29.06.2018 | Brussels Background A wind of change: The revision of the current SME definition

In 15 years the definition of small and medium sized enterprises (SMEs) has never changed. Till now: The Commissions’ President Juncker claims that SMEs are the backbone of the European economy and that they therefore need proper and fair access to funding and support in order to meet the needs of the economy. A clear cut definition is supposed to facilitate this access and thus support these enterprises. Especially in Germany, we have a different understanding of what is an SME – also called German Mittelstand. The next months will show if and how the Commission will adapt to the changing world and possibly adapt also the SME definition. The pharmaceutical industry – especially in Germany – will closely watch this space.

The current definition for SMEs is stipulated in the Commission Recommendation 2003/361/EC on micro, small and medium-sized enterprises and regulates the access to important funds, especially research grants for certain diseases and other research areas. The definition distinguishes enterprises according to three different criteria, namely the staff headcount, ‘financial parameters relating to turnover’ and the status of ownership. A medium sized company does thus have 50-250 employees and must meet the required financial parameters (either a turnover of 10-50 Million Euro or a balance sheet total of 10-43 million Euro). Regarding the status of ownership criterion, there are differences between fully independent autonomous enterprises and enterprises with partner relationships or a shared ownership. Whereas 99% of all Businesses in the European Union (EU) are classified SMEs – accounting for up to 67% of all jobs in the EU – the majority of German based pharmaceutical companies and the broader German industry far exceeds these thresholds and thus remain without access to these funds. .

Eventually, the European Commission has recognised a need to evaluate the definition of SMEs and analyse whether it is ‘fit for purpose’. Stakeholders have already provided input into the process via a public consultation which ran from February to 6May 2018.

Germany is in particular proud of its Mittelstand which is rather an entrepreneurial feeling than a concrete/ tangible and hard threshold. Therefore, the Institute for Research on SMEs from Bonn (IfM - Institut für Mittelstandsforschung Bonn) classifies medium sized enterprises as enterprises having less than 500 employees, which is significantly higher compared to the current EU definition. However, at the same time allows for the appropriate discretion of flexibility and so called Mid-cap companies which are the majority of pharmaceutical companies in Europe.

These innovative companies should be regarded as a special case. They have to overcome the greatest obstacles in order to enter the market. At the same time, it is precisely these companies that drive structural change and safeguard the economic location of the future thanks to their innovative products. This is why they deserve special support.

A broad Mid-Cap segment is essential to a functioning economy. Experience has shown that Mid-Caps can compete because they are flexible. They can also hold their own against large companies. However, Mid-Caps are at a disadvantage as regards their larger competitors. In order to prevent distortions of competition arising in the entire pharmaceutical market as a result of inappropriate definitions, the definition of an SME could be based on the market structure in the sector in question. In this way, the question of whether a firm is defined as an SME would not depend purely on absolute parameters, such as annual turnover or the number of employees, but rather on the size of the companies in the sector concerned. What would be decisive for the definition of an SME is its size in relation to the large companies in its sector, that is, the companies against which smaller firms are to become more competitive.

The European Commission at times of increasing global competition has a chance to revise the SME definition that allows European industries to become the real backbone of the EU economy. It will be interesting to see, if it will take it!