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maintain the pipeline of new products. Depending on the existing biotech and venture communities to provide new product will leave pharma orders-of-magnitude short of new molecules.
—Ben Bernanke’s free-money approach to monetary policy. He has printed so much money in the last 5 years that people in the investment community don’t know what to do with it. They are so perplexed that they are investing in biotech, despite having consistently lost money in the field for the last 15 years. Is this a new and permanent reality that will change the face of financial markets in general and bio-pharmaceuticals in particular? Time will tell.
—The JOBS Act. The new law has played an important role in the quality and duration of the current IPO window. By allowing confidential filings and the opportunity to test the waters prior to announcing a public offering, the act has produced more accurate pricing of offerings. As a result, more companies have priced within the range and traded well in the after-market. Early investors have made money and attracted more buyers over time. The improved efficiency in the pricing and managing IPOs, which have always been fraught with anxiety for both companies and investors, means better access to capital, the life-blood of the industry.
On the negative side, I view “asset-purchase buyouts” as an innovation that we could live without. Following the 2008 financial meltdown, pharma learned that they could force biotech investors to bear a substantial portion of the post-purchase development risk with milestone-based buyouts. Clever company lawyers drafting and enforcing contracts meant that even when molecules progressed, milestone payments could often be deferred or evaded on technicalities. Recently, we have seen pharma buyers insisting on purchasing assets, rather than companies. It’s a strategy that can reduce the post-purchase risk of business-associated claims from employees and creditors. More importantly, in two recent deals, foreign asset buyers were able to avoid a substantial U.S. tax liability.
While I can’t blame the buyers for wanting to avoid egregious penalties, such deals can create a brutal tax burden for U.S. biotech investors. Essentially all receipts above the net operating losses are considered operating profit and subject to a 35 percent corporate tax. As if that were not enough, when the company is wound-down and the proceeds of an asset sale are returned to investors, the shareholders’ distributions are taxed again. In one recent case, the government is expected to receive the largest payout in the deal. Small biotech struggled to make returns sufficient to sustain the industry prior to these “innovations.” The added burden pharma places on its small partners threatens to make them even less tenable when their services are most needed.
Looking ahead, here are my predictions for the coming year:
—Markets will return to reality. Money for biotech will dry up and a number of new kids on the IPO block who went public too soon will find themselves stranded for want of capital to advance programs that are still years from market. Ben Bernanke can’t print money at the rate required to sustain biotech indefinitely without creating an inflationary nightmare (which he may already have done).
—The crowd-sourcing aspects of the JOBS Act should come on line in the coming year. It is not likely to have much of an impact on bio-pharma, but it might still provide a way to jump-start opportunities in medical technologies that are languishing for want of venture or institutional funding.
—Deal terms will not improve for private buyouts. The inherent disparity in bargaining power between the ant and the elephant means that in a “fair-fight,” arm’s-length, buy-sell world, pharma will continue to shift the burden of the deal structure onto the little guy, namely VC investors. A pharma manager recently opened a discussion of deal terms with the caveat that from their perspective short-term would trump long-term considerations. As long as pharma faces a shrinking industry and diminishing budgets, short-term considerations will dominate pharma’s operational strategy, despite claims to the contrary from senior management and the long-term threat to everyone’s future.
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