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By Joshua Boger, Ph.D.
For the high-risk biotechnology industry, the current financial crisis seems like an unfair "piling-on." On top of the many ordinary challenges we face - spiraling research and development costs, regulatory instability, reimbursement uncertainties - an upheaval in the financial underpinnings supporting our companies could not come at a worse time.
No other industry in the world delivers the types of life-saving and innovative products that come from biotech companies. But no other industry in the world is as dependent on financial capital either, making our industry a delicate flower in today's harsh economic environment.
The United States has witnessed near unprecedented financial turmoil in 2008, a turmoil that rapidly spread to all world markets. Some of the world's most recognized and respected corporate brand names - names discussed around the dinner table for decades - have simply disappeared under an avalanche of financial pressures and speculative unwindings. While biotechnology and health care companies have by no means been immune, the industry as a whole has been relatively insulated - so far - from immediate damages from the roiling global financial markets.
At the end of November, the NASDAQ biotech index was down only over 22 percent year to date. Yes, I said "only" 22 percent, as the broader NASDAQ index was down some 42 percent over the same period. Take a closer look at other sector indices and you will see that the industries providing real value to people's lives - especially biotechnology, pharmaceuticals and other health care companies - have been less impacted by the ongoing financial crisis, while sectors such as retail sales and technology have not fared nearly as well.
We can take some comfort, no matter the current economic environment, that people worldwide need the products delivered by our biotechnology firms. People can live without their fifth-generation cell phone, but not without their multiple sclerosis medications. And the shared hopes of the world are invested in alternative energy sources, more efficient food production and a cleaner environment: goals being realized now from biotechnology. And partly for those reasons, the biotech sector as a whole has been a relatively safe harbor for investors over the past year, even as the financial storm continued to pound many other sectors.
While the industry's performance in the current market environment is certainly a sign of hope, this trend will not and cannot continue indefinitely. Yes, people need new medicines no matter the economic environment. But new medicines come from companies that are highly dependent on financial capital to fund expensive research operations and lengthy clinical development programs. With frozen credit markets and great instability among investors, biotechnology companies are finding it increasingly difficult to access needed capital not only to fund development programs, but also to simply continue their regular operations. Compared to 2007, the amount of capital raised by biotechnology companies has fallen by more than 50 percent through the third quarter of this year, according to industry experts.
Today, the cliché "cash is king" is apparent to biotech companies large and small, as those firms with strong cash reserves and promising late-stage pipelines will be the most likely to weather this storm with the least negative impact. On the other hand, recent BIO reports show that more than 40 percent of small biotechnology firms have less than a year of cash remaining, while more than 30 percent of small, publicly traded firms have less than six months of cash. In 2008, only one biotechnology firm has completed an initial public offering. In 2007, there were 28 biotech IPOs. Further, firms are now looking to alternative financing strategies, such as selling future or existing royalty streams, as a way to generate needed capital while still remaining independent and retaining rights to assets.
Unfortunately, we have recently begun to see the inevitable ripple effect of this cash crunch in biotech, with multiple firms reducing workforces and cutting back on early research efforts. While this may free needed resources for companies in the short-term, it is hardly a decision that will help the industry return to stability in the long-term. You can't save your way to greatness. The inevitable consequences are a decrease in the number of biotech products.
But today's crisis is not just a dearth of financial capital. The availability of human capital is being squeezed as a result of the ongoing credit crisis. Biotechnology companies are in constant need of the best and brightest employees. These prospective employees come from around the globe and across the country. In today's economic environment, it is increasingly daunting for an individual to uproot entirely from one locale to another. In a stable market, the allure of being one of the first few employees at a startup biotech firm may, for many, outweigh the potential risks. In today's environment, this equation appears different, with the perceived risks often outweighing the potential rewards. This pullback in optimism constrains growth and slows innovation.
If our industry is to continue on its path to heal, fuel and feed the world, the best thing our industry can hope for is a return to stability. Biotechnology is an inherently risky venture, and instability in the financial markets only adds to the risky nature of biotech. We should be encouraged that our government - and governments around the world - have acted quickly and boldly to try and improve the financial situation of our nation's industries. But we are not there yet. In the coming months, we will see more volatility. And we will see collateral damages across our industry.
We are at a critical point in the evolution of the biotechnology industry. The simple fact that our industry has not suffered more in the initial phases of this crisis is testament to the real value we have delivered to people and to the potential value in the pipelines of companies around the world. Today, there are hundreds of potential new therapies in the pipelines of biotech companies around the globe and scores of other companies are working on innovative energy alternatives and more efficient food supplies that may change the way people live and work in the decades ahead. There is great hope within the walls of our industry's companies. And that hope is backed with tangible progress and real delivery of innovation.
The current economic situation may cause increasing hardship for biotech, as it has done for many other industries. As we sail deeper into the storm, we must continue advocating for policies and actions that will support the innovation economy where biotech companies play such a critical role. Real innovation is the way out of this storm. We must continue telling the story of our industry: its companies and its people and its products. We need to reiterate the value our products deliver to people today and the hope that our companies may deliver a brighter tomorrow. We are likely to see worse days before we see better days. But there will be a brighter day. We are the future that we have been waiting for.
Joshua Boger, Ph.D., is president and CEO of Vertex Pharmaceuticals Incorporated and chairman of BIO's board of directors.
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