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PharmaDeals Business Commentary

The Impact of the Financial Crisis on the Biotech and Pharma Industry (2008-10-21)

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Less than a month ago, I wrote about how I saw the impact of the collapse of Lehman Bros, and warned that things were changing fast, as indeed they have.  The key development is the drying up of credit at an interbank level, which has had a huge impact on the banks' own lending. Now – unlike Lehman's – other major banks are being rescued by governments around the world, with the central banks pumping more and more money into the economy. As these desperate measures are implemented, the world is heading for probably the biggest recession since the Second World War.

What impact will this have on biotech and the development of new medicines? Clearly, the first impact is on the availability of venture capital to biotech companies. Venture capital has been poorly available to biotech in recent years anyway, and this state of affairs will simply get worse, particularly for start-up companies and those with little cash. Venture capitalists are only likely to back their current portfolio companies, and then only those with strong clinical prospects.  So biotech companies with little or no cash will have pretty tough prospects ahead, and unless they can do cash deals with larger pharmaceutical companies, are unlikely to survive.

How will pharmaceutical companies respond to the crisis? Well, like a lot of businesses, they will be susceptible to the efficiencies of the banks. Maintaining cash flow will become tougher and more expensive – a problem that governments are trying to tackle. The terms of licensing deals are already turning back to favour licensee pharmaceutical companies, and these companies will find many good deals as biotechs become more strapped for cash. However, these same pharmaceutical companies will find their own processes under pressure as governments take more control over pricing and reimbursement.  Even the US market will be affected, as it now seems likely that Barack Obama will win the US election, and introduce wide healthcare reforms which will have an impact on the price of drugs. I know too that a lot of people in the biotech sector will have strong views that the pharmaceutical industry should step in and provide the sector with some form of ‘bail out’. Our industry has been through tough times before. No doubt there will be causalities, but I am confident that we will weather the storm.