I’ve been speaking with biotech-level business development (or BD) people and they express extreme frustration with their large-pharma counterparts. Pharma BD teams have, according to my sources, been reorganized on average about 3 times in the last year. That means a biotech has probably had to do a start-to-finish education and negotiation process 3 different times with 3 different sets of people in order to get a deal done. As a consequence, deals are not being done, which exacerbates the cash situation.

To be clear, though, the real problem with funding is massive redemptions in the biotech space. I flagged this problem over a year ago, when funds-of-funds rebalanced funds out of underperforming biotech funds and into emerging markets and energy funds.

I also noted an expansion of this when downgrades in the credit market early in 2008 caused funds-of-funds to reclassify credit debt from low-risk to high-risk. Since these credit instruments were illiquid, this forced them to close liquid biotech positions to remain in compliance with the risk-balancing percentages in their investment agreements.

These redemptions were bad enough, but the desire of the banks and brokers to improve their own balance sheets caused the redemptions to be magnified by a drastic reduction in leverage.

Not only do biotech funds have to contend with redemptions, they're also having leverage withdrawn. In 2006, a biotech fund might have had to put up $1 cash for every $5 in portfolio position. Recently, 1 fund was notified by its broker/dealer that there would be no leverage offered on development-stage biotech positions. This adds up to significantly less investable capital on hand to finance biotech companies.

Finally, investment losses have been heavy with a rogue Food and Drug Administration (FDA). I recently wrote an analysis of potential changes at the FDA resulting from a new administration in DC, noting that even bad changes would be welcome provided they were consistently applied.

The current FDA has been without leadership so often since Dr. Mark McClellan left that it’s been difficult to figure out what it will do next. Current FDA Commissioner Andrew von Eschenbach has been an utter disappointment, playing no visible role in reining in ill-behaved department directors.

The combination of losses, redemptions, and reimbursements make the funding situation almost impossible in the sector. BIO’s proposal is an appealing temporary patch, which actually could have some long-term benefits past the bailout, if Congress decides to adopt some of the creativity we’ve seen at the state level and in other countries.