Waiting for Godot: Will Venture Funding Return? - Contract research, development, and manufacturing organizations betting on a comeback in venture capital financing will have a long wait. - BioPharm

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Waiting for Godot: Will Venture Funding Return?
Contract research, development, and manufacturing organizations betting on a comeback in venture capital financing will have a long wait.


BioPharm International
Volume 22, Issue 8

A LONG WAIT

Many contract service providers are anxiously waiting for venture funding to make a comeback, in expectation that the rising tide of increased spending will lift all of their ships. However, many VC industry observers hope and expect that the volume of investment will not return to recent levels, and may actually remain at 50% of historical levels for some time to come.

The rationale for the sustained decline is straightforward; as massive amounts of capital have flowed into venture investing, returns on venture investing have fallen rapidly. VC investments are no longer paying the exceptional returns with which they have been associated, and which are expected to offset their higher risk.

Returns on VC investments exceeded 20% during the dotcom boom, when companies were able to float initial public offerings at very high valuations. However, since the dotcom bust, returns have dropped sharply, to single-digit and negative levels. Recent returns have not been significantly better than those offered by the major equity indexes.

The flow of funds into VC funds is already declining, and is already less than half of what it was just two years ago. New VC funds are having trouble attracting new investors, and investors are reneging on commitments made in the last two years to established funds. Further, venture capitalists are reluctant to accept new investors into their portfolio companies because the new investors are insisting on onerous terms.

WHAT IT MEANS

The VC picture is bad news for the many CROs and CDMOs that have built their businesses strategies around the needs of on the venture-backed companies. This includes the so-called "one-stop-shops" that offer the complete menu of preclinical and early development services geared to getting early-stage companies to proof-of-concept as quickly as possible. It also includes the more traditional process development and formulation development CDMOs that have expanded their facilities and capabilities in recent years in response to the growth in the early development pipeline. As that pipeline shrinks, those companies are going to find themselves with a lot of idle capacity, which is likely to trigger a price war and a rash of closures.

The picture suggests that the period of entrepreneurial growth for the CRO and CDMO industry may be over. That doesn't mean there isn't opportunity and growth ahead for contract service providers, but that the future is likely to belong to larger, well-capitalized companies with a solid core of mid-size and major bio/pharmaceutical clients. It is no longer enough to depend on small venture-backed bio/pharma companies.

Jim Miller is president of PharmSource Information Services, Inc. , Springfield, VA, 703.383.4903,


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