By and large, for the past 40 years venture capitalists and investors have been buying into the hopes and dreams of biotech companies and, as a result, biotechs have been able to gain access to reasonably easy and comparatively inexpensive sources of capital. Along the way the industry has also had to weather five severe market droughts (1983, 1986, 1991, 1995, and 2000) yet has lived to tell the tale when the capital markets rebounded. The meltdown in the financial markets that we witnessed in October has left industry executives wondering whether they will be able to recover once more from what is predicted to be a downturn that will last at least 12 to 18 months.
The reason for the concern is that the root of the problem lies in the very sustenance of the industry—capital, which has been its umbilical cord since the industry’s inception. Now that the cord has been severed, the industry is entering a different world than it has previously experienced and capital, if available at all, will be more expensive and difficult to obtain.
The more mature and blue-chip biotech companies will certainly do just fine since they have plenty of cash on hand, product revenue streams, strong pipelines and big pharma partners. It is the large universe of small public companies and private companies looking for venture capital that will feel the most pain.
Almost overnight, it has become a buyer’s market with biotech public companies seeing their share prices fall to record lows. The focus of attention among successful private and public companies alike will be on those biotechs with a market cap well below their cash value but with $60 to $80 million in the bank. For private companies, with the IPO window firmly closed for them, it represents an opportunity to “go public” by merging into these companies that have fallen on hard times and have few or no options to undertake financing because of their low share price.
The grim prognosis for the almost 200 publicly listed biotechnology companies (representing 55% of companies tracked by the monthly Burrill Biotechnology Report) that have seen their market cap drop to less than $100 million is that they will find the next 12 months challenging since they are trading at almost no multiple to their cash.
These companies will need to find ways to extend their runway and stretch out the funds that they have remaining. Already we are seeing a flood of announcements that companies are restructuring by cutting their work forces and eliminating research and drug development projects in a desperate effort to extend their cash reserves. Some might have to sell themselves at fire sale prices. For example, Clinical Data acquired Avalon Pharmaceuticals recently in an all-stock transaction valued at approximately $10 million. At the beginning of 2008, Avalon’s share price was $3.25 representing a market cap of approximately $55 million.