The only way a company can compensate for a significant, long-term loss of revenue is to reduce spending, and that translates to fewer jobs and lower budgets for research and development. Less research and development delays the introduction of new life-saving drugs and devices and lower profits abroad force drug companies to raise prices domestically, making treatment more difficult to obtain for everyone.
Large pharmaceuticals already have a significant shortage of new drugs in their development pipeline and the number of smaller biotechnology companies, where most of the early R&D takes place, shrunk by 25 percent over the last year, from 400 in 2009 to 300 in 2010.
If individual European economies continue to show weakness similar to the difficulties Greece is facing in the bond markets or the real estate bubble in Spain, they will have a significant impact on U.S. drug and medical device sales and could have a significant impact on the entire U.S. economy. Pharmaceutical, biotechnology and medical device companies have become both an asset and a liability for the U.S. economy by becoming the backbone of U.S. exports. They are the canary in the coal mine for the financial health of the U.S. economy.
In the days of deep-shaft coal mining, miners would carry a canary with them into the mine. The canary's lungs were so delicate that if there were a deadly methane gas leak, the canary would fall off its perch and the miners would know to evacuate the shaft. Today, if the pharmaceutical canary continues to sing, we know the economy is likely to flourish. If the pharmaceutical and medical device canary stops singing, we should all be wary.
Stephen Brozak is president of WBB Securities, an independent broker-dealer and investment bank specializing in biotechnology, medical devices and pharmaceutical research. Dr. Lawrence Jindra is director of research for WBB Securities.