity, 2004. Smith, Herbert. A Legal Guide to Investing in France. 2009. (Legal firm’s guide). Retrieved from: http://www.herbertsmith.com/NR/rdonlyres/427381DC-A885-4330-B007-41626773D38B/0/InvestinginFrance.pdf Truffle Capital Website. Retrieved from: http://www.truffle.com/ Read More