Although the market for biotech IPOs is opening, capital constraints remain a key issue for biotech companies. Recent years have proven difficult with limited access to financing, and venture capital in particular has been virtually non-existent. Biotech companies with limited resources have focused on core development activities.
This has resulted in delayed development of pipeline products and is likely to have a future impact on the availability of new drugs for licensing and acquisition by big pharma. One of the consequences is that big pharma cannot rely on biotechnology companies to be the sole source of new products to keep their portfolio's stocked. They will have to continue to invest in their own R&D, however inefficient this may be. However, the trend of big pharma is to outsource and divest R&D as evidenced by the recent layoffs at AstraZeneca and GSK, and the loss of R&D facilities post-merger at Wyeth/Pfizer. The current strategy of big pharma is only likely to exacerbate their pipeline shortages in the face of the generic cliff many companies are facing.
Additionally, as reported earlier this week in the FT, the benefit to pharmaceutical companies of investing in their own R&D is that early stage development is cheap compared to the high cost of buying developed research. Late stage products come at a price premium reflecting their lower risk.
An example of this is the $1.2B licensing and development deal that AstraZeneca did last week with Rigel Pharmaceuticals (Nasdaq: RIGL) for their rheumatoid arthritis drug, fostamatinib disodium (R788). The Pharma Strategy Blog has further insight on this.
Big pharma cannot rely on outsourcing and biotech for all their new drug development and need to invest in their own R&D.