December 1, 2008 (Vol. 28, No. 21)
Capital Will be More Expensive and Difficult to Obtain in the Next Twelve to Eighteen Months
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.
By the Numbers
Analyzing biotech’s monthly and year-to-date performance, the Burrill Biotech Select Index, a price-weighted index tracking 20 of biotech’s blue-chip companies, finished October down 10% (the same YTD). In comparison, the Dow fell 14% (29.7% YTD) and the NASDAQ took a 17% hit (down 35% YTD).
Overall, shares of blue-chip biotech companies have weathered reasonably well in one of the most turbulent periods in recent financial history. Investors have regarded biotech’s elite as safe havens in these times of economic uncertainty and have backed away from the traditional big pharma companies. This is seen in the fact that year-to-date, the American Stock Exchange Pharmaceuticals Index has declined 20%, twice that of the Burrill Biotech Select Index.
The indices reveal the sheer magnitude of the fall off in the markets, and they reflect the realities that while investors still have faith in the blue-chip biotechs, they are staying well away from the more risky emerging biotech companies, with the stock values of the mid-cap and small-cap biotechs taking a pounding in October.
In terms of biotech IPOs in the U.S., 2008 is shaping up to be one of biotech’s worst in history with only one completed to date—Bioheart. Except for venture capital deals, which have remained at steady state for the past three quarters, generating about $1 billion each quarter, all other forms of financing have fallen compared to the first quarter of 2008 and comparative 2007 figures.
Collectively U.S. biotech financings, both for public and private firms, raised $2.5 billion in the third quarter bringing the year-to-date total to almost $8.2 billion. The industry is on pace to generate about $10 billion in the year. You have to go back to 1998 to find a smaller amount that was raised by the industry.
Partnering Remains Steady
While slipping almost $1 billion in Q3’08 compared to Q2’08, partnering deals did generate over $2.9 billion for U.S. biotech companies. Notable deals in the quarter included a potential $820 million partnership between GlaxoSmithKline and Valeant Pharmaceuticals, and Pfizer inked a $725 million potential deal with Medivation to develop and commercialize Dimebon, the company’s investigational drug for treatment of Alzheimer’s and Huntington’s diseases.
What Will the Future Hold?
Looking to the future, we believe the markets will return in early 2010. At that time, however, we are likely to see a very different industry than currently exists today due to attrition through bankruptcies and mergers.
These stressful times will force companies into looking at what assets they have and how they can be monetized. They will also have to look further afield for financing and potential partners than just the U.S., such as to the BRIC countries—Brazil, Russia, China, and India.
The industry has been and will be as creative in its survival as it has been in its product development. From this will emerge an even stronger industry.
Peter Winter ([email protected]) is editor of the Burrill Biotechnology Report, which is published monthly and provides detailed market intelligence on the latest global business and financial developments and trends in the biotech industry. Web: www.burrillandco.com/bbr.