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Columns : Nov 1, 2008 ( )
Preparing for a Shrinking Economic World
Big Pharma Is Well Positioned to Ride Out the Turmoil and Take Biotech Along with It!--h2>
Much has been discussed in the last few weeks about how the current financial crisis gripping Wall Street will trickle down and affect other industries. Clearly, the average American by now fully understands the danger of cheap debt—this is no different for large corporations that accessed the credit markets unnecessarily, loading up on something that was ubiquitous and seemingly affordable. Of course, as we are now observing every day in the marketplace, the devil always collects.
For the pharmaceutical industry, hope springs eternal: due to strong balance sheets and cash positions, Big Pharma has, by and large, emerged relatively unscathed. Pharmaceutical companies are predicted to actually ride out the current crisis, with the biotech industry destined to be the lucky winner. Over time, patients are expected to benefit, as they will have access to newer, innovative therapies. There will be some losers, however, as would be expected.
Equity analysts and the financial media love to hate pharmaceutical companies. Despite their strong balance sheets, Big Pharma gets punished because of the industry’s seeming inability in the last few years to discover blockbuster drugs to replace older drugs coming off patent. In response to this negative treatment, the major drug companies have been laying off employees, hundreds at a time (Belgium’s UCB Pharma layed off 2,000 employees, GlaxoSmithKline cut 850 R&D jobs, and Schering axed 1,000 reps). What’s worse, it takes about $1 billion to get a new therapy to market, including the cost of failures.
Big Pharma has cash on hand, however, since by and large they did not leverage themselves as precariously as did other industries during the run-up in the credit markets. The average large-cap pharmaceutical company has about $9.31 billion cash on hand, which will likely be used to fund acquisitions or other product investments. Pfizer leads in this regard with a whopping $27 billion of cash on hand.
Terms of the Deal
Although some pharmaceutical companies may seem ripe—or desperate—to buy into a company with a promising therapy or technology, it should be made clear that it still has the upper hand in negotiations. As such, it is expected that the terms of subsequent deals may not be the most favorable for the biotech concern. Perhaps this is okay, for the time being. All eyes will be on such M&A activity in the near future, to gauge valuations and how deals are structured.
Failure to Launch?
Oddly enough, biotech start-ups used to receive the attention—and the lofty valuations. Biotech start-ups had become the darlings of the venture capital and private equity communities, once most of the good Internet, storage, wireless, and network security deals became scarce. The VC and PE guys may now have to think twice about investing in promising biotech start-ups, however, as their limited partners may have disappeared and the ability to use debt to finance deals has vanished.
With M&A activity usually favoring the acquirer, the PE community is destined to lose the sky-high valuations it placed on the start-up companies only one year ago. This could add to the current headache gripping the financial services industry, but will be a benefit for the biotech company as Big Pharma will appear as the suitor.
Alas, there is one liquidity event that won’t be appearing any time soon: the biotech start-up going public. Since the first of several painful Wall Street events began, there have been several biotech companies that have withdrawn their plans to go public, most notably Aldagen, which withdrew its plans for an $80.5 million IPO on October 8. This clearly leaves biotech in a state of vulnerability, as IPO hopefuls may seem further from exit. This also means that ready, willing, and able buyers from Big Pharma will perhaps make a strategic acquisition.
Rather than going public, is being bought out by a major pharmaceutical company such a bad thing? Surely, there will be growing pains, but here is how both sides could benefit: the biotech concern gets much needed cash, as well as access to a well-known corporate brand army of sales reps, efficiencies in manufacturing, and a strong presence in Washington. Big Pharma gets, on the cheap, a drug pipeline, which it desperately needs. Regardless of these types of concerns, promising therapies from these deals will eventually come to market, saving lives and creating profits.
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