Everywhere you look this spring, there are signs of bubbly enthusiasm for technology. Microsoft just paid $8.5 billion for a company that isn’t profitable. Facebook has racked up more than 600 million members around the world. LinkedIn is teed up to go public this week at a valuation of more than $3 billion.
It may be hard to remember, but the history books say there was once a time when broad swaths of the American public got that fired up about biotechnology. I’ve now been writing about the industry for 10 years, and have never encountered that feeling myself. The only biotech industry I’ve ever known is populated by a small group of hard-core specialists. When I venture outside biotech circles and tell people I write about new biotech drugs, devices, and diagnostics, I usually get greeted with a blank look. I’ve learned the best option is either to pass the celery sticks, or change the subject to something popular, like Facebook, or something else I may have in common with the other person, like being a fan of the Green Bay Packers.
There are good reasons biotech lives in such a zone of public indifference. The industry has overpromised and underdelivered since its beginnings in the late ’70s. The investing public has learned, appropriately, to be skeptical of claims about revolutionizing medicine. Drug development is way more risky, requires more money, and takes a lot longer than anybody realized back in the early days. Even when a new biotech drug does make a big difference, it only really affects people with a certain disease, and maybe their family members, so it never enters the vast sea of pop culture awareness (except, perhaps, for Viagra).
All of this collective indifference has consequences for the industry. When an industry shrinks down to a small core of specialists, you naturally see little appetite for new IPOs among generalist investors who control most of the capital on Wall Street. And the lack of an IPO market makes it difficult for biotech companies to gain negotiating leverage they need to sell their companies for a mint to Big Pharma. When biotech fails to captivate the public imagination, it can’t get good returns for venture backers, and companies have to slash their payrolls, and, often, their ambitions.
The return of investor enthusiasm for tech has made me wonder whether there are any signs that biotech might, just might, ride the tech industry’s coattails. The verdict isn’t in yet on that question, but there are some signs of a modest (let me repeat, modest) renewal of interest in biotech.
This year, biotech/healthcare specific mutual funds have seen more capital flowing into them, rather than out, for 16 of the first 19 weeks of 2011, according to a report last week by Chris Raymond, an analyst with Robert W. Baird in Chicago. More than $2 billion of new investment capital has flowed into biotech/healthcare specific mutual funds this year, with more than half of that coming in the past two weeks, Raymond said. Investors apparently have noticed that biotech stocks are doing pretty well this year, compared with the broader market. The NASDAQ Biotech Index is up 17 percent this year, while the S&P500 has gained 7 percent this year, Raymond said.
The numbers may be encouraging, but $2 billion flowing into one sector isn’t really a very big deal. The money could easily flow right back out in a few weeks. And the numbers have to get much bigger than that before anyone can say biotech is really resurgent on the national stage.
Stelios Papadopoulos, one of the few investment bankers who has been around for every one of biotech’s booms and busts, told me on Friday that he doubts the biotech industry will ever really capture the public imagination like it once did. There were times in the early ’80s, mid-80s, and early ’90s, when investors thought they could get in early on the next Genentech—a company that blazed a trail in a new class of therapies. It rarely happened.
“As an industry grows and gets more data put into the equations, you see more examples and case studies, and you begin to narrow the range of maximum to minimum possibilities,” Papadopoulos says. “If there’s a guy who thinks the next IPO in line could be the next Amgen, he’ll buy it. But there are no outliers to drive extreme values anymore. We have a pretty good idea of what can happen, in terms of how much money it takes, how long it takes, what the FDA process is about. It’s a pretty difficult proposition. There was a time in the early ’90s, people believed every year there would be one or two new Genentechs. They were looking for it. Now we realize the next Genentech occurs maybe once every 10 years, not once a year. People have come to accept that. They are not as eager to think big. The only way to think big is to have a brand new set of ideas and platforms that promise to redefine the world. People need to let their imaginations fly with that.”
OK, so is there any really big idea out there now? There are entrepreneurs pursuing big dreams with stem cells, microRNA therapies, and genomic-based personalized medicine. Those ideas can still earn the occasional mass-market magazine cover story, but none of those ideas have really shown an ability to create a true groundswell of biotech interest.
“I don’t see anything today that could be so huge” as the genetic engineering was in the early days of biotech, Papadopoulos says.
Back at the JP Morgan Healthcare Conference in January, I remember seeing a lot of unfamiliar faces among investors, and there was scuttlebutt about how more generalist investors were starting to show interest in biotech again. We may be seeing some sign of that in the fund-flow data that Raymond has gathered. But I still hear from plenty of CEOs who worry about how the sector struggles to generate investor interest beyond a small core of usual suspects.
John Maraganore, the CEO of Cambridge, MA-based Alnylam Pharmaceuticals (NASDAQ: ALNY), is one of the guys out there with a sense for the generalist pulse, since he’s selling a really big, disruptive vision for the drug industry. His pitch is about making RNA interference drugs that are supposed to specifically silence disease-related genes, and hit targets that can’t be reached by traditional small-molecule or protein-based therapies. Alnylam got hit hard by investors last fall when one of its partners, Roche, threw in the towel on RNAi. Alnylam’s stock still hasn’t recovered, although Maraganore says he’s seeing some signs of renewed optimism from generalist investors.
“I think it’s the beginning of spring,” Maraganore says in an e-mail. “I’m beginning to see some generalist investors come back to the space based on two factors…A fundamental belief that biotech can lead biomedical innovation for the future AND a recognition that the sector is remarkably undervalued.”
But, he adds: “It’s not yet Christmas. Many generalist investors remain on the sidelines. Most of them are worried about the challenges of bringing new medicines to the market…largely due to fundamental challenges at FDA to appropriately set the right balance of risk and benefit for advancement of innovative medicines.
“I’m hopeful that the seasons will turn.”
I’m hopeful, too. I personally like to think that biotech is both important and interesting. It’s got the ingredients for popular storytelling—science, medicine, big money, ethical issues, and no shortage of colorful characters. If biotech can’t figure out how to capture the public imagination, then something’s wrong. So excuse me now, while I go over to Facebook to let my friends in on a secret—biotech is interesting, and who knows, maybe there’s even money to be made.
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