Biotech Firms in a Heap of Trouble

November 5th, 2008 | Sources: Wall Street Journal

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The Great Economic Crisis of 2008 has pounded the biotech industry, and it is a matter of time before many smaller firms in the space will be announcing layoffs, cancelling drug trials, getting acquired at bargain basement prices, or filing for bankruptcy.

Early-stage biotech companies are at risk because they tend to have tiny revenues and large cash flow requirements. In fact, the Biotechnology Industry Organization estimates that 38% of small biotech companies have less than one year’s worth of cash on hand.

Large biotech companies like Genentech and Amgen have experienced steep declines in their stock prices, but strong revenues should keep them afloat.

If left unchecked, the carnage in small biotech will eventually catch up with the global pharmaceutical companies since they tend to be short on innovation and have relied increasingly on the acquisition of these firms in order to shore up their pipelines.

But don’t expect big pharma to sit on the sidelines in this buyer’s market. GlaxoSmithKline for example, indicated it might soon ramp up acquisitions now that good values can be had. Novartis indicated it was watching the situation with interest.

No company wants to be acquired with a gun at its head, so the small biotechs are exploring other options—unpalatable though they may be. For example, Oramed Pharmaceuticals wants to raise cash from investors in exchange for a cut of their drug’s future revenues. Other companies are pulling out of certain fields to focus on areas with more promising short term prospects.

No doubt though, times are tough for the little guys.


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