Time to Cure Cancer or Stash Cash Under the Mattress?

8/15/11Follow @xconomy

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for biotech in the past three years. The biotech and pharma industry has struggled to efficiently churn out innovative new FDA-approved products. President Obama’s healthcare reform became law, providing access to millions of more patients. The FDA has tightened the screws on certain fields of drug development, like obesity and diabetes. Big Pharma companies are suffering from all kinds of mega-merger indigestion, which has prompted new rounds of cost-cutting and a retreat from really innovative fields like stem cell biology and RNA interference. Some high-profile product introductions have flopped lately—particularly Dendreon’s new prostate cancer drug—which has only served to fray the nerves of investors when they are already feeling pretty rattled.

Despite all the scary talk, I’m not convinced this is the moment to panic in biotech. The stock market drops are based more on the global macroeconomic concerns—as investors worry about things like defaults in Europe, and look to park assets in some safer place. But history says that every time investors get scared and sock away cash under the mattress they eventually get tired of that ho-hum business, and go off seeking greater returns through riskier ventures.

That process takes time, and some biotech companies will get hurt along the way, especially those hoping to pull off an IPO or a big acquisition in the short-term—or those with less than a year’s worth of cash on hand. Some short-sighted decisions will get made, as companies will try to throw investors some red meat by cutting costs, no doubt axing especially risky early-stage R&D programs that are supposed to pay off in five years, not five months.

Biotech companies have been in this position before—basically, for much of the last three years—so they ought to be in position to weather this latest storm pretty well. I’ve heard biotech CEOs shrug off recession talk before, essentially arguing that they always manage as if they have to scrimp and scrape for every single buck on the long and expensive journey of drug development. The last downturn killed off quite a few biotech companies, however, and if this one persists, it will certainly cull a few more members of the herd. It might even cause a few promising new drug programs to be axed before they get a chance to prove their worth. But the smartest biotech executives will be packing brown bag lunches, spending the money they have wisely on innovative programs, and ignoring the stock market as much as they possibly can.

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  • Joe Yanchik

    Interesting analysis, but only part of the story. I believe that the answers to biotech investor reaction are better explained by looking at the two years preceding the market corrections in 2008 and 2011. In light of the run up in values from 2009-2011 vs the relative flat performance of 2006-2008, the numbers would seem to indicate that biotech investors in 2011 had far greater gains to protect and therefore would be more likely to sell aggressively. One might conclude that the 2011 sell-off was a result of 2008 as the remaining biotech companies after the 2008 “shake-out” were far higher quality on average and better positioned to gain in value from 2008-2011.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    Joe—thanks for the comment. It’s true there was a run-up in biotech valuations from 2009 through 2011, and it could be that many investors are trying to lock in profits. But I’m not sure about whether the companies around today are of higher quality than the ones that got killed off in the recession of 2008/2009. That’s a really hard question to answer. It still seems like there are plenty of low quality companies out there in business, still raising money in 2011.

  • Joe Yanchik

    I will defer the discussion until the next Xconomy gathering on the viability of rational market theory. Although there will always be marginal companies raising money, the valuations over the last few years of newly minted companies would be one indicator of a rational biotech market that has concentrated greater value in a subset of quality companies. I believe that the indexes are being driven by a greater number of well managed development stage biotech companies than we have ever seen (e.g. Vertex, Biogen, Regeneron, Amgen, Gilead, Genentech & Genzyme (until recently) – etc..). When looking at the speed of technology development, the well placed sobriety of big-pharma, the diffusion of biotech development to BRIC countries and the state of the US public biotech sector, one might argue that the biotech industry (vs the large pharma segment) has never been in a better position for growth.

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