The IPO has been the traditional avenue by which early-stage companies raised capital necessary to fund late-stage drug development. As such it has been very important to companies that sell products and services to pharmaceutical companies. A recent analysis by PharmSource found companies that completed IPOs in 2004 increased their R&D spending by 50 percent in the quarters surrounding the IPO, while their capital expenditures jumped 30 percent. Much of the increased R&D spending goes to CROs and CMOs, as early-stage companies usually have limited in-house capabilities.
However, the IPO market has always been highly volatile, and that volatility has often made venture capitalists wary of investing in biopharmaceutical start-ups. After reaching an all-time high in 2000, the IPO window slammed shut in 2001, a result of the dotcom crash. It began to show life again in late 2003, and 2004 experienced a flurry of activity, with 30 biopharmaceutical IPO offerings that raised $1.8 billion, according to investment bank Burrill and Company. In early 2005, however, the IPO window closed again following a number of late-stage clinical failures and the withdrawal of Biogen-Idec's Tysabri product. Few deals were closed in the first quarter of 2005, and new biopharmaceutical venture capital investments dropped 30 percent in April, according to VentureOne.The volatility of the IPO market greatly compounds another mounting risk factor for biopharmaceutical investors: the need to advance pipeline candidates to a later stage before an IPO can even be attempted. While IPO investors were once willing to take a chance on companies with interesting technologies and a few preclinical prospects, they now expect to see one or more candidates advancing to late-stage clinical trials. That reduces the IPO investors' risk, but it greatly increases the risks to the venture capitalists, who must invest larger sums of money on their companies to fund progressively more expensive development stages.
This combination of forces — a weak IPO market and the growing expense of drug development — could have been a major blow to the biopharmaceutical industry if it were not for another major environmental shift: the need for major pharmaceutical companies to restock their drug development pipelines. Big pharma companies are rectifying the weaknesses of their internal R&D programs by pouring money into early-stage biopharmaceutical companies at unprecedented rates.
As their attention has turned to early-stage compounds, major pharmaceutical companies have found they can acquire entire pipelines, not just individual products, at a reasonable cost. Through April 2005, big pharma companies had already executed four major acquisitions of early-stage companies, versus just seven in all of 2004. Pfizer alone had already acquired two companies (Angiosyn in January and Idun Pharmaceuticals in February), and its CEO Henry McKinnell declared that more were in the works. Most major pharmaceutical companies also maintain venture capital funds that are investing in early-stage companies.