Over the last decade we have seen an unprecedented downturn in biotech investment. Just in the last 6 years alone the number US publically traded biotech companies has dropped by 1/3 and numerous VC firms have stopped investing in new biotech start ups. What led to this downturn?
It was not just one catalyst but a confluence of events:
· FDA becomes unpredictable. Instead of getting accolades for approving numerous life saving drugs FDA was attacked by lawyers and faced inquisitions by politicians every time there as a drug related adverse event. How can you miss this side effect? Guess what, there is a risk benefit to all drugs and all have side effects. FDA feeling prosecuted slowed down new drug approval and started focusing primarily on safety and less so on efficacy.
· The public markets don’t like unpredictable events. FDA’s “irrational behavior” took all the upside out of biotech investment. There has not been a good IPO biotech market in over 10 years! Changes on how analysts covered new biotechs and new banking rules did not help either. The few IPO’s that went through were at big discounts.
· Big pharma was an easy target for governments looking to for ways to bring health care cost escalation down. In particular many European countries started cutting drug prices with vengeance. More recently some cannot even pay their bills. With new drug approvals slowing down and revenue growth diminished big pharma started cutting R&D and looked towards acquisitions to fill new product pipeline. The lack of a public market gave big pharma/biotech the opportunity to change the way they acquired biotechs from all cash or stock to some cash upfront and milestones.
· VC’s cannot get venture returns without any good IPO’s and milestone driven M&A so all reduced if not eliminated early stage investing. The remaining healthcare VC’s focused primarily in supporting their existing portfolio companies hoping for an improved exit market.
· During the 2008, 2009 major market correction LP’s found themselves with too many private equity holding as the value of their portfolio dropped dramatically. Some did not even have enough cash to meet obligations. VC returns did not justify new LP commitment so many VC’s unable to raise new funds went out of business all together.
· US government grants unfortunately are not sufficient to keep the rate on new medical innovation growing.
· Pharma and biotech employment continues to drop. Another major US industry is declining fast.
Sadly the above events paint a depressing picture. Is there a rainbow in this cloud? As with all other industries, like oil, housing etc supply and demand will bring stability and hopefully a gradual recovery. When big pharma will no longer be able to find enough new drug candidates to acquire competition to acquire will lead to elevated all cash prices. Could Pharmasset be the first example of a bidding contest?
Big pharma/biotech consolidation has reduced the number of potential acquirers and most likely will moderated future acquisition prices.
For the sake of mankind let’s hope governments, regulatory agencies and the public will recognize that we need a vibrant biotech industry to keep improving world quality of life.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.