Biotechs on edge as money evaporates
By Luke Timmerman
Seattle Times business reporter
Seattle's biotech industry is working on some of the most complicated medical science in the world, but it relies on a simple mantra its executives know by heart: "Cash is king."
That fundamental principle is causing many biotech companies some serious grief. For more than a year, as stocks have fallen and recession has settled in, biotechs kept saying they were fine because they had squirreled away cash in 2000. That was during the enthusiastic days surrounding the Human Genome Project, hailed as the greatest scientific achievement since the discovery of DNA.
But now, in what many biotech companies consider one of the toughest climates ever to raise money, cash piles are getting smaller, and some companies are being forced for the first time in several years to make hard choices: laying off workers, stopping clinical trials and selling valuable gene patents.
Several Seattle-area companies have joined the club. NeoRx and Targeted Genetics have cut jobs and stopped clinical trials in the past month. Northwest Biotherapeutics, which has run low on cash and put itself up for sale, says it got into that squeeze because it was counting on the markets to brighten and fuel it with new cash this year. Now, none of the three companies has more than $19 million in cash, and they all are spending at least $1 million a month.
The predicament comes after biotech companies raised $19.9 billion through worldwide stock offerings in 2000 and about one-fourth that sum in 2001, Ernst & Young figures show. This year, however, biotechs have raised only $843 million from stock offerings, which, if the trend continues, would amount to less than one-tenth of the amount raised two years earlier.
There's no consensus on when money might start flowing into the industry again, but if history is a guide, many executives say, the drought could last until 2004.
With that in mind, some industry analysts have started creating so-called biotech-survival indexes. It's mostly simple math based on how much cash companies have and how fast they're spending it.
Roth Capital Partners estimates that about one in seven public biotech companies has a year's worth of cash or less.
Many can't turn to investors for help: Jennifer Van Brunt, editor of Signals, a biotech online magazine, said 39 of the 249 public biotechs she tracks were trading at $1 or less at the end of July.
Even companies in relatively strong shape — like Icos, which raised a remarkable $300 million in November — recently disclosed that marketing its new impotence drug worldwide means the company likely will have to raise more money in the next year or two.
There have been some exceptions to the bad news. Last week, Corixa raised $45 million, and Dendreon got a new partnership potentially worth $110 million with industry leader Genentech. Both companies are more appealing to investors because they have drugs that are considered close to getting FDA approval, moving them closer to make a profit.
Jim Johnson, chief financial officer of ZymoGenetics, said biotech investors have been frightened by the bear market, a string of high-profile clinical-trial failures and a perceived shift toward more caution at the U.S. Food and Drug Administration.
The ImClone Systems scandal — in which the FDA rejected its leading drug candidate and the former chief executive has been charged with insider trading on that knowledge — has caused further fear. The lesson was particularly eye-opening because even a supposedly savvy drug company like Bristol-Myers Squibb, which bet $2 billion on ImClone's drug prior to the rejection, can be lured into a potentially disastrous investment.
Johnson considers his company, with $226 million in cash at the end of June, one that can weather the storm.
"There's really going to be a lot of pain and agony if this goes on and we have two more years of bleak equity markets," Johnson said. "But we've been through this before as an industry."
Cash is especially important to biotech because it is an industry like no other.
For companies trying to create drugs and make a profit, it takes 10 years or more, hundreds of millions of dollars and the ability to show regulators that the drug is safe and effective.
Because biotech has proved to be extremely risky — well over 1,000 companies have been formed in the past 20 years and only a handful have become powerhouses — the industry has been considered too risky for loans or even junk bonds. Instead, biotechs are dependent on bullish venture capitalists, enthusiastic stock-market investors and deep-pocketed pharmaceutical companies that need new drugs to keep growing.
Pharmaceutical companies have historically been the second-best alternative for financing biotech companies through partnerships.
In such deals, big drug companies typically give cash up front, provide some scientific expertise and offer a stamp of approval that validates the biotech company with investors and boosts its stock price. In return, pharmaceuticals have tended to get the bulk of future profits.
Still, partnering trends can rise and fall. Some analysts believe the ImClone scandal has become a cautionary tale in the pharmaceutical industry, which is cutting off money for some biotechs.
"The fact that Bristol may lose control of its business because they made a bad investment has really sent a chill through other companies looking to partner with the biotech industry," said David Miller, president of Biotech Monthly, an industry newsletter.
In that environment, Johnson said, his company has become more focused on conserving cash than raising it. Flashy equipment purchases and hiring decisions are getting more scrutiny.
Martin Simonetti, chief financial officer of Dendreon, said biotech firms have to wrestle with ways to save cash now without wrecking their long-term prospects. He said layoffs and shelving of clinical programs only decrease a company's odds of long-term success and are typically a last resort.
Still, he said, more companies may have to take those actions, and more mergers and acquisitions may occur if biotechs can't raise more money soon.
"You want to set your company up for the long term, but you have to keep the doors open, too," Simonetti said. "Cash is certainly king. You can't do anything without it. Because of the long horizon to get a marketed product and the risk and uncertainty along the way, you have to have the cash to get you there."
Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com.
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