Is pharmaceutical biotech investment at risk?
Tuesday, March 04, 2014
OK. I'm not an analyst, at least not the certified financial type, but I believe there is a very disconcerting trend evolving in the financial markets. I wrote about this previously but I limited my attention at the time to startup biotech funding. I now feel the issue may have a profound effect on all Big Pharma and biotech. What am I talking about? Investor obsession with short term quick returns. Perhaps this isn't new, but it is certainly heightened in seriousness with the recent Facebook acquisition of WhatsApp, which also highlights why this trend is likely to continue.
First you have Facebook, a company started on a computer in a dorm room with less than a ten year history (approximate time required to develop, not just discover, one drug) but now with a market cap of $175 billion (just shy of Novartis market cap of about $190 billion). With revenues now surpassing $2.5 billion per quarter ($500 million in profit) Facebook has made its founder one of the richest people in the world. And despite several recent billion dollar acquisitions, Facebook continues to stockpile billions in cash and still has sufficient resources to make the $19 billion acquisition of WhatsApp. Founded in 2009, WhatsApp has only about 50 employees but already has an impressive 450 million monthly users with more than one million new registered users each day.
WhatsApp is just an example of why technology companies are so attractive to investors. These companies require little in the way of startup costs and capital. They can be developed and grow quickly without a lot of employees or overhead. Also, with no need to wait another two years for clinical trial results to address a market or regulatory concern, these companies can quickly modify their technology and business models. It seemed that Facebook was able to adapt to be more mobile and implement a more aggressive revenue model in a matter of months. These technology companies have few, if any, real rate limiting regulatory or market constraints. But, most importantly, they can generate huge returns for investors in a very short period of time.
So what's the big deal? Well, perhaps an analogous type of acquisition (albeit an exception) in the pharmaceutical biotech world would be Gilead's $11 billion acquisition of Pharmasset. Many felt at the time it was a huge leap of faith, and some still feel that way as it remains to be seen if Gilead can make the acquisition pay off in a soon-to-be very competitive Hepatitis C market. While a handsome payout for Pharmasset investors (still nowhere near that of WhatsApp), the asset base for Pharmasset had been in the making for over 10 years at considerable cumulative expense.
High profitability, strong cash positions, large global healthcare market opportunities, reliable dividends, and perceived security and stability have provided Big Pharma Biotech investors a solid basis for investment rationale. On the other hand, increasing cost of R & D, prolonged time to market, pricing pressures, marketing constraints, and regulatory uncertainty and challenges are now eroding investor confidence and interest. The point being, will investors look to the faster, lower cost, bigger returns from technology or will they expect even bigger payouts to offset the time and risks associated with pharmaceutical biotech investing? Perhaps technology is just in another bubble as we saw in 2000 and that may well be the risk equalizer. But, as long as investors are looking for and reaping massive, quick returns at low cost, I believe Pharma/Biotech will struggle to keep investors interested and happy.
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