The evolution of biotechnology in hostile financing environments

Purpose – The purpose of this paper is to study the development of the biotechnology industry at the industry and firm level when the financing environment becomes hostile and assess the reasons for this development. Design/methodology/approach – An organizational evolution perspective to analyze the case of the German biotech sector was applied and its response to the hostile financing environment in the years 2002‐2004, which followed the burst of the high‐tech bubble at the stock markets. Population ecology and data from biotech reports to investigate the pattern of external adaptation processes at the industry level were used. The evolutionary economics perspective, multiple case studies of bioventures, and biotech reports to study internal adaptation processes at the firm level was employed. Findings – The assumption of both external and internal adaptation processes was found in parallel is necessary to explain the evolution of the biotech industry in a hostile financing environment. Although external adaptation takes place to some extent through insolvencies and a reduced rate of new firm foundations, many bioventures adapt internally by downsizing, changing their business models, and entering into strategic alliances and M&As. This results in surprisingly weak consolidation at the industry level. Originality/value – This paper provides an explanation why the consolidation of the German biotech industry in 2002‐2004 was much weaker than expected by experts. Moreover, the paper shows that application of population ecology and evolutionary economics in parallel well describes industry evolution and organizational change. Finally, the paper demonstrates how bioventures can adapt their financing strategies to hostile environments.