Let's face it, IPOs are exciting. Whether you buy in and cheer them on, or sit on the sidelines and hope for an entertaining stock-price roller-coaster ride, getting in on the ground floor provides a certain thrill.
But it's not really the ground floor, of course. Companies that make initial public offerings existed well before their IPOs. Occasionally they're started with just the founders' money, but more often than not, venture capital funds are involved in getting the next Google or Genentech
If the idea of investing pre-IPO excites you, but you don't want to invest directly in a venture capital fund, it turns out there's a way to get in on a piece of the new company action by buying publicly traded companies: Many drug companies have venture capital arms.
This isn't really a new phenomenon; Johnson & Johnson
In perusing the pharmaceutical companies' websites, it's interesting to note that the venture capital arms appear to be purely in the business of making money, and often make investments without worrying whether their parent company will get an eventual licensing agreement. On the other hand, I'm sure that having a connection to the up-and-coming company doesn't hurt when it's looking for a marketing partner down the line.
While buying stock in these drugmakers does allow you to get a piece of the action, in reality it's a very small piece of most of the pharmaceutical companies' businesses. In scouring Merck's
While the venture capital business can certainly make money, a couple of drug companies have started programs --called incubators -- to take a more hands-on approach to developing new companies. Most likely, they are more interested in the prospects of filling their pipeline down the line than they are in getting equity in the pre-IPO company.
Just like the incubators that are used to grow cells in a laboratory, these incubators house up-and-coming businesses in their infancy. The pharmaceutical companies nurture with money, equipment, and experts.
In many ways, I like this system much better. It gives the start-up a fighting chance in the complex world of drug development, and potentially benefits the big guy as well.
Pfizer isn't alone in this incubator model. Biogen Idec
Desperate times call for sane measures
I don't think these investments are a sign of desperation by the drug companies, but they certainly point to the patent cliff that many drugmakers face. Drugmakers need to restock their pipelines, and if they're unable to do it in-house, acquisitions and licensing are the only option. Personally, I'd rather see pharmaceutical companies spending a little money on unproven pre-clinical drug candidates than a lot of money on phase 2 (but still unproven) drugs.
More Foolishness on not-so-public investments: