This time the biotech industry consolidation is for real. The gloomsayers who predicted an industry downsizing in the past were wrong, but this time they are right. The trillion dollar black hole of derivative speculation has curbed the appetite for risk and slowed venture funding in biotech. Potential funding for the life sciences is trapped in “upside-down” housing where the owner owes more than the house is worth, and toxic collateralized debt obligations (CDOs) in banks worldwide.
Moreover, the risk factors for biotechnology are as real as ever: political uncertainty, the impact of “binary events” like clinical trial results and FDA decisions on stock prices, generic/biosimilar competition, and the emergence of a national healthcare plan implying lower drug costs. The industry has navigated through troubled times and big issues before, but never in times of a financial meltdown.
The markets need to be cleared of securitized debt before risk capital can return to biotechnology. The past few years has seen the greatest misallocation of capital in the history of the modern U.S. economy so it will take time to get back to funding of real technology, products, and services.
The hardest hit companies in the current environment are public microcaps with weak balance sheets, development-stage biopharmaceuticals with longer-term clinical risk, and drug discovery start-ups. Many of these stocks are down 25% or more in Q1 2009.