Can you spare £500 million?


As the credit crunch deepens, biotech has now joined the banks and carmakers in looking for state support claiming it is needed to provide a crutch to the industry's future viability. In the US, this is in the form of enhanced tax credits, and the UK through a superfund, comprising a proposed


government £500 million "investment" followed by a similar private amount (Biotech leaders call for government support).

While governments may seem increasingly generous in these recessionary times, drawing on comparisons with bail-outs for the financial sector aren't particularly relevant. Supporting the underlying financial system has gone some way to providing liquidity and more importantly, confidence; it was never to do with supporting bankers' jobs. Without confidence, the whole financial and banking system as we know it could implode, with domino repercussions across the wider market and all industry sectors. The same could not be said for supporting individual industries, such as carmakers or biotech. So long as confidence remains within the system, the market functions to allocate capital and resources more effectively than government ever could. Or as Luke Johnson, serial entrepreneur, and FT columnist says:

The real danger the west faces is not a serious recession: it is that we revert to a world of nationalisation and creeping socialism, a rising tide of regulation and government involvement in the economy. We risk becoming permanently mired in debt, with a debased currency, a bloated, untouchable welfare state and an inability to accept the inevitable pain that comes with a severe cyclical downturn. Political intervention distorts markets and will lead to bigger problems in the long run.

So, while a biotech bail-out might ease some pain in the short-term, it still doesn't deal with the bigger issue of how to make the industry sustainable and develop business models that actually work longer-term. And ironically, companies most deserving of support (those with good validated science, realistic commercial opportunity and return on investment, lean cost structure, focus on earliest route to market, effective use of partnering and collaborations) are the ones which need it least. They are already in a stronger position in the current market, where consolidation opportunities and valid IP assets are more readily available than six months ago when too many companies had inflated value expectations.

Finally, a recent FT Lex article also gives overviews of the US and UK biotech bail-out plans and problems inherent in both. In particular, it highlights that due to political pressures, governments would not be able to make the tough decisions usually made by VCs in a private environment – which companies to support and which to let go:

Biotech bail-out

Published: December 10 2008 09:30 | Last updated: December 10 2008 19:44

 

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First it was banks, then it was carmakers, and now it is biotechnology companies. The list of industries lining up with begging bowls grows ever longer. Thanks to the financial crisis, traditional sources of funding for this high-risk, cash-intensive industry have all but dried up, leaving a quarter of listed US biotech groups with less than six months of cash on hand, according to the Biotechnology Industry Organisation, a US trade group. The situation in the UK is similar. In both countries, companies want governments to ride to the rescue.

In the US, companies want lawmakers to change laws that allow them to claim tax credits against net losses in a given year, and allow them to claim that money up front as a rebate. The UK’s BioIndustry Association recently made a similar proposal around research and development tax credits. Some UK industry leaders have gone a step further, asking the government to create venture capital-style funds to invest directly in biotech companies.

Each approach has problems. Governments risk not getting paid back if companies that receive rebates do not survive long enough to turn a profit. Venture-style investments, in which the government takes an equity stake, stand a better chance of making money in the long run. But these require tough decisions about which companies deserve support. Spreading money across many companies risks leaving all of them under-capitalised.

Funding only the promising few is something venture capitalists are happy to do with private money, but it becomes fraught with political baggage when public funds are at stake.

It might be argued that the costs of inaction could be far higher than the cost of a bail-out – if lack of funding delayed development of cures for diseases such as cancer or diabetes. But such special pleading can become a dangerous epidemic of its own. Taxpayers, who are already looking at a mountainous public debt pile, should hope politicians let the biotech sector fend for itself.

   

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