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Economic meltdown and where the money is
November 2008
by Chris Anderson  |  Email the author
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It's pretty hard to be the editor of a business publication and not address the recent world-wide economic meltdown. And in an job where my mentor always told me the first rule of good business journalism was to "follow the money," having a $700 billion dollar (give or take a couple hundred billion) carrot dangled in front of me is hard to ignore. That said, what's to make of this mess and what are the potential impacts on the biotech and pharmaceutical industry?

Well, if you are looking at the public markets, it's pretty obvious if you had money invested in pharma or biotech (or any other industry for that matter). It's going to be a while before you get your money back. On another note, please, please tell me you didn't lock in your losses and sell a bunch of your retirement assets on the way down.

But when it comes to these companies doing business, what are the real and potential impacts? For the bulk of the public companies, those that have decent cash reserves, the paper losses incurred due to a shrinking price per share should have little effect on the business.

What may be affected are deals and offers that were already on the table, but had not yet closed.

In these stock-only, or cash-for-stock offers and deals, a market that has tanked by more than 30 percent and taken virtually all publicly traded companies down with it for the ride has some interesting implications.

Take, for instance, the proposed offer Roche made for the remaining shares of Genentech it doesn't already own. In July, it offered what seemed at the time a paltry 8-plus percent premium, or $89 per share, to get full control of the company. Investors saw the offer as a bit stingy, too, and promptly bid up the price to the mid-90s, with the stock even flirting with the $100 mark.

Of course, we all know what has ensued. While investors waited for Roche to up its offer, the market tanked. Genentech shares fell to as low as $73 per share, and suddenly, that $89 offer didn't look quite so bad.

Since the bottoming out, Genentech has recovered to trade in the low 80s. And Roche? Well, it is doing what it seems to do best: waiting. Not surprisingly when Roche announced earnings recently, it reaffirmed both its offer and its interest in consummating the deal.

Where there may be more pain, though, is farther down the publicly traded food chain. It's no secret that in the biotech world, there are scads of publicly traded companies whose share prices are buoyed not by anything as concrete as earnings. No, these companies trade on the promise of their pipeline, research platform or new technology.
And it's a tenuous existence in the best of times.

For these companies, the price of failure is steep, and the odds may just have gotten steeper due to the credit crisis that promises to make loans to businesses both harder and more expensive to obtain (though the Federal Reserve is attempting to work on the expensive part).

Look at it this way: if you are a bank and you are just now rising bloody and bruised from all your "paper" that went south through non-payment and default, to what kind of company are you more likely to lend your money—the company with a steady revenue stream that turns a slight profit, or the company that thinks, gee, maybe we have something really big here that could generate some revenue by 2012?

Yeah. Me too.

And outside the public markets, private money is also going to be harder to come by for the scads of technology start-ups. The free-fall hit everyone—not just the guy on Main Street—and the private equity types will also be tightening the purse strings and re-evaluating the companies in their portfolio. Which ones have the best chance of moving on and which ones are too risky? Which companies deserve to get some more money in the next tranche and which might need to pursue other alternatives?

My guess is there will be quite a few companies in the coming year needing to pursue the other alternative route and that brings us right back to the top of the food chain: Big Pharma.

You see, even as Pfizer takes a play out of Merck's book and writes an $894 million check to settle Bextra and Celebrex lawsuits, the big players in the industry are sitting on piles of cash—cash needed by theses smaller public and private players.

As next winter turns into spring and companies start to worry about cash reserves, and burn rates and non-existent credit facilities, it'll be the pharma companies that provide the financing to keep these pipelines alive.

Only they won't be there to hand out loans. They'll be looking to augment their sagging pipelines at bargain prices from those unfortunate companies that will be the eventual casualties of the credit crunch. DDN

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