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Has the Economic Mess Diluted Biotech's Hand?
[September 26, 2008]

Has the Economic Mess Diluted Biotech's Hand?

(BioWorld Today Via Acquire Media NewsEdge) Three CEOs walk into a congressional hearing. One heads an investment bank, the other a automotive company and the third a pharmaceutical company. . . .

OK, I've made up the opener. Someone, somewhere, must have a conclusion to this joke. It's begging to be told, if only so that frustrated citizens can blow off a little steam. Pharma execs have been in the hot seat for some time up on Capitol Hill, and whatever else they may be feeling about the financial turmoil currently gripping the nation, it must be mingled with a bit of relief that the nation's rage, as reflected through the lens of sanctimonious legislators, is turned elsewhere for the time being.

Indeed, it seems almost impossible to talk about anything other than our financial crisis, as the boulder dropped into our national pond sends ripples ever wider throughout the economy.

Investment banks and insurers aren't the only ones looking for a bailout. Automakers are putting a hand out, whining about the cost of retooling factories to make low-emission vehicles and begging for a $50 billion government welfare package . . . er, rather make that "low-interest loans." The best part of that is that Chrysler is one of the companies holding out a cup.

That's Chrysler, taken over in 2007 by Cerberus Capital, a private equity group. Yes, private equity guys are asking for government welfare support! Geez, these are only some of the richest people on the planet, after all. If they make a stupid, ill-advised gamble in an effort to further enrich themselves and their investors . . . and fail . . . well, then, of course our tax money should help bail them out! Otherwise, we might waste our money on something frivolous like starting businesses that actually succeed. Can venture capitalists be far behind in asking the government to recompensate them for the failure of Hail Mary biotech start-ups or the lack of an IPO window?

Maybe life science companies can catch the spirit of the times and get in on the action before it's too late. After all, health care is a major chunk of the economy, and right now it is threatened at the highest levels by unprecedented upheaval. So what about a "patent expiration holiday?"

Or maybe drug companies could come up with their own version of the mortgage credit default swaps that destroyed the banking industry. It'd be easy - they could just start insuring the outcomes of each other's clinical trials. Devise instruments that leverage the insurance so that a minor setback - say, failure to enroll patients on schedule - puts the holder on the hook for the entire cost of a clinical development program. Then a few clinical failures will bring about a massive financial crisis and drug companies can threaten to close their doors and stop making vital medicines. Voila! They're suddenly too big to fail.

Sounds ludicrous, of course, but it's not so different than what has gone on in the financial sector. So the life sciences industry deserves this bit of credit: It at least understands the meaning of risk. It understands that when you take an all-or-nothing bet, you may really end up with nothing.

And perhaps there's a silver lining for big pharma: In an incredibly uncertain economy, drug companies suddenly make sense as a safe haven investment again. Not only do many companies offer relatively reassuring balance sheets - Pfizer, for instance, almost could have managed the bailout of Bear Stearns single-handed, using its cash reserves - but they offer products that people will continue to need even in dire economic circumstances. (And let's not forget that the government is a buyer of last resort for some of those who cannot afford their medicine).

Unfortunately, it's not so clear that biotech will fare so well out of the current turmoil. Unlike their larger brethren, they generally have much weaker balance sheets in an environment when loans have become extremely difficult to secure and an appetite for risk may be running low.

Another big question mark is what the investment banking industry will look like after all the major firms are gone or have become parts of giant commercial banks. Will biotech find the same assistance in raising capital, negotiating mergers and acquisitions, and getting their companies covered by analysts? They certainly won't be getting much attention while this mess sorts itself out, nor is there much likelihood they'd be able to raise much cash in any case.

Frighteningly, there are more questions than answers right now. The calculus that recently had biotechs in a position of strength, as pharma companies troll for new products, may have changed - at least for companies with less than two years of ready cash.

But a lasting blessing for the drug industry is that its public image finally may start to improve, if only by comparison to the other corporate villains on display. Charges of data manipulation, unethical promotional practices and all the rest just got less interesting.

OK, I'll take a stab at finishing the joke about the banker, the auto exec and the pharma CEO brought in to testify before Congress. The senator chairing the hearing tells them that he only can give one of them immunity from prosecution, so they should each use their time to try to convince him why it should be them who wins a pardon.

"My decisions may have derailed the economy and put thousands out of work," says the banker, "but at least I didn't kill anyone."

The senator nods and turns to the next CEO.

"My decisions may have destroyed a great American industry and put thousands out of work," says the auto exec, "but at least I didn't kill anyone."

The senator finally turns to the drug company CEO, who clears his throat. "My decisions may have killed some people," he says. "But at least I'll still be able to contribute to your reelection campaign."

Guess who got the pardon? n



Copyright ? 2008 Thomson BioWorld, All Rights Reserved.

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