Baby Biotechs Treading Water

Monday’s Boston Globe had an article about how smaller biotech firms are having to cut spending to stay afloat since the current economic environment has made it almost impossible to raise more cash.  This shouldn’t be surprising given that these companies spend years (and years) developing new treatments and technologies before they are ever able to sell anything – assuming that their R&D does produce something that can be sold.  And the investing/lending world is currently not very interested in such long-term and speculative prospects. The immediate result is that these companies are laying people off, reducing their office space and actually mothballing research projects.

But what will be the longer-term results?

The fact that companies are cutting back on research is of concern.  As the Globe stated, one company “recently elliminated some development programs to focus on its most promising potential drugs.” (emphasis added) While this is clearly a good business strategy for keeping the lights on, making these choices was probably not easy for the company’s management.  And I’m concerned because it is often research and development that initially is not seen as “most promising” that leads to some of the most significant breakthroughs.

Possible Longer-Term Outcomes
For companies that don’t manage to stay alive, there are several possible outcomes.  First, as their stock prices sink, they may be snatched up in a fire-sale by larger biotechnology/pharmaceutical companies.  However, that end of the industry spectrum may not be doing too well either –  Merck indicated today that their earnings and revenues would be below expectations.  (This was in part due to the strong dollar versus international currencies.)

Another possible outcome is that after companies go under, once the capital markets return, new biotech companies will form from their ashes as companies license in the the old data and patents – which presumably will be held by some creditors/old owners.

In either case, the best result will likely be a delay in the exploration of possible avenues leading to new treatments and cures.  The worst result would be that patents will run out on promising discoveries, making it unlikely that other companies will pick up where the fallen company left off.  To minimize either of these situations, let us hope that the economic downturn quickly turns around, so that these companies  looking for money to keep the lights on can refocus their energy on R&D.  That will clearly be the best outcome for the economy, jobs, and healthcare over the long-run.

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