Does anyone want to put money into the pharma/biotech industry? Let's widen that question: does anyone want to put money into R&D-driven industries in general? That question, which on first glance seems ludicrous, becomes more worryingly believable the longer you think about it. Consider this exchange between Eric Schmidt of Google and Peter Thiel. Thiel makes a pretty provocative statement about what Google is doing with its money:
PETER THIEL: …Google is a great company. It has 30,000 people, or 20,000, whatever the number is. They have pretty safe jobs. On the other hand, Google also has 30, 40, 50 billion in cash. It has no idea how to invest that money in technology effectively. So, it prefers getting zero percent interest from Mr. Bernanke, effectively the cash sort of gets burned away over time through inflation, because there are no ideas that Google has how to spend money.
That apparently didn't get answered to the moderator's satisfaction, so it came up again:
ADAM LASHINSKY: You have $50 billion at Google, why don’t you spend it on doing more in tech, or are you out of ideas? And I think Google does more than most companies. You’re trying to do things with self-driving cars and supposedly with asteroid mining, although maybe that’s just part of the propaganda ministry. And you’re doing more than Microsoft, or Apple, or a lot of these other companies. Amazon is the only one, in my mind, of the big tech companies that’s actually reinvesting all its money, that has enough of a vision of the future that they’re actually able to reinvest all their profits.
ERIC SCHMIDT: They make less profit than Google does.
PETER THIEL: But, if we’re living in an accelerating technological world, and you have zero percent interest rates in the background, you should be able to invest all of your money in things that will return it many times over, and the fact that you’re out of ideas, maybe it’s a political problem, the government has outlawed things. But, it still is a problem.
ADAM LASHINSKY: I’m going to go to the audience very soon, but I want you to have the opportunity to address your quality of investments, Eric.
ERIC SCHMIDT: I think I’ll just let his statement stand.
ADAM LASHINSKY: You don’t want to address the cash horde that your company does not have the creativity to spend, to invest?
ERIC SCHMIDT: What you discover in running these companies is that there are limits that are not cash. There are limits of recruiting, limits of real estate, regulatory limits as Peter points out. There are many, many such limits. And anything that we can do to reduce those limits is a good idea.
PETER THIEL: But, then the intellectually honest thing to do would be to say that Google is no longer a technology company, that it’s basically ‑‑ it’s a search engine. The search technology was developed a decade ago. It’s a bet that there will be no one else who will come up with a better search technology. So, you invest in Google, because you’re betting against technological innovation in search. And it’s like a bank that generates enormous cash flows every year, but you can’t issue a dividend, because the day you take that $30 billion and send it back to people you’re admitting that you’re no longer a technology company. That’s why Microsoft can’t return its money. That’s why all these companies are building up hordes of cash, because they don’t know what to do with it, but they don’t want to admit they’re no longer tech companies. . .
I agree with Alex Tabarrok; this sort of thing is disturbing food for thought. As his point about the reveal preferences of technology leaders, some possible bright exceptions are people like Elon Musk, who seems quite serious about his space program (and good for him). And I very much hope that Google's Schmidt and others are serious about thing like their asteroid-mining venture, and that it's not just the "propanganda ministry".
Closer to home, I got to thinking that if there were any sort of robust returns to be earned in biotech or pharma, that Google, Microsoft et al. would have probably taken a spare billion or so and funded some ventures in these areas. But they haven't. Keep in mind, these folks have money well in excess of what they seem to need to continue investing in their own business. They're presumably looking for something to do with it all, and the point about not being able to return it to the shareholders is a valid one, because (rightly or not) that's seen as an admission that they don't have any particularly good new ideas. (Of course, the fact that they're letting the cash pile up might also be interpreted that way, but issuing a dividend really nails it down).
There are many similarities between this situation and the discussion/argument we had around here about pharma companies buying back their own stock. The likes of Apple can plausibly claim that hey, their business is going so well that they really don't have to spend all those revenues on running it; their current spend is plenty to keep the good times rolling. But what drug company can say that? Everyone in this business is on a frantic treadmill, thanks to patent expirations above all. You'd think that taking money that could be spent on R&D (yours or someone else's) and using it to prop up the share price would be an unaffordable luxury. I know, I know - a public company has obligations to its shareholders. But in this business, perhaps one of those obligations is to explain to your current (and potential) shareholders just what sort of business this is, and what it requires. In a better world, you might end up with a better-informed and more realistic group of people holding your stock.
Unless - and I can't rule this out - the belief is that a completely honest look at the way things are in this business would scare off too many people from investing in it at all. It seems to have scared off Big Tech, with their massive piles of fallow cash. It's not like they have to become experts to invest over here; expertise can be hired. What if they went to some of the existing investment groups over here and asked them what they would be able to do with a billion dollars? Are there even a billion dollars worth of ideas out there right now?