Time to Cure Cancer or Stash Cash Under the Mattress?
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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.