Bargain Basement Biotechs
Next to the Big Three, no industry has been harder hit by the credit squeeze than biotechnology. Says Joe Panetta, president
of BioCom, Southern California's industry group: "Private equity has gotten scarce for many small and midsize companies. To
make sure that they're still standing at the end of 2009, they're going to need assistance."
Stories of biotech bankruptcies began cropping up in the media late last year, and are likely to proliferate in 2009 if no
cash infusion comes. According to BIO, more than a third of the 370 publicly traded US biotechs (nearly double the number
publicly traded in 2007) lack the liquidity to survive until July. Panetta noted that even as he was speaking, BIO, the national lobbying group, was on Capitol Hill, hat in hand, to ask for up to $30 million per company of their estimated
total R&D tax credit. "When you consider that the US car industry is a fossil, while biotech produces cures for diseases,"
Panetta says, "which is more deserving of taxpayer investment?"
Biotech's loss may be Big Pharma's gain. "We'll continue to see pharma taking advantage of this golden opportunity to buy
interesting technology on the cheap," says Sandy Hillsberg of the law firm TroyGould.
A year ago a biotech with even a single product commanded a sky-high valuation. No more. "The economic downturn has brought
the price of acquisitions and other deals back down to earth," says Daiichi Sankyo's Joe Pieroni, allowing that he would not
be surprised if 2009 saw the same flood of M&A action by big Japanese pharmas that made 2008 so notable.
The collapse of the credit and capital markets will keep biotech valuations down for at least the next 18 months, according
to Ernst & Young's projections. For now, pharma's only problem is figuring when to bite. "If pharma makes the mistake of waiting
until companies are on their last legs, the talented people may have already left," says Panetta.
Yet in the long run, pharma's fate is inextricably linked to biotech's. With half of R&D at some big companies done in partnership
with biotechs, a decline in these entrepreneurial firms could poke more holes in pipelines. "A lot of biotechs and important
early-stage research are going to die in the current financial crisis," says Peter Young, head of Young & Partners.
That's why Bain & Company's Tim van Biesen expects to see pharma be creative in funding as wide a range of biotechs as possible.
"The all-or-nothing, buy-or-pass option is no longer adequate," he says.
Peter Young advocates a collaborative model in which drugmakers pool risk-sharing funds. "Money needs to flow more regularly
to biotechs, so they don't have to spend their time raising venture capital," he says. How would you determine which company
owns a particular product? "Maybe by sharing patents," Young says.
As venture capital flees biotechs, it is turning, ironically, to Big Pharma, whose high-risk drug development looks increasingly
attractive to investors. Goldman Sachs recently announced that it would spend hundreds of millions of dollars to fund diversified
portfolios of Phase I and II trials.
In related news, the economic crisis has been playing havoc with what looked like 2009's biggest deal: Roche's $43.7 billion
bid for the 41 percent of Genentech it doesn't already own. In December, the business press reported that no bank would lend
the Swiss giant the money.
The deal will go through in 2009, says Dan Zabrowski, global head of Roche pharma partnering: "Roche will introduce an appropriate
level of leverage for the company from long-term bonds. The remainder of the debt is likely to be made up of bonds of short
As for the rumors of a mass exodus of Genentech talent, Lee Babiss, Roche's head of global R&D, says, "We've been clear from
the start that Genentech will retain ownership of its discovery and development center, and we will share knowledge and intellectual
property. We will only have ourselves to blame if there is a talent flight."