The credit crunch is now some 16 months old and major market indices are down around 50% since their peak in October 2007. So, where are we now within the life sciences sector? Despite all the doom and gloom, principally related to funding (or lack of!) and its knock-on effects, the early part of 2009 does seem to have seen a change in outlook.
LOWER EXPECTATIONS, GREATER RETURN?
In speaking to various industry leaders over the last 2 months, and taking a broader market read, there seems to have been a broad change in acknowledging the environment in which we now live. Initially the response was shock and disbelief. Everyone was caught unaware and it took several months to really understand the severity of this downturn (often quoted as the worst we’ve seen in our lifetime and since the Great Depression of 1929).
Now, we seem to have made a fundamental downward change in expectations. Expectations are more closely linked to “when” there will be more bad news around the corner, rather than “if”. Though, ironically, it is usually at times of greatest pessimism when the cycle changes again – I’m not making any predictions here, though Warren Buffett had a very interesting take on it a few months ago in his recent Op-Ed piece in the New York Times. In it, referring to American companies, he says:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Specific changes within the life-sciences sector have included: reduced availability of funding, through public and private markets; downward valuations of most assets; hesitation or even withdrawal by companies to commit to anything other than core research budgets; and hesitation by some managers to engage in meaningful corporate discussions. But there is a silver lining…
WHAT’S CHANGED IN 2009?
So, what’s changed in 2009? Well, managers and investors now seem to have recovered from the initial shock. They have accepted that this IS a brave new world, where cash is king (as mentioned in a recent blog-post “Fundraising in the Credit Crunch”). However, the key thing that has not changed is that big pharma still have to fill and grow pipelines – and product development timelines and investment required remain as lengthy and as costly as ever. A similar story exists for medtech. So, smaller companies at R&D stages still have a clear path to exit. A recent FT article, “Biotech tie-ups face squeeze” even goes one step further to support this notion. It suggests (from a report from Oliver Wyman) that where biotechs may be cash constrained and hence threaten existing partnership arrangements, then:
“…it may be better for pharmaceuticals companies to refinance biotech companies directly, even on less-favourable terms than their original partnerships, rather than risk having their work threatened or delayed in litigation.”
And by and large, managers and investors recognizing that great opportunities still exist, are once again rolling up their sleeves and getting on with it. This also echoes the resilience, character and long-term vision needed to build biotech and medtech companies.
EMERGING BUSINESS MODELS
Another emerging trend we’re seeing is adapting business models to survive in the new climate. One of particular interest is utilizing a product financing approach. This is where a company (be it an investor, pharma or biotech) is identifying many projects for POC review, often by investing small amounts of cash to validate key science, in exchange for equity stakes in new IP. The attraction to this model is since many projects are reviewed, it is much easier to reach “kill” decisions if early critical end points are not met. And at this early stage, management overhead can be spread across several projects, rather than accounting for a top-heavy cost base for early stage IP that is spun into a new company (cited at 30% or greater by one serial entrepreneur/ investor we spoke with).
By definition every cycle has its ups and downs. Of course, upturns are nice, carrying with them an air of optimism and possibility. But downturns are just as essential – to cut the excesses, and through pragmatism and creative necessity, sowing the seeds for future growth.
And finally, to put this all in perspective, today’s situation was perhaps best described by Charles Dickens, in a Tale of Two Cities:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”
This post is by Raman Minhas.