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Yearly Archives: 2011

September 23, 2011 no comments

Why killing “above average” projects is the only way to rescue biotech’s return on investment

Across the whole sector, the return on investment in biotech (broadly defined to encompass diagnostic and medical device companies, as well as therapeutic developers) is poor, whether you look at publically traded stocks or private investments through venture capital funds.  So poor, in fact, that no ‘generalist’ investor would touch biotech as an asset class.

Drug Baron Silver Medal
Silver Medal Companies: Successful… but not successful enough?

This, according to Stuart Duty of Piper Jaffrey, is the reason why the IPO window closed for biotech companies, and will likely remain closed for the foreseeable future.   This inability to attract ‘generalist’ capital to buy our companies at the end of the life cycle blocks up the whole biotech company pipeline.  And there is only one solution: improve the return on investment of the sector so that it becomes competitive with other asset classes.

That much is obvious.  Less obvious is how this is to be done.  DrugBaron’s prescription is to kill more projects before they consume ultimately non-productive capital.  The key is to recognize just how high the barrier has become for commercial success, and that even “above average” projects are unlikely to ever achieve profitability.  This prescription is easy to swallow in theory, but difficult to implement in practice.  Killing companies (crystallizing losses) is difficult to do when they are obviously failing – so doing it when they are apparently succeeding (just not succeeding enough) requires a special kind of insight… and no small measure of bravery.More


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