Collateral Damage in Iceland

October 30th, 2008 | Sources: Economist

What can the financial collapse in Iceland teach us about health care start-ups close to home? Plenty, it turns out.

The north-Atlantic island nation is home to two innovative health care companies, DeCode Genetics and Actavis, and although they are not to blame, both have been staggered by Iceland’s economic catastrophe.

DeCode Genetics pioneered personal genomics by perfecting DNA-sequencing processes and leveraging its access to Iceland’s unique national genetic database. It made breakthroughs in the last 2 years that leave no doubt it is a player. For example, it identified genes associated with basal cell carcinoma and possibly causative gene mutations for schizophrenia.

DeCode cut its burn rate by half earlier this year to guard against financial hard times, but it wasn’t nearly enough. Like many early-stage biotech companies, DeCode has tiny revenues and large cash flow needs. It is now encountering severe difficulties accessing credit. Worse, Lehman Brothers tied up $30m of DeCode’s reserves in risky US auction-rate securities before it went bust a month ago. There are no buyers for the securities right now.

Actavis, Iceland’s other health care jewel had risen to become the world’s fifth-largest generic drug maker through a series of smart acquisitions. The company had diversified product offerings and built a global distribution system which should have insulated it from financial hard times.

Not so. Actavis’ problem is that Thor Bjorgolfsson, a billionaire who controls the company had a large stake in an Icelandic bank and that money vaporized when the bank was nationalized 3 weeks ago. Now many speculate that Bjorgolfsson will sell Actavis to recoup some cash.

Both companies are likely to survive since they demonstrably create value for shareholders, but not without a good deal of hand wringing, soul searching and tumult. US biotech companies take notice.


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