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Volume 21, Issue 12
The meltdown in the financial markets represents a sea change in the world of financing that will continue to affect the flow of much needed capital into the sector for the foreseeable future.
October 2008 will be remembered for a very long time by biotech CEOs after the industry dusted itself off from one of the worst months on record as far as the capital markets are concerned. Not only did we see wild swings in the Dow but also the almost immediate impact it made on the progress and prospects of small and emerging biotech companies.
G. Steven Burrill
The meltdown in the financial markets represents a sea change in the world of financing that will continue to affect the flow of much needed capital into the sector for the foreseeable future. Biotech companies have had reasonably easy and inexpensive sources of capital in the past 40 years, but now the world has changed for them and it is going to get much more difficult going forward.
In the past, biotechs have recovered from several "nuclear winters" as the financial markets rebounded from various perturbations. This time, however, the problem lies in the very sustenance of the industry—capital, which has been its umbilical cord since the industry's inception. Now that cord has been cut and we are entering a very different world where capital will be more expensive and difficult to obtain.
The more mature and blue-chip biotech companies will do just fine because they have plenty of cash, product revenue streams, strong pipelines, and Big Pharma partners. The small public and private companies looking for venture capital will feel the most pain.
The prognosis for the almost 200 publicly listed biotechnology companies that have seen their market cap drop to less than $100 million is that they will find the next 12 months challenging because they are often trading at almost no multiple to their cash. These companies will need to find ways to survive and stretch out the funds that they do have remaining.
In fact, 30% of the public biotech companies tracked by the monthly Burrill Biotechnology Report were facing the specter of NASDAQ delisting notices until the NASDAQ Stock Market announced that it had suspended its minimum bid price and market-value requirements for continued listing for three months in response to the severe financial conditions. Even this extension may not be long enough as the consensus appears to be that the industry is facing a long downturn.
Looking to the future, I believe that the markets will return in late 2009 or early 2010. However, at that time we are likely to see a very different industry than currently exists. Companies with limited cash are already starting to cut their work forces and even eliminate research and drug-development projects in a desperate effort to extend their runway. Some might have to sell themselves at less than favorable prices to at least salvage some value for their investors and shareholders. There will be attrition through bankruptcies and mergers. The focus of attention amongst successful private and public companies alike are 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.
We are not writing biotech's obituary just yet. In fact, these stressful times will force companies to look at what they have and how their assets can be monetized. They will also have to look further afield for financing and potential partners such as 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 and even stronger industry.
Analyzing biotech's monthly and quarterly performance, the Burrill Biotech Select Index, a price-weighted index tracking 20 of biotech's blue-chip companies, finished the third quarter down 0.74%. In comparison, the Dow fell 4% for the third quarter and the NASDAQ also dropped 10%.
For October, our indices reveal the magnitude of the fall off in the markets and they reflect the realities that investors still have faith in the blue-chip biotechs but 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 (Table 1).
Table 1. A comparison of biotech indices through the year. Investors still have faith in the blue-chip biotechs but are staying well away from the more risky emerging biotech companies.
The Burrill Biotech Select Index finished October down 10% whereas the Dow fell 14% and the NASDAQ took a 17% hit.
The collective market cap of the industry closed October at $417 billion, a drop of 10% for the month. Genentech's market cap closed the month at $87.5 billion; Amgen was at $63.4 billion, and Gilead Sciences at $42.2 billion.
In terms of biotech IPOs, 2008 is shaping up to be one of biotech's worst in history with only one completed to date. 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, US biotech financings, both for public and private firms, raised $2.5 billion in the third quarter bringing the year-to-date total to almost $8.2 billion (Table 2).
Table 2. US biotech financings ($ million). Collectively, US biotech financings, both for public and private firms, raised $2.5 billion in the third quarter.
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.
While slipping almost $1 billion in Q3 2008 compared to Q2 2008, partnering deals did generate more than $2.9 billion for US biotech companies in Q3. Notable deals in the quarter included a potential $820-million partnership between GlaxoSmithKline and Valeant Pharmaceuticals and a $725-million deal that Pfizer inked with Medivation to develop and commercialize Dimebon, the company's investigational drug for treatment of Alzheimer's disease and Huntington's disease.
G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, email@example.com