Bubble Trouble

Biotech Finance

I work with the life sciences industry, and for those of us who have defended the potential of the chronically loss-making sector for decades, the last few years have been heady times. Not only has the sector been attracting capital at record rates, it has respectable sales and profits.

There have been biotech investment bubbles before, but in the industry’s pre-revenue stages investors were banking on hopes and dreams — or as some would say, smoke and mirrors. The bubbles would eventually burst when generalist investors came to the reality that drug development is a slow process that usually ends in failure.

So it’s not surprising that as soon as the most recent biotech bull market took off, some folks were speculating what kind of event would bring it crashing to a close.

Now it seems clear that concerns about price controls are bursting the bubble. In the wake of a flat-footed move by a hedge-fund-manager-turned-CEO to exert pricing power by upping the cost of an old drug by 5000%, the price of drugs has become part of the daily news cycle.

High health care costs are irresistible fodder for candidates, and Martin Shkrele gave them a sound-bite-perfect example of corporate greed at the expense of patients. There’s no question that the White House hopefuls will keep fears of the next Daraprim on voters’ minds through the course of the election.

This is probably good news for those of us hoping for a soft landing. The fundamentals of the sector are still strong, and the industry has only begun to exploit its potential to improve human health.

Even if the controversy over pricing extends beyond Shkrele’s gaffe (which is likely as a Wall Street Journal has already taken the ball and run with it), pricing is something that can be fixed. In fact, with the economics of health care in the US in flux, drug pricing will probably be overhauled without specific political pressure.

So while the generalist investors may be scared off in the short term, the financing pipeline will not be cut off completely. Here’s hoping for a soft landing and even less volatility in the long run as the sector matures.


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