In the fast-paced world of life science research, collaborations between public institutions and private companies are increasingly common and crucial for driving innovation. However, these partnerships often navigate complex legal waters, particularly when it comes to European Union (EU) State Aid regulations. This blog post examines a case study that illustrates the intricacies of applying State Aid rules to life science research collaborations.
Case study Consider a university medical center initiating a research project and seeking collaboration with a pharmaceutical company. The total cost of the project is €2.5 million, with the pharmaceutical company agreeing to fund 50% (€1.25 million) of the costs.
At first glance, this scenario seems like a straightforward arrangement, but it raises several important questions under EU State Aid law.
State Aid rules aim to prevent unfair competition within the EU by regulating government support to enterprises. In research collaborations, public funding to universities can potentially constitute State Aid if it indirectly benefits private companies. The key regulations governing this area are:
The General Block Exemption Regulation (GBER)
The Framework for State Aid for Research, Development and Innovation (RDI Framework)
Before diving into the specifics, it’s crucial to understand the overarching regulatory framework:
Treaty on the Functioning of the European Union (TFEU): Article 107(1) of the TFEU establishes the general prohibition on State Aid. It states that any aid granted by a Member State or through State resources which distorts or threatens to distort competition by favoring certain undertakings is incompatible with the internal market, insofar as it affects trade between Member States.
Notification Requirement: Article 108(3) TFEU requires Member States to notify the European Commission of any plans to grant State Aid before implementing them. This “standstill obligation” means that aid measures cannot be put into effect until the Commission has approved them. This process allows the Commission to assess whether the proposed aid is compatible with the internal market.
General Block Exemption Regulation (GBER): The GBER plays a pivotal role in streamlining the State Aid process. It declares certain categories of aid compatible with the internal market, exempting them from the notification requirement to the European Commission. This allows for faster implementation of State Aid measures that meet specific criteria, providing legal certainty and reducing administrative burden for both Member States and the Commission.
In the landscape of State Aid for research and development, Article 25 of the General Block Exemption Regulation (GBER) plays a pivotal role. This article is particularly significant as it provides a framework for assessing and implementing aid for R&D projects without prior notification to the European Commission.
Research Categories and Aid Intensities: Article 25 defines three categories of research, each with its own maximum aid intensity:
Fundamental research: Up to 100% of eligible costs
Industrial research: Up to 50% of eligible costs
Experimental development: Up to 25% of eligible costs
Feasibility studies: Up to 50% of eligible costs
These thresholds represent the maximum percentage of the project costs that can be covered by public funding without requiring notification to the European Commission.
Fundamental research ‘fundamental research’ means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct commercial application or use in view;
Industrial research ‘industrial research’ means the planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or aimed at bringing about a significant improvement in existing products, processes or services (…).
Experimental development ‘experimental development’ means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services (…).
Feasibility study ‘feasibility study’ means the evaluation and analysis of the potential of a project, which aims at supporting the process of decision-making by objectively and rationally uncovering its strengths and weaknesses, opportunities and threats, as well as identifying the resources required to carry it through and ultimately its prospects for success;
Eligible Costs: The article specifies costs that can be covered by aid, such as personnel costs, equipment, overhead, and operating expenses.
Bonuses: Aid intensities for industrial research and experimental development can be increased by up to 15 percentage points under certain conditions, such as collaborations between undertakings and research organizations.
The first crucial step in applying Article 25 is determining whether the research qualifies as “industrial research” or “experimental development”. This categorization is vital because it directly impacts the amount of aid that can be granted without notification.
Case study In our university-pharmaceutical collaboration, the 50-50 cost split aligns perfectly with the industrial research threshold. However, if the project were to be classified as experimental development, this split would exceed the GBER limit, potentially requiring either adjustment of the funding ratio or notification to the Commission.
The GBER’s role here is crucial: by providing these pre-approved thresholds and clearly defining eligible costs, it offers a “safe harbor” for research collaborations. Projects that fall within these limits can proceed without the need for individual assessment by the Commission, significantly reducing administrative burden and uncertainty.
For life science collaborations, this framework allows partners to structure their projects in a way that maximizes available funding while ensuring compliance with State Aid rules.
The GBER allows for increased aid intensities in certain scenarios, which can significantly impact the permissible level of public funding in research collaborations:
Collaboration bonus: +15% for effective collaboration between an undertaking and a research organization
SME bonuses: +10% for medium-sized enterprises, +20% for small enterprises
These bonuses could potentially bring an experimental development project into compliance, even with a 50% public funding share.
The concept of “effective collaboration” is crucial in the context of research partnerships.
Effective collaboration Collaboration between at least two independent parties to exchange knowledge or technology, or to achieve a common objective based on the division of labour where the parties jointly define the scope of the collaborative project, contribute to its implementation and share its risks, as well as its results.
To qualify for the collaboration bonus, the project must meet one of these conditions:
The collaboration involves at least one SME, or is carried out in at least two Member States, or in a Member State and a Contracting Party of the EEA Agreement, and no single undertaking bears more than 70% of the eligible costs, or
The collaboration is between an undertaking and one or more research and knowledge-dissemination organizations, where the latter bear at least 10% of the eligible costs and have the right to publish their own research results.
Case study As the university medical center and the pharmaceutical company intend to collaborate, the collaboration bonus likely applies, and the maximum aid intensity can be increased. As the pharmaceutical company is a large company, the SME bonus does not apply.
A critical aspect of State aid assessment in research collaborations is the concept of indirect aid. Even when a public research organization (like our university medical center) is the direct recipient of public funds, we must carefully consider whether this arrangement indirectly provides State aid to the collaborating company (in our case, the pharmaceutical company).
The Framework for State aid for research and development and innovation (RDI Framework) provides detailed guidance on how to assess and prevent indirect aid in these scenarios.
Indirect aid occurs when the benefits of public funding flow through the direct recipient (the research organization) to indirectly advantage a third party (the collaborating company). This could happen if the company receives preferential access to research results or intellectual property without paying market price, effectively subsidizing its R&D activities.
The RDI Framework outlines specific conditions under which no indirect State aid is considered to be granted to the participating undertakings through the research organization. These conditions fall into two main categories:
Research on behalf of undertakings (contract research or research services)
In this scenario, the research organization provides a service to the undertaking. No indirect aid is present if:
The research organization receives payment of an adequate remuneration for its services, and
Either: a) The research organization provides its service at market price, or b) If there is no market price, the research organization provides its service at a price which reflects its full costs plus a reasonable margin.
Collaboration between undertakings and research organizations
In collaborative projects, no indirect State aid is considered to be granted to the participating undertaking if one of the following conditions is met:
a) The participating undertakings bear the full cost of the project.
b) The results of the collaboration which do not give rise to intellectual property rights (IPR) are widely disseminated, and any IPR resulting from the activities of the research organization are fully allocated to that entity.
c) Any IPR resulting from the project, as well as related access rights, are allocated to the different collaboration partners in a manner which adequately reflects their work packages, contributions and respective interests.
d) The research organization receives compensation equivalent to the market price for the IPR which result from its activities and are assigned to the participating undertakings, or to which participating undertakings are allocated access rights.
Case Study In our university-pharmaceutical company collaboration, we need to consider:
Cost Coverage: The 50-50 split suggests the company is bearing a significant portion, but not the full cost. This alone doesn’t prevent indirect aid, so we must look at the other conditions.
Results Dissemination: Will the non-IPR results be widely disseminated and will any IPR resulting from the activities of our university medical center be fully allocated to that center?
IPR Allocation: How will the IPR be allocated between the university and the company? This should reflect their respective contributions to the project.
Compensation for IPR: If the company receives IPR or access rights resulting from the university’s work, is the university compensated at market price?
To ensure no indirect aid is granted, the collaboration agreement should clearly address these points, particularly regarding the dissemination of results and the allocation of IPR.
By carefully structuring the collaboration in line with these principles, the partners can minimize the risk of inadvertently providing indirect State aid, ensuring compliance with EU regulations while fostering valuable research partnerships.
To ensure compliance with State Aid rules, the collaborators should:
Clearly define and document the nature of the research (industrial vs. experimental)
Assess the applicability of bonuses
Establish clear agreements on cost sharing, result dissemination, and IP rights
Consider adjusting funding ratios if necessary to meet GBER thresholds
Prepare for potential notification to the European Commission if GBER thresholds cannot be met
Non-compliance with State Aid rules can have severe repercussions for both the aid grantor and the beneficiary. If the European Commission determines that illegal State Aid has been granted, it can order the full recovery of the aid plus interest from the beneficiary. This ‘clawback’ can pose significant financial risks. Moreover, competitors who believe they have been disadvantaged by illegal aid may initiate legal proceedings.
Beyond financial implications, there are reputational risks to consider. Public disclosure of non-compliance can damage the credibility of research institutions and their private partners, potentially hindering future collaborations and funding opportunities.
Given these serious consequences, it’s crucial for all parties involved in research collaborations to prioritize State Aid compliance from the outset of any project.
This case study highlights several key points for life science researchers and institutions:
Early Planning is Crucial: State Aid considerations should be part of the initial project planning, not an afterthought.
Flexibility in Project Structure: The ability to adjust funding ratios or project classifications can be vital for compliance.
Documentation is Key: Clear documentation of research activities, their classification, and the rationale behind funding structures is essential.
Expertise is Valuable: Given the complexities of State Aid rules, having access to legal expertise in this area can be invaluable.
Balance of Interests: While compliance is crucial, it’s also important to structure collaborations in a way that respects the interests of all parties involved, while adhering to mandatory rules.
As this case study demonstrates, navigating State Aid rules in life science research collaborations requires careful consideration and planning. While these regulations may seem daunting, they play a crucial role in ensuring fair competition while still allowing for valuable public-private partnerships. By understanding and properly applying these rules, universities and companies can forge compliant, effective collaborations that drive innovation in the life sciences forward, and companies can avoid having the aid be recovered.
For those involved in such collaborations, it’s essential to stay informed about State Aid regulations and to seek expert advice when needed. The potential benefits of these partnerships – advancing scientific knowledge, developing new therapies, and ultimately improving human health – make it well worth the effort to get the details right.