Tuesday, March 20, 2012

"The gravy days are over." (WSJ)

This just in: financing for biotech companies is scarce.

The WSJ article reporting this has in-depth analysis and loads of figures. Depending on your view, any and all of the following are responsible for a general decline in biotech financing:

-big pharma being more selective
-FDA intransigence
-trouble getting liquidity/the difficulty of IPOs. (Due to Sarbox.)
-better options for investors in other industries, especially the internet
-generics and the threat of biosimilars.
-economic difficulties (and US budget pressures) are increasing pressure on basic R&D budgets.

The truth is, with a few very rare exceptions (1999-2000), biotech financing has almost always been scarce, and to think otherwise, or plan otherwise is just plain stupid. There's a high technical barrier to entry for investors, long turnaround times for investments, and enormous technical risk with any drug development effort. Revenue-generating companies - which more investors understand, and therefore have an expanded pool of investment capital for them - take 7-10 years to build in this industry.

This is a sector that SHOULD have a high cost of capital, and probably an undersupply of capital.

But I'd say that this is just about the best time to have a great idea to develop, because:

  • pharma's need for new products has never been higher, and the aging US & European populations are increasing demand for pharmaceuticals
  • start-up and operating costs have been driven down by outsourcing & virtual operations.
  • the abundance of specialized CROs & consultants lets smallish companies rapidly access expertise and capacity.
  • with big pharma continually restructuring, there is an abundance of talent and facilities available.
  • the current FDA & NIH administrations are trying to streamline the regulatory burden. Also: more regulatory paths are opening. I've heard of plans to gain approval first in China by some companies.
  • increasing globalization makes it easier to collaborate. (Design a molecule in the UK, synthesize in the USA, screen in China, on a faster AND more efficient basis than if you had a fully integrated operation at one site.)
  • increased genomic understanding and lower sequencing costs are enabling more effective R&D.
  • China, China, China: increasing the supply of capital, talent, ideas, and lab assets. And not just in China: I've been told by US & EU academics that it has never been easier to find talented, financially-supported post-docs, from China for their American or EU labs.
  • a growing generation of successful firms and alumni to incubate, mentor, and lead new ideas. (Guys like Patrick Soon Shiong (Abraxis founder, among other ventures) Henri Termeer (ex-Genzyme CEO), and RJ Kirk. (Not that this is exclusively a new development (think Alejandro Zaffaroni), but their numbers are growing. I can't wait to see what emerges from the Genentech alumni in years to come.)

If anything, biotech may suffer from an abundance of good - new drug targets, under-validated lead compounds, and interesting but not bulletproof diagnostic technologies are very easy to find these days. Just walk into any university's tech transfer office - they probably have some promising target IP just waiting for the right investor/believer.

The scarcity of investment capital is probably a good thing, culling the herd such that (on average) only the best ideas go forward.

This is all small consolation to the team at a small company struggling to raise their next round, but it definitely seems that better days are ahead, and it'll be a Molecular Future.

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