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Will Lehman’s Collapse Affect the Pharmaceutical Industry? (2008-09-19)

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By the time you read this, things will have probably moved on considerably since the collapse of Lehman Bros in New York. As I write, the financial markets are in turmoil, and uncertainty is a much talked about phenomenon. It appears at this stage that the collapse will add to the prospects of a recession – possibly a significant one. So what effect could this sort of financial turndown have on the pharmaceutical industry? Historically, the industry has been relatively immune to economic downturns, largely because of the continued need for healthcare. However, if we enter into a year or two of recession, with funding becoming even more risk averse than it is now, then our view would be that it will be the early-stage biotech companies requiring funding that will be most affected. Some would argue that the worldwide biotech sector has been suffering from a reluctant financial market for several years, but with the collapse of Lehman Bros, can things get worse?

Well, there are two views here. The first is that things will get worse simply because the financial markets will be so risk averse that no investor will back companies with any risk profile, particularly with respect to earnings in the short term. The second view is that the reason why investors have not been interested in biotech is that there were too many other apparently attractive investments – such as debt financing through private equity buyouts and investment in resources (mining, oil, etc.). Many of these alternative investment opportunities have now either gone or are in decline. The price of oil, for example, has just dropped to below US$100 a barrel. This second view also says that while investors will, of choice, turn to risk-averse investments, they will still put some investments into known risk sectors, and the biotech sector is one that has a very well recorded risk profile. Of course, the risk of exits for an investor plays an important role here too. Unless there is a rapid return to the IPO market, there is only one profitable exit, and that is through acquisition by a larger biotech or a pharmaceutical company. Pharmaceutical companies still require stronger pipelines, and further acquisitions are highly likely. If this scenario is indeed the case, then the pharmaceutical and biotech sector may be one of the few sectors that will lead the world economy out of recession!