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The Money Keeps On Comin’

I enjoyed this post by Bruce Booth on the biopharma funding landscape. But I think we would all agree that. . .well, it’s been weird the last few years. This has been a long, long boom in the amount of money that’s flowed into this sector, and I don’t think I’ve ever seen anything like it in my own career. You can see from Bruce’s chart on equity capital funding in biotech that the cash has been coming in for ten years now – there are some ebbs and flows, but the trend just keeps on ratcheting higher.

Along the way, we’ve all had to readjust our thinking. I’ve had several periods where I thought “OK, this wave seems to be dying down, y’know, like they all do” only to be proven wrong yet again. And as the post points out, each of the last four quarters has been greater than the previous 2015 record. This has been VC money going into early-stage startups, it’s been IPOs, it’s been follow-on financing of already public companies. Investors just cannot throw enough money at biopharma.

But Bruce makes a point that he’s made before, and I think it’s pretty close to a law of nature: the more money that flows into a sector, the less disciplined it tends to be. In a rough market, people think long and hard about where their money is going, but when everything looks good, there’s a “Just go buy something” attitude that kicks in. Now, you won’t find any particular investor or fund who would say that’s what they’re doing – no, they’re all carefully deploying their assets, every last one of them. But that can’t be true. It’s a story that they tell themselves, and that we tell each other – what happens is that the definition of “careful” gets gradually rewritten.

There are plenty of other follow-on effects – here’s Booth:

In addition, the feed-forward flywheel of biotech financing psychology also happens. It goes like this: successful and/or lucky biotech firms are able raise large amounts of cash onto their balance sheets through both financings and deals. Initially, their plan was to do X, advancing new medicine(s) down the road towards patients. But in the presence of an abundance of cash, they often expand their goals to not only do X, but also Y and Z. Rather than have, say, 4-5 years of cash runway, the influx of capital changes the pace and nature of their “use of proceeds” – such that now its “just” 2-3 years of runway.  Their focus gets spread over more things, and both “strategic complexity” and its distracting cousin “organizational entropy” increase. Management teams are challenged to address more things, more frequently. New eager investors encourage them to raise even more money so they can have a stake in the story. In short, the presence of more cash often makes burn rates go even higher, re-tightening runways, and requiring more follow-on financings.

This all works until it doesn’t, and then it really doesn’t work. I keep hoping that we don’t have a hard landing in all this, while recognizing that my fundamentally skeptical nature makes me biased towards bracing for one. I have an optimistic side too, and I freely admit that it seems that there are more interesting, unusual, and exciting things going on right now in drug research than at any time in the last 30 years. That really does mean something, and it’s a big part of why all this money is flowing in.

But Bruce quotes Warren Buffet that “the market is manic depressive”. If we get a big disaster or two with some of these new ideas, a lot of people might bolt for the exits, and that’s a process that feeds on itself. I very much hope that doesn’t happen, but there’s always a chance of that – it’s research after all, and God knows there are plenty of unknowns out there and plenty of things that we don’t understand. There will eventually be a landing, one way or another. May it be soft!

16 comments on “The Money Keeps On Comin’”

  1. non-fungible biotech says:

    This trend isn’t surprising given the bloated financial assets of the uber wealthy, be them individuals or corporations, due to irrational propped-up markets, which translates to plenty of VC money. There’s nothing else for the uber wealthy to do to get more uber wealthy but to gamble. Better biotech than bitcoin – at least it might actually translate to something that benefits mankind. If there’s ever a reset of the financial markets that reflects the real economy, biotech will be in the undertow. For now, party on.

    1. Anon says:

      Your right, bitcoin is terrible. We must preserve the money printing machine at the Fed, and make sure those newly created dollars hit Wall Street first. It would be terrible if the plebs were given a way to opt out of our rigged monetary system.

      1. Patrick says:

        I should really find the time to reply to this, but I’ll just go:
        lolololololololololol instead; it’s the level of reply the idea that Bitcoin represents *anything* like this merits

        Also; the early 1800s called, they want their anti-bank party back.

  2. Erik says:

    Uh, he wasn’t exactly trashing bitcoin, just saying it isn’t as clear of a direct benefit to humanity. On the other hand, in order for bitcoin to grow to equal the US financial system, we would have to double the entire energy expenditure of the USA to power the calculations. Note, I only said that bit of realism in response to knee jerk (and anonymous) defense of bitcoin, which I think is a little crazy.

    1. Vader says:

      This is the thing about bitcoin that a lot of people don’t understand. It gets harder and harder to mine more coin — much more so than, say, actual gold, and certainly there’s no difficulty in expanding fiat currency. So there are very hard limits on how much you can expand the money supply.

      We are sufficiently aware of the perils of inflation — I am, for example, doing what I can to hedge against what I expect will be quite severe inflation in the next few years — that we sometimes forget the equal if opposite perils of deflation.

  3. Biotechscientist says:

    What is the effect of this influx of investment on the job market for R&D scientists? In the biotech area it seems hard to hire people those days and the salaries seem to be going up

    1. PV=nRT says:

      So let’s think for a moment about the supply and demand curve. Wouldn’t we predict that increased investment into R&D would increase the demand for good associates, and thereby increase their salaries?

      1. Thoryke says:

        I would feel much better about the whole ‘supply and demand’ thing if all the talk about “we need scientists! We are desperate for more STEM people!” had turned into livable salaries and career paths for the people who answered those calls.

        1. Shanedorf says:

          If you are a Clinical Pharmacologist or Pharmacometrician, you can have your choice of many jobs, high salaries and great benefits right now. I can’t speak to every STEM job market, but those 2 are hotter than hot – in great part due to their ability to advance clinical drug development and the FDAs embrace of those fields as a way to accelerate medicines to patients.

  4. sadeghi says:

    What effect do you think Bitcoin has on this?

    1. Patrick says:

      None. Why would it have any? This is a serious question. It remains a niche asset, owned like precious metals, not actually used as a means of exchange. (For one thing among various, transaction rates and costs are laughably high for traditional Bitcoin.)

  5. mymagoogle says:

    There is all sorts of silly money out there the past few years. A lot of it is from companies and VC’s not normally in biotech just chasing ideas and trends. You hear about a new company raising a $20m A round from … who? What is ____ doing investing in this area, what do they really know about the many varied nature of risk in pharma development? Gene therapy ventures seem oversubscribed with respect to risk in particular given how few products have made it to market and how many clinical holds one hears about due to incidents.

  6. JustAnOldGuy says:

    Med tech has already extended my lifespan. Why not invest in it? It might extend my lifespan even more, and I could get a good return on my investment to support that extension.
    If the investment fails, my lifespan won’t be extended more, and I won’t need the return.

  7. Andy says:

    I don’t know, I wonder if the newly powerful democrats are going to “take away the punch bowl right when the party is getting started”, as the saying goes: https://bit.ly/3ej97Is

    They seem to be salivating at the hundreds of billions of dollars they can save by using the drug industry as a piggy bank.

  8. TerribleGolfer says:

    Power of cash is losing ~15% annual (with respect to assets, CPI enthusiasts would beg to differ, I’m sure). Options: SP index (probably gets you close to even), risky growth (has a chance of winning), real estate, gold, bitcoin.

    Given personal attitudes towards the above, process of elimination usually leaves few options.

    1. Patrick says:

      This is such a weird way to talk about this… No one with a choice is holding any significant amount of cash. This money would not otherwise be cash.

      CPI is not primarily about holding cash. It’s about purchasing power of wages. Which are income streams, not assets.

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