A look at healthcare sector indices against broader market indices can provide some useful information. Over the last 12 months, both biotech (Nasdaq Biotech Index, NBI)and healthcare (S&P Healthcare Index, HCX) have performed well against broader market indices (S&P 500, SPX).
The NBI has fallen about 15%, versus about 25% for HCX and 35% for SPX. This has suggested to some that healthcare and biotech display certain defensive characteristics. This has particularly been the case for biotech where until now, demand from trade buyers (big pharma and big biotech) supported valuations in the pursuit of filling their own pipelines.
However, the last 3 months indicate this is no longer the case, and both biotech and healthcare are no longer immune to the credit crisis. If we look at a graph since the NBIs peak valuation, around Aug 14th, the index has fallen some 24% (compared to 21% for HCX and 30% for SPX for the same period):
While 3 months is a short period of time, it does demonstrate biotech and healthcare are not immune from the current credit crisis, with downward valuations, regardless of defensive qualities; all sectors have been affected due to the massive deleveraging taking place. And given the global macro nature of the problem, this is not about to unwind any time soon. We touched on this in last month’s blog (Fundraising in the Credit Crunch).
So, what can the sector do to survive, and better still prosper, in this climate? In a word….restructure.
While companies with attractive IP will still be able to garner headline grabbing deals (e.g. Osiris’s $1.4 billion deal with Genzyme, Onyx’s $320 million deal with BTG), many companies are going to find the environment much less supportive. In particular, earlier stage companies have suffered greater falls in valuation, have earlier stage and thinner pipelines, with less cash runway. Even when companies have the industry recommended standard of two years cash, there is no guarantee that such cash will fund projects to critical value inflection points, or that future cash can be raised in the absence of inflection points.
Restructuring will be painful. This will involve streamlining R&D spend, killing programs earlier in the cycle if there is negative data (see related blog post, Tough Calls on Small Pipelines), greater collaboration and M&A between complimentary companies to build critical mass (with concomitant R&D streamlining and manpower reductions). Further options could include deals at lower valuations with well funded partners and buyers. While this may hurt at least it gets critical cash through the door (and is less unpalatable than the alternative – running out of cash all together).
Many of these options will also be unpalatable to existing management and ownership, but as stated by G. Stephen Burrill in a recent release on one of biotech’s worst months on record:
“We are not writing biotech’s obituary. In fact, these stressful times will force companies into looking at what they have and how those assets can be monetized…. The industry has been and will be as creative in its survival as it has been in its product development. From this will emerge an even stronger industry.”