Biotechs Bank for Survival

Image: Anne MacNamara Like prudent squirrels bracing for a harsh winter, biotech managers are scrambling to conserve money in an effort to keep their companies alive during the current financing downturn. Biotechs have not gone under in droves, despite the funding turn back. Most have survived using strategies such as licensing and partnership deals, innovative financing, and simple cost cutting, including layoffs. "We haven't seen the kind of consolidation you would expect. It is a little surprising," says Jill Kiersky an analyst who follows biotech at Morningstar in Chicago. One key to the industry's resilience is that many companies were awash in capital before the funding drought began. Based largely on enthusiasm for genomics, 72 biotech companies went public from December 1999 to the first quarter of 2001 and raised $6.8 billion (US) in financing, according to Recombinant Capital, a Sanfransico biotech consulting firm. But 20% of the members of the class of 2000 now have a negative value, if you subtract the companies' cash from their market values, according to Recombinant Capital. The firm estimates the group as a whole has about 2.2 years' worth of cash, and points out that the previous biotech investment downturn lasted three to four years. STRATEGY FOR SURVIVAL The most widely used strategy for extending the clock is to form licensing deals and partnerships with larger players. While many biotech firms initially dreamed of becoming full-scale drug development companies, current realities have forced them to spin off potential products, or equity in their firms, in return for a chance at survival. "They're hocking the wedding jewelry," says David Webster, a Pennsylvania consultant to the biotech and pharmaceutical industries. "They're looking around in the cabinet to see if there is something there that is not critical to their independence and viability as a business, and licensing it." In 2000, he says, biotech companies with soaring stock prices were thinking about making acquisitions. Now, many are takeover bait. Photo: Courtesy of Morningstar Jill Kiersky Dick Haiduck, a director at the San Francisco biotech investment firm of Burrill & Co., says partnership deals rose 300% from the first to the second quarter of this year while equity investment fell 50%. During the first half of the year the industry closed on $3.9 billion in partnering deals, he says. "It's very dramatic," says Haiduck. "With the shortfall in equity, people are looking at partnering as something that makes a lot of sense." Haiduck says that despite the biotech companies' desperate need for cash, they are not suffering in a buyer's market. The companies are still getting good prices for their technologies because the primary buyers, big drug companies, have their own problems. With a dearth of new blockbuster drugs coming to market, drug makers are hungry for new biotech products. Many companies that set aside cash to run their own clinical trials are now shifting that process to larger pharmaceutical partners with more experience in Food and Drug Administration regulations. "In the well-funded days, biotech companies said, 'I'll build that capacity myself,'" says Haiduck. "Now you have the situation where people are saying, 'I have to be careful about my burn rate and spending levels. How am I going to get all of these things done that I've never done before? Why don't I access the capacity that is already there?'" LAY OF THE LAND For scientists, the most direct effect of the current cash conservation is in reduced hiring and layoffs, a rarity in the booming industry in recent years. "This is something you never saw in 2000 and 2001," Webster says. One popular transaction used to stem the cash-burn rate is known as a PIPE, or private investment in public equity, which has raised over $1 billion for biotech companies in the past several years, according to Stroock & Stroock & Lavan, a New York law firm. In a PIPE transaction, a fixed number of securities are sold at a set price to an institutional buyer. Companies that have used PIPE financing include San Diego-based Amylin Pharmaceutical, Triangle Pharmaceuticals of Durham, NC, and Curis, based in Cambridge, Mass., according to Stroock & Stroock & Lavan. Webster says many companies are trading at values equal, or below, their cash on hand. Indeed, one survival strategy is to acquire companies, simply for their cash. Last year Exelixis, a South San Francisco genomics company that went public in 2000, acquired a software firm for $110 million in stock, mainly to take advantage of the company's $110 million in cash. Exelixis then licensed the software technology. "We never intended to be in the software business, and doubled our cash position," says Jane Green, Exelixis' spokeswoman. Exelixis has deployed a full range of strategies to weather the current financial climate, Green says, including a major collaboration with Bristol-Myers Squibb. She says Exelixis has about $170 million in cash, enough to last two years. To stretch that, the company has also initiated some cost containment policies, including a hiring slow down and closer monitoring of travel. "You have to build a business for the long term," she says. "It's not just about having great science." Haiduck expects that if nothing else, biotech managers will continue to come up with survival strategies. "These are entrepreneurial companies with highly creative people managing them and on their board," Haiduck says. "The prediction that there will be some sort of uniform, patterned response is the only thing I predict won't happen." Susan Warner (swarner@comcast.net) is a freelance writer in Philadelphia.

Biotechs Bank for Survival

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