>>Think biotechs are a great sector<< Maybe so, George, but as it seems to me not for investors.
My brokers & I have had quite a few discussions on and off about the smallcap debacle on the Russell & NASDQ and one thing we're all wondering is if there hasn't been a more or less permanent sea change -- as permanent as anything on Wall Street can be, anyway -- favoring large caps and maybe mid caps.
The tremendous growth in size of mutual funds, pension plans, and other collective investment vehicles has led to a proliferation of funds which are too big to risk serious buying small caps. These giants truly rule the markets. Without them, even a cure for old age will profit shareholders not one bit.
Biotech start-ups aren't the only investments that are commonly capitalized below the safety level of investment fund managers but they are typical of the breed. I know it is fashionable to say "small caps will have their day" but increasingly it seems unlikely to happen to any appreciable degree unless large pension and mutual funds suddenly change their investment policies or decide to decompose into smaller subunits, something I don't foresee happening in this "global economy" where big is almost always said to be better.
At the same time, for biotechs in particular alternative funding sources like government-assisted research grants have shrunken dramatically since the early '70s. The very sort of thing that sustained the original discoverers of BPI in New York -- public funding of pure research -- is largely a thing of the past. Today those same academics would have to start their own IPO and hawk shares to their neighbors and relatives to keep going. Even universities are getting into the act with their so-called "incubation" programs and insistence on royalty payments. For research faculty it's no longer "publish or perish" -- it's "profit or perish."
For these and other reasons I expect consolidation of small and mid-cap biotech firms is the only thing likely to save what we think of as the "biotech industry," at least as an object for individual investments. Companies like Xoma will have to sell out to large pharmaceuticals or merge with other biotechs in the same class until they are sufficiently capitalized to be a reasonably liquid investment for the fund managers who drive modern markets. Here and there, perhaps, someone will luck out with another AMGN but the "industry" as a whole will have to consolidate, be absorbed by the pharmas, or horizontally integrate with some other industry (Foods? Agriculture? Hospitals? or, perish the thought, Insurance?) to survive. Small and even mid-cap bios are an endangered species.
Will consolidation of the biotech industry lead to arbitrageur profits like the merger mania days of old? I doubt it. The coming consolidation will be mostly a matter of survival and job protection, not greater "synergies" for maximizing profits. It is ironic, perhaps, that just as the biotech industry seems to be on the verge of dramatic breakthroughs because of recombinant genetic technologies the generally small cap companies in this industry are being threatened with extinction. Then again, did you ever heard of the Studebaker Carriage Shop? Or the Tucker automobile? Invented seat belts... power steering... power brakes... etc, etc. |
