Bubbles, Bailouts, Bears and Biotech

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Researched by Industrial Info Resources (Sugar Land, Texas)--In 2007, the Biotech sector set a record for mergers, acquisitions and strategic coalitions. An analysis of Industrial Info's Pharmaceutical Tracker - Online Database brings to light that covenants within this sector were worth upwards of $60 billion in the United States. Now, in 2008, the financial markets are in disarray, banks are failing/consolidating, home values have plummeted, energy and food prices have soared and a "buy now, pay later" nomenclature has become ingrained in our society. Could the trend in Biotechnology consolidations have been a harbinger for the other economic sectors today?

The Biotech industry was hatched out of necessity in a somewhat inhospitable economic incubator. In the beginning, these firms were usually launched by academia for institutional research purposes. However, large pharmaceutical firms that were reeling from patent expirations and increasing pressure to deliver innovative new drugs, discovered the value of partnering or owning these companies to enhance their drug pipelines, allay investor concerns and ultimately beef up their profits. Biotech has always been a market of meager profits, time consuming and expensive product development and a high level of uncertainty of product success. However, there is nothing more meaningful and altruistic than the development of a drug that will cure a chronic disease or be used as a tool that will enhance the human quality of life. Many analysts have often compared the Biotech industry to the dot-com frenzy of the late 1990s. However, the contrast of these two sectors is that one is for human physiological enhancement and the other is for human psychological enjoyment. No doubt, Biotech is intrinsically valuable and here to stay. This industry will produce amazing and breathtaking new products, but the question remains: Do investors have the patience and capital to see this sector to full maturity and fruition?

Only 11 of the world's top 20 biotechnology companies currently achieve a positive net income. As an example, Theravance Incorporated (NASDAQ:THRX) (San Francisco, California) is the fastest growing biopharmaceutical company in the world with a growth rate of 12,456% over the last five-year period. However, Theravance also has one of the highest levels of net losses within the industry, highlighting the need to sustain more stable, predictable and stronger financial performance. Clearly, angel investors often avoid biotech start-ups because of long and costly development times of biotech products, as well as a tendency for venture capitalists to set over-diluting terms when entering in follow-up financing rounds. These trends are exacerbating an early-stage funding gap in the biotech sector, which is unlikely to be remedied unless angels return to a disciplined form of collaboration with venture capitalists when investing in seed-stage rounds.

In recent years, the biopharmaceutical industry has emerged as one of the most important sectors in the life science industry. Advances in life sciences have resulted in the drug discovery process becoming more science-intensive, with an increasing emphasis on cross-company collaborations and the exchange of information. However, growing commercial pressures and rising research and development (R&D) costs have prompted many biotech companies to seek financial support from global Big Pharma corporations through licensing and collaborative R&D deals. On the other hand, the bio sector's technology platforms and pipeline promises have proved to be a strong draw for pharma dollars in various configurations, ranging from outright purchases to partnerships. This interdependency is clearly the base from which both industries will grow.

Clearly a lot is at stake. Financial bubbles (being part of a boom and bust pattern) distort capital allocation, make it more difficult for innovative companies to achieve endurable financing, harm the public confidence in important institutions (such as stock markets, banks, listed companies and innovations) and entice people into making poor investment decisions. In the case of life sciences, a sector that directly impacts no less than the quantity and quality of life, it underlines the importance of paying now, rather than later.

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Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.