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?"

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 maturity."

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."