One common misperception of risk is that early stage biotech plays are more risky than later stage clinical deals. Its wrong.
Scientific and technical risk is certainly important – but there are a bunch of other critical risks:
Regulatory risk. The FDA could raise the bar, move the goalposts, change the playing field or whatever other sports analogy you want. Its a huge factor, and delivers body blows to small companies. Lots of other Exhibits here beyond Alimera. Orexigen’s off 80% from its CRL earlier in 2011. Biodel’s lost 85% since its CRL a year ago. ARCA’s off more than 85% since its CRL in May 2009. Alexa’s off 60% since its 2010 CRL. These events destroy any hope of big returns to existing shareholders.
Financing risk. If you need to spend a ton of money to get to the value inflection, you’ve got plenty of financing risk. And without an excited public market, financing risk looms large as the cost of capital doesn’t go down with capital intensity.
Liquidity risk. Where’s the exit door for existing shareholders? With IPOs remaining challenged, M&A is the typical way out. But what if every buyer is distracted with restructuring or EPS when you’ve got your data? We’ve all had companies with good data in hand but no buyer. Similarly, if the public markets are in crisis (which never happens), will you be able to get public at all?
Execution risk. We all face this. Bumps, delays, mistakes – they all add to the burn considerably. Fortunately, if you’re small and early stage, the fixed cost of delays are modest; for a Phase 3 stage company a 6-month delay in recruitment necessitates another financing.
Reimbursement risk. Look at what happened to Dendreon. Its not simple to navigate this one.
Idiosyncratic safety risk. One patient has a “possibly related to drug” event? Tough place to be trying to explain away a weird event. And weird things are probabilistic – more patients, more likely of a weird event.
Good analysis or list of risks for biotech