Having spent the past few years arguing that the U.K. biotech sector was more robust, had more public companies, more products in the clinic than rival Germany's sector, Britain's biotech leaders are now conceding that the U.K. is off the pace and something needs to be done to redress the balance.

Indeed, spurred by continuing evidence that the rate of new company formation in the U.K. has slowed while the growth in German biotech start-ups continues apace, the U.K. BioIndustry Association is proposing what is a very unBritish solution - take a leaf out of the German book and provide soft loans for start-up companies. Even more surprising, the proposal has influential supporters within the British government.

Essentially, the BIA is calling for a soft loans scheme similar to that pioneered by the German government. Under the proposal, a start-up with funds from a venture capitalist would be able to apply for up to three times as much money through soft loans from a government-appointed agency.

"Probably the initial investment would be equity, but that would be very small, say of the order of £100,000," said Daniel Abrams, CFO of Xenova Group plc (LSE:XEN; XNVA, Slough, U.K.) and chairman of the BIA's Finance and Taxation Committee. "The loans would be long term and carry interest that would roll over until a suitable exit such as a trade sale, IPO or redemption."

An essential prerequisite is that the company has secured an approved venture capital investment. "The government will not be involved in the management of the company and will piggyback on the due diligence conducted by the investing venture capitalist," said Abrams.

Although details must be ironed out, Abrams would like to see the government earmark £100-£150 million ($144-$216 million) a year for the scheme. And while conceding that the government does run a risk that it might lose its money if a company should fail, he argued that securing the loans would likely put the government ahead of most other creditors in the liquidation process.

The German experience

No one doubts that Germany's soft loan scheme was a major catalyst in the development of that country's biotech industry. But the conditions were different when Germany first proposed the mechanism. It had no biotech sector - indeed Germany was considered a biotech no-go area - and venture capitalists were a rare breed, while the equity bug had not bitten Germans. Then politicians woke up to the fact that being out of biotech would hinder the country's future competitiveness.