Biotech firms face financial crunch
Bear market hurts already struggling small Mass firms
By Ronald Rosenberg, Boston Globe Staff, 3/14/2001
boston.com
BioTransplant Inc. had $15 million in the bank at the end of last year. But the company surprised investors on Monday by suggesting it had only enough cash to operate until summer.
A recent acquisition of a medical device company and a marketing campaign in Europe eroded BioTransplant's cash position faster than anybody expected - a development that is being seen elsewhere in the biotechnology industry.
''We've changed our business strategy ... and that has meant using more cash,'' said Elliot Lebowitz, chief executive for the 10-year-old Charlestown company that has been developing drugs and researching the use of pig organs for human transplants. ''I am confident we'll find the additional funds we need.''
Focal Inc., a small Lexington developer of surgical sealants, had about $3.8 million in cash late last year before one corporate partner, Genzyme Corp., put up another $5 million in January, leaving it with $8.8 million. But executives at Focal still fear they're running out of money.
''We're looking for corporate partners and we have hired a consulting and investment firm to help us out,'' said Harry R. Trout III, the company's chief financial officer, saying Focal has enough cash for about six months to a year.
''It's tough going these days. There are a lot of small companies fighting to interest the big companies. And investment bankers are very skeptical of no-profit companies,'' he said.
Welcome to the biotech cash crunch.
BioTransplant and Focal typify a growing number of small biopharmaceutical and medical device companies the recent biotech boom left behind. None are profitable, and nearly all are running out of money.
Now, with their battered shares trading from $1 to $6 a share, or less, raising cash from Wall Street has become next to impossible. Some have lost key managers; others have been told their partners won't bail them out.
Ernst & Young estimates as many as 35 percent of the publicly traded biotech companies have less than a year's operating cash. About 40 percent have between one and five years' worth of cash, and only 25 percent have more than that.
''The [gap] between the rich and poor has been there consistently and is now aggravated by the market conditions on Wall Street,'' said Steven Buckley, Ernst & Young's life science director for New England. ''So public companies running out of cash really have relatively few options.''
Unlike such heavyweights as Millennium Pharmaceuticals Inc. and Vertex Pharmaceuticals Inc. that used their hefty stock prices to raise additional cash during the biotech boom, the outlook for smaller biotech companies this year is bleak. Many simply couldn't raise additional money during the boom cycle that ended last summer and don't have the cash to ride out the current bear market.
One factor is investor expectations. Flush with profits from technology stocks, some a year ago saw biotech as the next big wave. So they jumped in, only to be burned as their investments shriveled in the second half of the year.
And for biotech companies that were not deep into the hot arenas of genomics, biochips or other leading edge technology, attracting investor attention has proved difficult.
Today, biotech companies as a group are out of favor. The exceptions are companies that generate revenues and profits, with drugs and devices either approved or nearing approval by the US Food and Drug Administration.
BioTransplant's stock price has dived from $18 a share last fall to a low of $3.28 this week. It has begun to alter its business strategy. A developer of products for organ and tissue transplant as well as cancer drugs, it hopes to generate its first revenues from Europe by midyear. But instead of drugs, those sales will be in medical devices that can remove unwanted cells from bone marrow. Those devices were acquired when BioTransplant bought Eligix Inc. of Medford in December.
''What has changed is our desire to aggressively commercialize programs versus being an early-stage research and development company, and this new strategy has meant spending our cash a bit faster,'' Lebowitz said.
''We are doing some stretching and that's not easy, but we think we have a number of potential corporate deals'' to help develop products, he said.
Lebowitz said the company also expects to reduce part of its $2 million a month in operating costs through a joint venture announced last fall with Novartis Pharma AG of Switzerland. In January, the two companies said their joint venture, called Immerge BioTherapeutics Inc., will focus on pigs as potential donors of cells, tissue and organs for humans.
''Biotransplant is moving forward, but it is hard to get investors to pony up money for using pig organs that sound a little (like) science fiction,'' said John T. McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif.
Finding corporate partners remains difficult, prompting some public companies to cut deals with investor groups that buy stock at discounted prices.
One financing vehicle is Public Investment in Public Equities, or PIPE, in which companies get major investment firms to place the sale of millions of shares at fixed prices to large investors, such as mutual funds. The price is usually about 10 percent below the market price and the deal is not announced until it is completed and the stock formally registered with the Securities and Exchange Commission.
For biotech companies, the advantage is fast cash, as the funds often arrive within a few days of the transaction. The disadvantage is the dilution that comes through selling shares below the market value. Existing shareholders, who likely paid more for their stock, are not thrilled to see a big-block investor get a break on the price.
''PIPES are good when the market is slow, not when it is going up and biotech companies would rather turn to corporate partners or some other way of raising money,'' Buckley said.
Still, some companies are fortunate when an institutional investor comes to their rescue.
V.I. Technologies Inc. of Watertown was running out of cash last year when the State of Wisconsin Investment Board, an early backer, agreed to invest another $10 million. V.I. Technologies is developing Inactine, a red blood cell product that inactivates blood-borne bacteria. But instead of buying shares on the open market at varying prices, the fund bought a large block from the company.
''We saw the pace of our research and development program pick up (before the stock sale) and, while that was a good news situation, we went through a lot of cash and we needed more pretty quickly,'' said John Barr, chief executive of V.I. Technologies. Barr noted his company made the sale on its own, saving about $500,000 in investment banking fees.
Acknowledging the $10 million would tide the company over, Barr announced last Friday that V.I. Technologies plans to sell its blood purification manufacturing operation in Melville, N.Y., to its management team for at least $34 million.
The unit has a three-year contract with Bayer Corp. to help produce a hemophilia drug and a blood transfusion product for the American Red Cross.
''The cost of raising money is the real issue nowadays,'' Barr said. ''You don't want to sell equity at today's low prices, so you have to continue developing your products, hit your milestones and work closely with your partners.''
Ronald Rosenberg can be reached by e-mail at rosenberg@globe.com |
