How to Navigate a Period of Market Instability in Biotech Financing?
Returning from several Biotech Investment conferences in New York, it became clear to me that there is a consensus among biotechnology sector experts. Specifically, sector analysts agree the biotechnology sector is headed for a period of market instability and possible correction due to two key factors.
First, we have witnessed an unprecedented period of growth. Biotechnology stocks were one of the hottest sectors in the U.S. stock market from late 2011 until this past summer. Since peaking in late July this year, the S&P 500 Biotech Index has fallen 23%. This fall is twice as much as the broader S&P 500 Index during that period. The Nasdaq Biotech Index, which includes more small-cap issues, has fallen even further: a drop of 27%. Typically, a bear market is measured when prices fall 20% or more over a period of several months.
Second, the recent inflating of certain pharmaceutical prices has led to public outrage, mandated investigation and initiated the potential for government intervention. On September 17th, HIV activists wrote a blog and complained that Turing Pharmaceuticals raised the price of a 30-year old drug from $13.50 to by $750.00 per pill (5,000% increase). On September 20th New York Times ran a story on Turing. On September 21st, Hilary Clinton tweeted that she will be taking on “outrageous” [pharmaceutical] pricing. As a result of a single tweet, a four year period of the S&P and Nasdaq biotech indexes rising as much as 300% came to an abrupt end. It’s hard to believe, but this is how bubbles often begin to burst. It’s not always with some ground-breaking change but rather a single straw on the back of a stock market that may be unsustainable in the short term.
So what does all this mean for biotech entrepreneurs, investors and CEOs?
First of all, you should lock down your financing as soon as possible. If you are closing a financing, licensing, or any other transaction you should close it quickly because the opportunity may drift. If you were going to do an IPO, consider lowering your price and going public as soon as possible. In difficult times, public companies can raise money much easier and faster than private ones.
Secondly, it is important to remember that investors invest in people with a track record first and then on the science and technology behind a company’s product. Having an experienced team with a proven track record will become the most important item on an investor’s list. When hiring senior management, development experts and regulatory consultants you increase the potential for success when you ask them the following key questions:
- When was the last time they got a drug approved?
- When was the last time they were in front of the FDA?
- When was the last time they took a company public?
- When was the last time they built a company and sold or licensed the products to pharma?
The good news is we have all lived through the most difficult period for biotech financing. In my opinion, the market instability we are seeing right now will have minimal ramifications to the biotechnology sector as a whole. Ultimately, experienced management and sound science will always attract pharmaceutical partners and good investors.
Happy Canadian Thanksgiving!