Sweden: A Midnight Sun for Biotech

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Moreover, in contrast to the rest of Europe and the U.S., Sweden has a unique policy on intellectual property. The so-called teacher's exemption allows scientists—not the universities where they work— to own full rights to their discoveries. This has encouraged many academics to strike out on their own in search of outside investment capital. Since they own the intellectual property, they can transfer it to an independent company. "This is a key competitive advantage and one that has spurred a flurry of entrepreneurial activity," says HealthCap's Steiner.

From Academia to Industry

Take Mohammed Homman, who founded a company based on the results of his doctoral research at Karolinska. Having developed a novel technology that can more accurately detect and diagnose viruses, Homman set up Stockholm-based Vironova two years ago. The technology's potential to shorten discovery time for anti-viral drugs and shed light on new therapeutic targets has attracted the attention of venture funders, who have put an undisclosed amount into the startup. Homman also has inked partnership deals for his technology with IBM (IBM) and Olympus (7733.T) and is planning to set up a U.S. office in the near future to attract new customers and investors.

Homman's story typifies a new generation of Swedish scientists who are moving out of academic labs and into industry. Historically, most of the country's biotech R&D was done by academic institutions and a handful of big pharmaceutical companies such as AstraZeneca (AZN) and Pharmacia, now part of Pfizer. But cuts to university funding and the breakdown of pharma research centers due to mergers and acquisitions have brought about a shift: These days, startups have become the major source of biotech R&D—and the bulk of their funding comes from venture capitalists.

The pairing up has led to a string of Swedish successes. Take NeuroNova, a Stockholm-based biotech started in 1998 by two leading neuroscientists from Karolinska. The company focuses on discovery and development of drugs designed to stimulate neurogenesis, or the formation of new neurons, which offers promise for treating degenerative diseases such as Parkinson's as well depression.

NeuroNova's strong science helped it to raise $33 million from venture capitalists including HealthCap, which has a 32% stake in the company, and Investor Growth Capital, the venture arm of Investor (INVEA.ST), the holding company owned by Sweden's powerful Wallenberg family. Now NeuroNova has three potential drugs in preclinical development.

Next Stop: U.S. Markets

Already established in Sweden, companies such as NeuroNova are eager to take their business to the next level. For most that means boosting access to the U.S. market, either through alliances with U.S. biotech and pharmaceutical companies or by setting up operations of their own.

The chance to forge such links drew the crème of the industry to the recent third annual Swedish American Life Sciences Summit in Stockholm. The aim of the gathering, says founder Barbro Ehnbom, a former Wall Street analyst and pharmaceutical executive, "is to increase the number of cross-border businesses between the U.S., the largest health-care market in the world, and Sweden, one of the most important life science centers in Europe." With a growing number of products from Swedish firms entering clinical trials, the deal-making looks likely to get red hot.

Capell is a senior writer in BusinessWeek's London bureau.