As I write here in San Francisco, in January 2009, nearly half of the publicly quoted biotech companies in the US have less than one year’s cash left. With financing and valuations reaching rock-bottom, these companies potentially face bleak outcomes, and likely bankruptcy.
So what are their options? Let’s first look at the potential good news. Despite the change in our economic environment, pharmaceutical companies still require products, and so companies with good technologies and products have the opportunity to partner. The bad news is that they need to do this fast, and if their cash reserves do not get them to the next critical point for partnering on time, they are likely to fail.
Furthermore, they will face difficult issues on valuation, and, unless they can opt for a rights issue, they are likely to have their existing shareholders wiped out – assuming, of course, that existing shareholders do not want to invest.
A common strategy is, basically, for companies to go into hibernation by reducing cash burn to the minimum, and waiting for the market to turn in their favour. The critical question here is: 'When will this recovery occur?' What's more, by freezing R&D, can one potentially lose a competitive position, and, more importantly, will this approach eat into critical patent life?
The companies that are at risk are often the ones that have been drip-fed financing by their investors. This popular strategy by some investors is one of the biggest causes of biotech failure, as it forces the CEOs of companies to make poor decisions, by limiting their options. Moreover, the CEOs of these companies are often distracted from their operational demands, as they spend all their time fund-raising.
The biotechnology game is about risk and failure, and all biotech companies need sufficient funds to spread that risk, and to take products to the next-value inflection point. Clearly, cash-strapped companies are a higher risk then cash-rich ones.
Companies that have adopted a dual model of both service and R&D also have a higher chance of survival, as they have cash sources independent of equity. These companies have, in the past, been shunned by some investors: I wonder what those investors think now?
The basic message here is that – in order to ride the good and bad times – companies need to appraise their cash flow strategies well, so as to ensure that they are not exposed to a situation in which they have little or no cash.