While pharma companies are self-funding their operations and research programs, the capital fueling the biotech industry is largely external.
Part of this phenomenon is due to the still-maturing landscape of the pharma industry, while others parts are due to more unique market-driven factors.
By a wide margin, biotechs are being backed by large sums of money from venture capital. According to a 2015 report, biotech was third overall in venture capital income, behind the software and media/entertainment industries. The second quarter of 2015 saw $2.3 billion covering 126 deals – a 32 percent increase from the prior quarter. “This amount is the largest quarterly investment total going into biotechnology companies since … 1995,” reported PwC. In all, according to an estimate, biotech companies raised nearly $71 billion in 2015.
This investment, according to Forbes, is “offering an opportunity for emerging companies to scale and develop their pipelines more significantly than ever before.”
But, the same report noted, this is not your grandfather’s venture capital. Instead, the VC is coming from hedge funds and public market investors and is not being distributed widely – actually, just a handful of projects are getting nearly half of all biotech funding. Similarly, the funding is going largely to the same companies which have always gotten VC funding anyway.
VC goes to most biotech companies early in their life cycles and generally comes from wealthy investors who manage venture funds are like to put money into startups with a potential to generate lucrative returns. From there, the startups can either pursue an initial public offering or look for a merger and acquisition possibility.
VC is not all that is out there, of course. Up and coming biotechs can pursue grants, chase private investors, pray for an angel investor, or put on a suit and go to the bank for a loan.
But is capital for biotechs about to dry up? Market forecasters Ey suggest that could be the case. “The biotech indices have relinquished (2015’s) enormous gains, and the queue of companies lining up for public offerings has dwindled. In this environment, the question to ask isn’t whether the climate is changing, but just how long this winter will last.”
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