Market entry and exit by biotech and device companies funded by venture capital

Health Affairs

Volumn 28, Issue 1, 2009, Pages

  Burns, Lawton R ^a   Housman, Michael G ^a   Robinson, Charles A ^b  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

^b NONE

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; BIOMEDICINE; BIOTECHNOLOGY; DEVICE; FINANCIAL MANAGEMENT; FUNDING; HEALTH CARE POLICY; MARKETING; MULTIVARIATE ANALYSIS;

BIOTECHNOLOGY; CAPITAL FINANCING; COMMERCE; EQUIPMENT AND SUPPLIES; FINANCING, ORGANIZED; PUBLIC POLICY; UNITED STATES;

EID: 59449100178     PISSN: 02782715     EISSN: 02782715     Source Type: Journal    
DOI: 10.1377/hlthaff.28.1.w76     Document Type: Article

References (28)

1. See, for example, Congressional Budget Office, Technological Change and the Growth of Health Care Spending (Washington: CBO, 2008);
2. D.M. Cutler, Your Money or Your Life: Strong Medicine for America's Health Care System (New York: Oxford University Press, 2004);
3. M. Platzer, Patient Capital: How Venture Capital Investment Drives Revolutionary Medical Innovation (Arlington, Va.: National Venture Capital Association, 2007);
4. Global Insight, Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy (Arlington, Va.: NVCA, 2006);
5. K. Kruger, "The Medical Device Sector," in The Business of Healthcare Innovation, ed. L.R. Burns (Cambridge: Cambridge University Press, 2005), 271-321;
6. and C. Pfeffer, "The Biotechnology Sector - Therapeutics," in ibid., 103-189.
7. F.M. Scherer and D. Ross, Industrial Market Structure and Economic Performance, 3d ed. (Boston: Houghton Mifflin, 1990);
8. and Z. Acs and D. Audretsch, "Innovation in Large and Small Firms - An Empirical Analysis," American Economic Review 78, no. 4 (1988): 678-690.
9. The different exits are not mutually exclusive. As noted above, some firms that enter the public market via an IPO can be subsequently acquired by a larger incumbent. Nevertheless, researchers commonly dichotomize the different types of exits into two classes: unsuccessful versus successful. Other labels for these categories are involuntary versus voluntary exit and destruction versus retention of organizational capabilities.
10. Platzer, Patient Capital.
11. Milken Institute, Biopharmaceutical Industry Contributions to State and U.S. Economies (Washington: Milken Institute, 2004).
12. AdvaMed, The Medical Technology Industry At A Glance (Washington: Advanced Medical Technology Association, 2004), 14, Chart 3.2.
13. The private sources include venture capital firms, corporate venture capital, specialty venture capital, business angels, incubators, private equity and hedge funds, private placements via merchant or investment banks, private investment in public equity (PIPEs), stock warrant off-balance sheet R&D financing (SWORDs), convertible and asset-based debt, and government-funded Small Business Innovative Research (SBIR) grants. Pfeffer, "The Biotechnology Sector"; and Kruger, "The Medical Device Sector."
14. The authors thank David Cassak, managing partner, Windhover Information, and Windhover Publications for this information.
15. Many of these differences are discussed by Pfeffer, "The Biotechnology Sector"; and Kruger, "The Medical Device Sector."
16. Much of the theory and evidence is summarized in literature reviews. See, for example, J. Baum and T. Amburgey, "Organizational Ecology," in Companion to Organizations, ed. J. Baum (Oxford: Blackwell, 2002), 304-326;
17. and L. Berchicci and C. Tucci, "Entrepreneurship, Technology, and Schumpeterian Innovation: Entrants and Incumbents," in The Oxford Handbook of Entrepreneurship, ed. M. Casson et al. (Oxford:Oxford University Press, 2006), 332-350.
18. The result is an inverse-U-shape relationship: too few entries suggest that the area is not a legitimate investment, while too many entries suggest that there is too much competition.
19. To investigate these different patterns, and to control for the confounding effects of firm size, prediction models typically include age, size, and their squared terms.
20. In the case of venture capital-funded companies, they can also stem from the firm's ultimate failure to resolve product development problems.
21. The VentureXpert database is cosponsored by PricewaterhouseCoopers, Venture Economics (a division of Thomson Financial), and the National Venture Capital Association.
22. The VEICs (industry codes) for biotechnology firms are 4110, 4120, and 4130; the VEIC codes for medical devices are 5210, 5220, 5230, 5240, and 5299. The description of the types of technologies represented within each VEIC is given in Table 2 in the Technical Appendix, online at http://content. healthaffairs.org/cgi/content/full/hlthaff.28.1.w76/DC2.
23. When only the exit date was missing, we estimated the year of exit as three years after the last observed company activity: for example, round of venture capital financing, acquisition, or IPO. When the founding date was missing, we estimated the year of market entry as three years prior to their first company activity. These estimates were based on the observed timing of entry and exit among companies for which these data were available.
24. Table 1 in the Technical Appendix (see Note 15) presents the descriptive statistics for all of the variables included in our entry models.
25. Table 2 in the Technical Appendix (see Note 15) presents the summary statistics for all of the variables included in our exit models.
26. David Cassak, personal communication, November 2007.
27. See Table 3 in the Technical Appendix, as in Note 15.
28. See Table 4 in the Technical Appendix, as in Note 15.