iotechnology firms may be hard-pressed to raise cash in this time of growing economic uncertainty following recent terrorist attacks in New York’s financial district, industry experts predicted.
Still, the overall outlook remains positive given the sector’s strong fundamentals, analysts said.
Many biotech companies have a strong financial cushion remaining from last year’s record level biotech financings and signed partnerships with drug companies and biotech firms to fund costly research and development.
Analysts from Robertson Stephens, a FleetBoston financial company in New York City, offered in their Sept. 17 life sciences industry report a “best guess as to how the recent tragic events will affect the biotech sector.”
In the report, analyst Michael King said, the “financial outlook for biotechnology is essentially bullish, with some caveats.”
King projected the attacks would provide a blow to the nation’s already struggling economy.
He expected investors to seek out a safe haven in “most everything health care-related.”
On Sept. 17, the first day of trading after the terrorist attacks, investors indeed sought refuge in pharmaceutical giants.
Shares of giant drugmakers , including U.S.-based Merck & Co., British-based GlaxoSmithKline Plc and AstraZeneca Plc, and Switzerland-based Novartis AG and France’s Aventis SA , all rose in trading that day.
King expects this pattern to continue and pointed to the European markets where pharmaceutical and large cap biotech stocks have performed well following the terrorist attacks.
On the flipside, investor’s unwillingness to funnel money toward smaller firms without solid products on the market could provide a problem for those in need of cash.
On the first day of trading last week, San Diego-based biotech firms, such as Arena Pharmaceuticals, Alliance Pharmaceuticals, Maxim Pharmaceuticals, Cymer and Neurocrine Biosciences saw their stocks tumble.
– Small Firms Face Big Challenge
Smaller firms are likely to face the biggest challenge in raising funds from private and public sources, King said.
Steven Burrill, chief executive of San Francisco-based merchant bank Burrill & Co., said in a weak economy and difficult equity market, everyone suffers.
“The biotech industry is not immune to macroeconomic terms,” Burrill said.
Recent figures confirm just that.
According to Bloomberg News, private placements and convertible debt in the biotech sector have fallen substantially so far this year compared to last year.
Private placements have dropped to $1.4 billion as of September compared to $2.3 billion for the same period a year ago; convertible debt has fallen to $1.7 billion this year from $2.1 billion last year.
Some biotech companies may partner with bigger companies to fund their expensive research efforts, Burrill said.
In this disrupted market, biotech mergers and acquisitions however, are unlikely, he added.
“The unstable situation does not make it easy to do initial public offerings, secondary offerings and venture level (deals) with the same valuation,” Burrill said.
“This (last week) is much more a buyers market than it was a week ago.”
Other industry experts however, see the potential of more consolidations within the biotech sector.
John McCamant, editor of the Berkeley-based Medical Technology Stock Letter, said some smaller biotechs would make good M & A; candidates for larger equals.
But he also stressed that most biotechs don’t face the same financial pressures existing in the past, because they are now much further along in their drug development activities.
– History On Their Side
Historically, the health care sector has performed well even in bad times, Burrill said.
That is because people need to buy medicines even in times of recession.
Meanwhile, the uncertainty of what actions the government will take following the unprecedented terrorist attacks on the East Coast has many Americans fearful and investors jittery.
Analysts at Robertson Stephens, however, said in the report that the “stock market has behaved in a remarkably consistent manner over the years when war has broken out.”
The analysts said that one could draw similarities to the pre-Gulf War period in the sense that Iraq invaded Kuwait at a point when the American economy was slumping, corporate profits were weak and stocks were under significant pressure.
Stocks rose sharply in the months following the Gulf War.
The Amex Biotechnology Index (BTK) returned 27.6 percent during the fourth quarter of 1990; the rate of return was 60 percent during the first quarter of 1991; and 80.25 percent for the full year of 1991.
“We would like to believe that the behavior is likely to recapitulate that of the Gulf War period,” King said.
McCamant however, found differences in the economy and the biotech sector are too great to draw comparisons between then and now.
“The (biotechnology) industry was much different 10 years ago,” McCamant said. “There were less companies and (there wasn’t) the sustainability and stability (we see today.)”
Indeed, biotech is a huge industry today generating some $22 billion in revenues last year.
And biotech heavyweights such as Biogen, Genentech Inc., Amgen Inc., and Genzyme Corp. are already looking more like pharmaceutical firms than biotechs, experts said.
– Biowarfare Firms Gain Attention
In the wake of recent terrorist attacks, those biotech firms working quietly in the areas of biological and chemical warfare are likely to get more attention.
Last week, Reuters reported that heightened concerns over the potential of bioterrorism has drawn investors interest toward firms that make products to detect and counter biochemical agents.
They include Isis Pharmaceuticals Inc. in San Diego, Maxygen Inc. based in Redwood City, and Osiris Therapeutics, Inc., in Baltimore.
“God forbid we would be put (in a position to ever use this technology),” said Doug Obenshain, health sciences partner at Ernst & Young LLP in San Diego in an effort to dispel people’s fears.
But he agrees with others that the possibility of a bioterrorist attack can no longer be dismissed.
