The PharmSource Blog by Jim Miller

In theory, the current volatility in the financial markets shouldn't have much effect on funding for bio/pharmaceutical companies. The market for mortgage-backed securities has little or no relation to the venture capital world: venture capital investors don't invest in mortgage-backed securities, and don't package their investments into traded securities. Further, venture capital investing is high-risk by definition, so you don't expect VC investors to be spooked by a general heightening of risk aversion.

Still, we think that investment could be negatively impacted by the current turmoil in several ways. One way would be for the general decline in liquidity and heightened risk awareness to reduce the availability of debt financing for bio/pharmaceutical companies. According to data collected by investment bank Burrill and Company, bio/pharmaceutical companies have raised nearly $30 billion through debt placements in the past three years. The biggest deals have been done by big pharma companies, of course, but mid-size companies and even early-stage have benefitted. The latter have used convertible debt instruments (which gives the lenders the right to convert their debt into stock) to raise capital for R&D investment, especially during times when it has been difficult to complete IPOs. In the current risk-sensitive environment, when major private equity firms like Blackstone and KKR are having trouble selling bonds for their leveraged buyout deals, debt deals for early stage companies could be difficult to complete.

Another negative secondary effect for the bio/pharma industry would be for current events to change investor perceptions of risk. One of the factors that drove the mortgage-backed securities business has been the large sums of money available for investment. That drove investors to seek ever-riskier investments in an effort to boost returns, and the competition to invest in those vehicles drove down the risk premiums that they normally would be expected to command. We think that all that money has fed venture capital investing in bio/pharma, and the need to put that money to work has led to a lot of questionable companies and compounds being funded. How else do you explain why there are 50+ HIV/AIDS vaccines in development? A new attitude toward risk could affect the funding available for these marginal companies.

A reduction in funding for bio/pharmaceutical companies would impact the CRO and CMO business quite negatively. The ramp up in early phase compounds over the past 5 years as fed the tremendous growth in demand for early development services including preclinical toxicology and clinical scale API manufacturing. It has also encouraged a resurgence of the "one-stop shop" model, which first emerged during the funding frenzy of the late 1990s. If the funding bubble bursts, a lot of CROs could find themselves in a heap of trouble.