Growth and profitability in small privately held biotech firms: preliminary findings

Abstract

This paper reports on preliminary findings on a study of the relationship of growth and profitability among small privately held Finnish Life Science firms. Previous research results concerning growth and profitability are mixed, ranging from strongly positive to a negative relationship. The conventional wisdom states that growth is a prerequisite for profitability. Our results suggest that the reverse is the case. A high profitability-low growth biotech firm is more probably to make the transition to high profitability-high growth than a firm that starts off with low profitability and high growth.

Untangling the relationships among growth, profitability and survival in new firms

“…Hence, while firms differ substantially cross-sectionally, changes in profitability and sales growth lead to important changes in the outcome variables. This highlights the theoretical notion that profitability and growth differences among firms tend to be fairly stable over time, but that a transition from a non-profitable to a profitable firm is relatively rare (Brännback et al, 2009;Coad, 2010). This highlights the importance of controlling for the potential of unobserved differences in studies of firm growth.…”

“…Their approach involved categorizing firms at the beginning of the observation period in terms of growth and profitability achieved and then examining the probability of individual firms moving from one category to another. This approach was subsequently espoused by Brännback et al (2009) who analyzed 336 Finnish life science firms. They find profitability to be positively associated with sales growth, but not the reverse.…”

“…To validate this variable, we also use a second profitability measure, Earnings Before Interest and Taxes (EBIT) divided by sales. This measure has also been used in some studies (Brännback et al, 2009;Kwoka and Ravenscraft, 1986), but less often so than ROA. EBIT has been argued to be relevant to business managers as it is less likely to be influenced by low asset bases, as is common in the service sector (Kviluoto, 2011;Wennberg et al, 2011 ).…”

Planning and the Entrepreneur: A Longitudinal Examination of Nascent Entrepreneurs in Sweden

“…Recent reviews in the field, however, agree that selfreported measures correspond well with actual measures (Shepherd and Wiklund 2009). In addition, Davidsson, Steffens, and Fitzsimmons (2009) and Brännback et al (2009) showed that early profit actually drives subsequent profitable growth.…”

Are Biotechnology Startups Different?

“…The literature on biotechnology startups is rich both from an academic as well as business-oriented standpoint. A few general books can be quoted (Shimasaki 2014, Binder 2008, Hughes 2011) and academic work is numerous even if again a few articles are worth being mentioned (Audretsch 2001;Bradford 2003;Brännback et al 2009;Zahn and Patel 2005;Zucker et al 1998). A recent publication by Tzabbar & Margolis (2017) exemplifies some unique features of the roles of founders.…”