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May 01, 2009 (Vol. 29, No. 9)

VC Lock-Down Mode Paralyzes Bioindustry

Downsizing of the Industry Is Inevitable as Financing Window Is Virtually Closed

  • Financing Update

    Investments in public companies such as PIPES (private investment in public equity) were stable for the first quarter with 65 healthcare PIPES deals and a total value of $810 million compared to $894 million in Q4 2008, according to Rodman and Renshaw.

    According to Burrill and Co., U.S. biotech industry financings totaled about $20 billion in 2006 and 2007, in addition, $20 to $25 billion was allocated to partnering deals. Twenty IPOs were launched in 2008. For Q1 2009, Burrill reported total capital flow of $9.8 million, compared to $6.647 million in 2008. However, $2.651 million of this was debt and $4.761 million was partnering money.

    In a study conducted with PhRMA, Burrill reported drug R&D spending of $65.2 billion for 2008, a healthy investment in the industry for future products. Targeted diseases include cancer, cardiovascular, diabetes, and HIV/AIDS. In April, the WSJ reported R&D spending by big companies such as Johnson & Johnson and Abbott continued at last year’s pace despite revenue weakness.

    A downsizing of the industry, with a loss of about 100–200 publicly traded companies due to failures or takeovers, is predicted by Burrill, which reported that on April 1 half of the 344 public biotech companies were trading at cash value.

  • Public Markets Rally in March

    The life science public markets held up well in the first quarter of 2009 despite a severe correction in February exacerbated by fear of Medicare reimbursement cuts and the Obama administration healthcare initiatives.

    The financing window for start-ups and small cap biotechs will be virtually closed for the next 12 months, however. Of course, creative deals will be cut and alternative financing routes will be found such as angels, government grants, the Stimulus Package, and corporate partnering. As the industry restructures the stage will be set for a rebound. The data indicates financing should still be available to medtech and healthcare service companies with emerging growth in revenue or positive cash flow.

    Near-term events such as clinical conferences and product milestones may provide an impetus for rallies and funding through PIPES, but the bear market is intact until we view the fourth quarter of 2009 landscape. Investors have short memories so any positive developments should spark the markets; supposedly, there is a lot of money on the sidelines (but where?).

    Over the years healthcare investing has always found a way to re-create itself and, even as details of a national healthcare plan emerge there will be new opportunities. Corporate and NIH R&D investments combined with total healthcare spending provide the core engine for creation of compelling new products and services. For example, the aging population will require home healthcare services in the near term and related diseases such as cancer and Alzheimer’s disease require new cost-effective drugs in the longer term.

    Greater regulation of security markets and banks may actually be a positive development for healthcare investments as we go back to funding real companies and technologies rather than leveraging money to make money through financial engineering and derivatives.

    The big issue remaining, once the credit crunch subsides, is whether there will be fundamental shifts in the business model away from biopharmaceuticals to tools, diagnostics, and devices.

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