This piece by Allan L. Shaw was originally published in Life Science Leader.
The biopharma sector has enjoyed increased market success over the last few years. And while some may be tempted to bask in the optimistic “bio-euphoria,” others question whether the industry might be in the midst of a market bubble.
What led to this current period of biopharma success, despite the industry’s inherent risks (e.g. scientific, clinical, regulatory, and commercial)? Several factors contributed to the industry’s current success, including:
- low interest rates (desire for beta [i.e., the tendency of a security’s returns to respond to swings in the market])
- lack of risk-capital alternatives (e.g., funds used for high-risk/high-reward investments, such as emerging markets, precious metals, or emerging biotechnology stocks)
- generalists’ (vs. industry specialists) capital allocation to biopharmaceuticals
- FDA lowering the bar (i.e., record new drug approvals, particularly with biologics)
- capital/clinical efficiency and proliferation of targeted therapies, orphan diseases, new modalities and technologies (e.g. gene therapies), and new drug categories (immuno-oncology) reflecting better scientific understanding of the mechanism of diseases coupled with our evolving knowledge and application of genomics coupled with companion diagnostics
- increase in specialty-drug spending related to new and exciting drugs launches (e.g., Solvadi, Keytruda, Yervoy/Opdivo, Tecfidera)
- the shift in Big Pharma resource allocation has created a proliferation of M&A and partnering deals, which indicate a de-emphasis on internal research and increased emphasis on external collaborations
- the emergence of a supply/demand imbalance for new companies (The capital markets’ prior drought adversely impacted the VC community and its capacity to create new companies. This lack of startups or eco-system deficiency has given rise to demand-driven premiums for innovative drugs and technology platforms.)
And while the scientific risks are daunting, the commercial risks may prove to be the biggest long-term challenge. For example, consider the global price/cost containment initiatives aimed at tethering unsustainable healthcare spending.
Looking toward, I would suggest the following:
- Do not try to time the market; grab the money when you can.
- Go public when you can; companies have much better success with capital market access once they have listed their securities.
- Continue allocating resources in the same manner you did with your last $100. Organizations are generally more effective with capital deployment when they have less as opposed to more.
- Make sure your business plans are funded to the next value inflection point along with some additional reserves in case things do not evolve as planned.
- Focus on keeping your promises to maintain creditability with investors and market access.
- Maintain investor confidence; access to the capital markets is a privilege and not an entitlement. Embrace the fundamental principle of under promising and over delivering.
- Apply the lessons learned from the last capital market drought.
Perhaps the capital markets are behaving rationally on a macro level and will simply be reallocated among winners and losers with outsized gains/losses — rewarding companies that are executing and penalizing those that are not. In a rising tide, all boats are lifted; it is when things get tough that the true mettle of management teams is tested. As such, pick your management teams wisely. If history is any indication of the future, trips to the capital markets will not continue to be as easy as visiting your ATM machine — though only time will tell.
Learn more about the biotech market outlook from industry experts at the BIO Investor Forum, taking place October 20-21 in San Francisco, CA. The forum is an opportunity for investors, analysts and industry executives to interact, evaluate investment trends, and get a big picture overview of the issues affecting the industry. View ebrochure for the full program and register today.
Allan L. Shaw is a Senior Biopharmaceutical Executive / Chief Financial Officer: Currently member of Akari Therapeutics’ board of directors and serves as chairman of the audit committee as well as an independent board member of VIVUS, recently managing director – life science practice leader for Alvarez & Marsal’s Healthcare Industry Groupand continues to support the firm on an ad hoc basis, formerly CFO of Serono, possessing more than 20 years of corporate governance and executive/financial management experience and responsible for more than $ 4 billion of public & private financings (including an IPO) and numerous business development transactions.