SAN DIEGO -- Biotechnology companies and investors probablyhave little to fret from President Bill Clinton's agenda for healthcare reforms, but both groups still have plenty to worry about,according to investment analysts at an investment conferencehere.
While four leading analysts at the PaineWebber/Biotechnologymagazine conference shared a rosy long-term outlook forbiotechnology, the industry must now contend with a financingshortfall and cooling interest of investors.
Investors were jittery early in the year when they didn't knowmuch about the form of the Clinton plan, its long-termimplications to the industry or its timing (it's now been pushedto September), said David Stone, a managing director of Cowen& Co. in Boston. "We're feeling a little bit better now because itturns out Bill doesn't know either."
Cowen and many analysts feel that biotechnology will emergelargely unscathed from health care reform. The Clinton plan ismost likely to grapple with increasing access to medicalservices, which should help health care providers, anddetaching medical insurance from employment. "We'll see abroad-brush program coming out of Washington," Cowen said.Clinton's most important effect was that it's "made it possiblefor anyone to inquire about prices."
And that's been a problem for drug makers. The recent slumpin pharmaceutical and biotechnology stocks "has to do withcompetition in a managed care environment," said RonNordmann, managing director of research at PaineWebber. "Ithas nothing to do with health care reform."
Pharmaceutical makers came under attack by the Clintonadministration early this year because "it plays wellpolitically," Nordmann said. With health care growing to anestimated 14.6 percent of the gross domestic product (GDP),drugs were a handy target because they represent a portion ofthe medical bill that Americans are most likely to pay out ofpocket instead of relying on insurance coverage, he said.
"If the Clintons were to board up the pharmaceutical industry,health care spending would be reduced to 13.1 percent (ofGDP), Nordmann said. While the U.S. spends more than $2,000per person annually on health care -- or roughly twice asmuch as several European countries -- the pharmaceuticalportion of the bill is in step with European costs, about $210.
Pricing pressures from the government, insurers and evengroups of employers has restricted the ability of drugcompanies to bump up prices on existing products, whichduring the 1980s rose at three to four times the pace of overallconsumer prices.
The immediate problem for many biotechnology companies liesin lining up financing in a tight market. The very success of theindustry's financing frenzy two years ago has aggravated thesituation by creating a raft of new companies, many of whichnow need a financial refueling. "We're facing a terrible squeezebecause of this monster we've created," said Jeff Casdin, amanaging director of Oppenheimer & Co.
The 1991 boom was touched off by hopes of replicating AmgenInc.'s commercial success at other companies, a mood thathealth care offered a recession haven, and declining interestrates on other investments, Casdin said. But none of those twoconditions are now in place to spark a similar resurgence instocks and public financing, he said.
During the boom, biotechnology companies raised $6.2 billionfrom initial public stock offerings, on top of the $23.7 billion ofadditional capital raising from other public and privatefinancings, according to Stuart Weisbrod, a vice president withMerrill Lynch in New York.
A group of 79 biotechnology companies that went public in1991-92 are running through $1.5 billion a year and have, onaverage, enough cash left for about 2.4 years of operations,Casdin said. "Nothing compresses quite like a biotechnologycompany with a year of cash left," he said. But to cover the $1.5billion burn rate, "you'd need to do 40 secondaries a year at$40 million each," which appears unlikely.
As a result, many companies will be looking to soak limitedpools of private funding, strategic partners or to merge.Pharmaceutical companies, however, may provide a brightspot. If they can cope with the pressure on product pricing andprofits, they will likely be looking to acquire new technologies,Casdin said.
The companies that do squeeze through today's small financingwindow aren't faring that well, either, Casdin said. Fifteen ofthe 79 companies from the class of 1991-92 have recently filedfor public stock offerings, but six of them subsequently shelvedthe deals. Nine others followed through on offerings, but raisedonly enough funding, on average, for an additional 1.1 years ofcurrent operations, giving up 26 percent of equity in theprocess.
This year's decline in biotechnology stocks "isn't just a problemof product failure, but that there are more companies outthere," Weisbrod said.
Only about 100 of the more than 200 publicly tradedbiotechnology companies are worth tracking, and analysts don'thave enough time to stay on top of all of them. "It's hard forme at a retail house (brokerage) to talk about the 199thcompany on the list," Weisbrod said.
And the large number of companies is taking a toll oninvestors. "I think investors' interest in the group has beenwaning," Weisbrod said. Some investors may be relieved,grateful for the time to evaluate companies without the fear ofmissing out on an upward price spiral. The falling interest frominvestors is probably most apparent in the declining share ofbiotechnology stocks held by institutional investors, which hasdropped from 60 percent in March 1991 to less than 40percent two years later, he said.
The second-tier stocks have been hardest hit by the recentdecline, said Denise Gilbert, a managing director with SmithBarney. Faring better are the top-tier companies, with productson the market, and the third tier, comprised largely ofcompanies that went public in the past two years.
"If investors move back into biotechnology, they'll go back intothe bigger companies," Casdin said. "It's a boon for the Amgens,Genentechs and Chirons of the world."
But the merger and acquisition game has largely been a loserfor biotechnology investors, especially in stock-for-stocktransactions.
Weisbrod cited last year's merger of Scios and Nova to formScios Nova Pharmaceuticals as a case in point. Both stocksdeclined in price following the announcement.
However, the long-term view is much brighter, largely becauseof biotechnology's role in finding innovative drugs."Biotechnology represents an enormous source of new drugs,even new categories," Gilbert said.
She maintained that most cash-strapped biotechnologycompanies have been extremely efficient in deploying theirlimited cash into research. She compared a basket of 70biotechnology companies with an aggregate market valuationof $25 billion against Merck, the biggest pharmaceuticalcompany, with a $45 billion valuation. The biotechnologycompanies are spending about 30 percent more than Merck onresearch working on about 250 announced products, comparedto fewer than 100 at Merck.
Gilbert noted that pharmaceutical companies typicallyannounce products later in development than smallbiotechnology companies. Still, "to me, that's a sign of enormousefficiency," Gilbert said.
That push toward innovative medicine is also being propelledby the "demographic tailwind" of the baby boomers slippingpast 50 and into the age groups where medical needs increase,Stone said.
-- Ray Potter Special to BioWorld
(c) 1997 American Health Consultants. All rights reserved.