Controversial JOBS Act Will Boost Biotech

My fellow Fool, Ilan Moscovitz, brought up some really good points about the Jump-start Our Business Startups Act in an article last week. Even with the changes made before being passed by both houses of Congress, there are still some investor protections that disappear with the new legislation.

For biotech investors, though, I don't think it matters that much. Many of the issues don't really apply to biotechs and the potential benefits from the JOBS act seem to justify the means.

For instance, the JOBS act loosens Sarbanes-Oxley regulations for five years after going public. For your average company selling products and making capital improvements, the regulations could increase fraud or at the very least number massaging.

But investors in development-stage drugmakers only need to care about two numbers: how much cash the company has on hand, and how much cash it's burning. Looking at revenue and earnings is actually detrimental because milestone payments are often amortized over the expected life of the partnership even though the money is sitting in the bank (assuming it wasn't spent already).

Ariad Pharmaceuticals (NAS: ARIA) , for example, registered revenue of $25 million last year as carry-over from its partnerships with Merck (NYS: MRK) and Bellicum despite neither project having reached the market yet. Ditto for the half a million dollars Discovery Laboratories (NAS: DSCO) registered from collaborative arrangements and grants last year.

Even with those changes, biotechs are going to report those two numbers -- if they don't, they won't have any investors -- and if they're going to lie about it, Sarbanes-Oxley probably isn't going to stop them. In fact, investors face greater risk from biotechs massaging the data for their drug pipeline, which Sarbanes-Oxley has no control over.

JOBS also increases the amount of money that can be raised through Regulation A to $50 million. That provides an alternative to the IPO market for companies that really shouldn't be on the public markets yet, but have run out of options in the venture capital setting. For instance, Merrimack Pharmaceuticals (NAS: MACK) , which went public yesterday, had already had seven rounds of venture raises. At some point the VCs turn off the spigot.

And perhaps the added option will eliminate situations like Verastem (NAS: VSTM) , which went public despite not having any drugs even in the clinic yet. Perhaps a few more years as a semi-private company would have done the company some good and allowed it to stay above the closing price on the first day after it IPOed.

The only bad thing I see about the JOBS act is that it might remove some desperate biotechs from the licensing and auction block. Lately big pharma and big biotech have been able to get some good deals from private biotechs that are desperate for cash. Now they'll have an alternative.

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At the time thisarticle was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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