France’s biotechnology cluster continued growing to one of the largest in the world last year even as many of its companies struggled to raise funds, this year’s annual report on the industry found. According to the 2011 Life Sciences Panorama, issued by France Biotech and Ernst & Young (E&Y), French biotech and medical device companies raised just €277 million ($350.7 million) last year from venture capitalists, new stock market listings, and refinancings.

That’s a 40% drop from €460 million ($582.3 million) in 2010. The number of new biotech businesses created in 2011 plunged 47% to 24 from 46 in 2010, while the number of closures soared to 25 in 2011 from just eight in 2008.

“As financial resources continue to dry up, companies in the sector will have to develop more rapidly,” warned Franck Sebag, a partner at E&Y. The report noted that raising financing was a challenge throughout Europe. Biotech companies across the EU collected €3.327 billion (about $4.2 billion) in 2011, a 36% drop from the previous year.

“In spite of the difficult period we are going through, our sector is proving its vitality,” said Andre Choulika, chairman of France Biotech. “Will venture capital, which remains the source of financing for the expansion of our industry, be able to meet the needs of the sector, taking into account the unprecedented drop in financing observed in 2011? The capital strength of our companies will be the fundamental means of support for growth, so that we may continue to take on staff, innovate, and post solid performances.”

Choulika attributed the drop-off in financing in part to innovation grant reforms by France’s previous administration of President Nicolas Sarkozy, who was unseated by voters earlier this month. The reforms, according to Choulika,“have blocked the path of many of our fast-developing companies and may continue to do so.

“Each small and medium-sized enterprise in our sector is a large company in the making” Choulika said, adding that his association “will continue battling to get the government to review its standpoint on the recent reforms.”

The report included results from the 190 companies that responded to a survey of France’s biotech strengths and challenges. Survey respondents overwhelmingly favored several public initiatives rolled out by France’s government with more biotech activity in mind, such as the French state innovation agency Oseo and tax rebates for research. Survey respondents, however, also cited “the extremely negative impact of the reform of the Young Innovative Company status.”

Eager to reduce France’s deficit and plug what it deemed to be tax loopholes, the Sarkozy administration curbed some “Young Innovative Company” provisions, for example, tax losses are now only available for carry-back to the fiscal year immediately preceding that in which the losses arise and up to a maximum of €1 million ($1.26 million).

Despite the funding falloff, France’s biotech cluster remains dynamic, the report concluded. It cited figures from the Organization for Economic Cooperation and Development (OECD), which last year ranked France’s biotech sector as second-largest in the world with 1,359 companies, while the U.S. remained on top with 6,213 companies. The EU has a combined 5,398 companies among its member nations. Biotech partnerships from French academic research in 2011 increased from 49% in 2010 to 52% in 2011.

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