Everyday some or other biotech firm gains attention of investors with an announcement of clinical data, flying IPO or due to a big M&A deal. In such a scenario, investors tend to ignore the relative scale of the biotech segment relative to big BioPharma companies. The size differences between the two are highlighted under three parts.
Biotech segment is a tiny fraction of the bigger BioPharma industry. Small little changes in a big BioPharma company leave a significant impact on the scale of the biotech industry. For example, Biogen Idec Inc (NASDAQ:BIIB) announced initial Alzhemier’s antibody data in January which moved the stock price upward by almost $108.
The second key point is because of the scale difference small changes done in the resource allocation measures within large Pharma firms offer the potential to change the biotech ecosystem. If the big BioPharma firms channeled almost 5% of their balance sheet funds into private biotech companies, it would fund the entire group of VC-backed biotech segment for almost a year. Even minor changes done in the internal and external research and development allocation would yield same results. As the market cap differentials are huge, the cost of capital also varies across the two segments.
Differential in size
The third factor is differential in size which makes BioPharma segment increasing externalization of research and development activities a financial buffer versus the cyclic ups and downs. It is compared with the movement of the public capital markets. The IPO part for the past eight quarters has resulted in lucrative returns for Pharma companies. They also remain at risk during the downturn in capital cycles. However, big BioPharma companies financial scale and their appetite for innovation, offers a healthy long-term base for the biotech sector. The three factors show that performance of biotech largely depends on the performance of big BioPharma companies.