capacity every 18 months, together with increases in magnetic storage and fiber optic transmission capacity led to rapid strides in increasing computing power and reducing its cost, in turn setting the stage for the Internet. Given the opportunities opened up by the new platform, it may have been natural for entrepreneurs to focus on software applications for the new medium, while continued progress in microelectronics followed a predictable course within the capacity of large established firms such as Intel, AMD, and their equipment suppliers. Thus, following a few early independent commercial successes in Internet applications, it could be expected that acquisitions would dominate in information technology during this period rather than IPOs.

The drug discovery and development field exhibits other, perhaps more permanent, characteristics that favor acquisition over going public, according to David Morgenthaler of Morgenthaler Ventures, Leighton Read of Alloy Ventures, and Ed Penhoet of Alta Partners.8 The high cost of extended mandated clinical trials and the prolonged uncertainty regarding reimbursement by medical care payers means that only large pharmaceutical houses have the resources and risk tolerance to take innovative products all the way to market. Thus, exit via acquisition is a more common pattern in biotechnology than exit via IPO notwithstanding the well-known exceptions of Genentech and Amgen. Of course, public policy changes could ameliorate these disincentives for entrepreneurial biopharmaceutical firms to go public and remain independent but probably not enough to make a substantial difference. Besides, other factors such as high pharmaceutical marketing costs and the premiums on having brand recognition and extensive sales forces reinforce the acquisition route. Others pointed out it is worth asking whether technological progress across a range of fields has for the time being ceased to offer as many opportunities for building major, stand-alone technology firms. Apart from what some perceive as a slowdown in information technology and remaining high scientific hurdles in biopharmaceuticals, there is uncertainty about the future of nanoscale science and engineering applications and about “green” technologies. Focusing solely on financial markets is one-sided.

TAKING INTO ACCOUNT “DEMAND” SIDE FACTORS

Several participants pointed out that exit strategies are determined not only by influences on investors’ and entrepreneurs’ behavior but also by characteristics of the market, including characteristics of established firms. For acquisition to be an attractive option there must be willing buyers. Perhaps a good example is again from the pharmaceutical industry. For whatever reasons, the productivity of the R&D operations of a number of major pharmaceutical houses seems to have declined in recent years. Fewer new molecular entities are being filed with the Food and Drug Administration as candidates for clinical trials. Thus young entrepreneurial firms, especially those engaged in the development of biologic therapeutics, are more attractive candidates for acquisition to replenish drug development pipelines. David Morgenthaler characterized most biotechnology companies as “farm clubs” for pharmaceutical companies.

8

At the time of the workshop, Penhoet was president of the Gordon and Betty Moore Foundation.



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