Brian O'Connell

In early August, the Dow Jones Industrial Average (DJIA) gave back 1,400 points on increased fears over a worldwide credit crash. With the subprime mortgage lending mass spilling into the more traditional lending market, Wall Street analysts are fearful that tightened credit on the part of lenders and a lock down on spending by jittery consumers will give the stock market and the US economy a 1–2 punch that will put both on the canvas faster than you can say "Smokin' Joe."

Let's take a look at the financial markets and see how all this might play out, and how it might affect the life sciences industry.

August 9, 2007, was a tough day on Wall Street, with stocks falling 400 points on increased credit concerns over the struggling mortgage lending market. On the same day, AIG released a report showing that borrowers in the category just above subprime were showing increased residential mortgage delinquencies.

AIG is the world's largest insurance company and will have its hands full if lenders can't collect from borrowers. It's also one of the largest mortgage lenders in the world. The company reported that more than 10% of its subprime mortgages were 60 days overdue, while 4.6% in the category just above subprime were late during the second quarter. Also, total delinquencies in AIG's $25.9 billion mortgage insurance portfolio clocked in at 2.5%.

According to AIG, delinquency rates for first mortgages, which represent 90% of AIG's domestic mortgage business, also jumped to 3.89% in June, up from 3.56% in April. Although second-lien mortgages only made up 10% of AIG's mortgage insurance portfolio, that segment incurred $159 million in losses during the second quarter. These mortgages are susceptible to defaults and are especially sensitive to falling home values, the company said.

Can the credit crunch spill over into the biopharmaceutical industry? Sure. With the money supply tightened, many companies, especially younger and less cash-rich companies, will find it more difficult to raise the capital they need to find new drugs, develop new markets, and keep hiring good people.

Also, if stocks continue to slide, shareholders may decide to cut their losses and sell their life sciences stocks, opting instead to put their money into more cautious portfolios like cash or bonds. That will cut into the operating capital and the revenues of publicly traded biopharmaceutical companies, who, in turn, will decrease investments in research spending, hiring, and other key operational areas.

VENTURE INVESTING

With credit tight, and the memories of the 1990s, when billions were lost in Internet companies, venture capitalists are reluctant to fund new companies in such a bearish financial climate.

Again, the markets are taking their lead from the housing market, which is traditionally a good benchmark for the economy as a whole. Economist Robert Samuelson, writing in the August 9, 2007, edition of Investor's Business Daily, said that the real estate market had added, on average, 30,000 new jobs per month in the past few years. But with the housing market in sick bay, those numbers have flipped, and housing industry companies have let go an average of 15,000 employees per month in 2007.

Back in the late 90s, venture capitalists were waving checkbooks at any new firm with a passable idea. Over $100 billion was sunk into such companies from 1998 to 2000. According to Samuelson, this number is down significantly 10 years later, with 2007 and 2008 shaping into an even thinner period for venture investment.