ALL ACROSS the technology universe the topic of conversation (or is it cries of grief?) is the Nasdaq. Not the market so much, but the index. Everyone with a stake in a company knows that the Nasdaq composite index is down over 50% from it’s all-time high.
Like investors across all technology sectors, those who bought into genomics companies are now feeling the pain of the Nasdaq’s freefall following a tremendous ride. Over the past year many of us walked through the genomics amusement park and marveled at the ground-breaking technologies being invented while we gobbled up shares of new companies that offered technological and financial promise. We rode the Nasdaq roller coaster, enjoying the peaks and valleys, twists and turns, and, oh, that view from the top. But we all know what happens when you ride the biggest coaster on a full stomach.
Now that the ride is over and the market is deflated, where is the industry headed? During this financing lull (and it is only a lull), many investors are going to evaluate their portfolios and sit by as they wait for actual products to begin to emerge. The sequencing of the human genome has provided the industry with wondrous technologies and hundreds if not thousands of potential drug targets, but as yet there are few actual products. No products means no revenues and no profits.
To this writer, this is a period of déjà vu. Many of us remember the days when investors had a passion for monoclonal antibodies well before monoclonals were humanized or, for that matter, injected into patients. Eventually, investor interest waned and they moved on to the next hot fashion. It would be years before monoclonals regained investor interest. The resurgence began when good antibody-based products were developed and started moving successfully toward regulatory approval. And, as they say, the rest is history.
I see the same pattern developing for genomics. Genes have been identified, but much work remains ahead. Which genes are clinically relevant? How do we regulate and manipulate them? Are there drugs in existence that may play in gene regulation? Will this give new life to compounds whose patents are expiring or have expired? How will these compounds be identified? Will computer technology bring it all together? And what about proteins? When answers to these questions begin to emerge so will the products that will rekindle investor appetites.
For the coming months, however, companies will have a hard time launching initial public offerings and they may also encounter difficulties in executing follow-on offerings. There is cash out there and it needs to be put to work, but private equity players will be cautious and will drive hard deals on valuations. Remember valuations are set by the public market and have recently been dramatically reset.
In the near future, investors will be looking for product-based companies and will demand to know how management teams are using their resources to develop products that will drive revenues. Many companies will find that their business models are not sustainable and will find it difficult to raise additional capital. Those companies may be acquired for their technology (and at values that may be way below their previous valuations) and other companies may just go away!
For those of you in the lab or in the boardroom, this scenario means that you had better stick to your knitting. Don’t be distracted by Nasdaq gyrations. Execute your business plan, evolve and adapt as necessary, and develop products that will drive revenues and ultimately develop a healthy bottom line.
Ira Leiderman is managing director of the Palladin Group, a New Jersey-based investment management firm. He was previously a senior healthcare banker at Gerard Klauer Mattison. You can e-mail Ira at [email protected] .
Trendspotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets are expected to affect the genomics industry. The column appears every Friday. Next week Robert Goldberg, a senior fellow at the National Center for Policy Analysis, talks about genomics, Bush, and Capitol Hill.