We are currently enjoying a much needed resurgence in the biotechnology industry. The industry has been the best performing sector in the stock market for the last two years and it appears it will be again this year. This performance has enabled companies to raise capital, either publicly or privately, in record amounts. We expect the industry to raise more than $4 billion this year. The performance of the stock of companies that have executed initial public offerings is quite impressive. The average stock prices of the 23 life science IPOs through July are up over 50 percent from their offering price (on average) with only four trading below their offer price.
We have seen this enthusiasm before. When Genentech went public in October 1980, the stock rose from $35 a share at the offering to $89 per share in the first hour of trading. Likewise, when the New York Times ran an article in 1998 discussing the emerging field of angiogenesis and the possibility of curing cancer in a short time frame, the biotechnology sector benefited in a very positive way. The completion of the human genome project at the beginning of the last decade is another example of a time point when investor enthusiasm was high which enabled the industry to raise significant capital.
Since the extraordinary success of the current bull market will probably not last forever, we as an industry, need to prepare ourselves for a pullback at some point. When the markets have paused in the past there were many companies that traded below their cash or had less than one year of cash in the bank which amplified the downturn in the sector.
Given the better capitalization of the industry and the extraordinary advances in the scientific underpinnings of the sector during the last decade, it makes sense to examine the lessons learned the last time the industry and stock market took a pause. These are some observations from past history and some steps that companies may want to take to prepare for when the markets are no longer at all-time highs:
1. Focus on Cash Management: We often have been too lax … Next Page »