Funding scarcity haunts biotechnology companies

With Genusia’s cash falling in 2018, investors threw a lifeline to the US biotechnology company that allowed it to shift focus from developing a genital herpes vaccine to the target of cancer treatments. There was no such safety net in May, when another cash crisis forced the 16-year-old to collapse.
“A year ago, Ginosia may have raised enough money to stay afloat so that it could complete trials on custom cancer drugs,” said Diana Gribush, an analyst at SVB Lyrink. But now, “the world has changed for biotechnology companies.”
Ginosia’s fate illustrates the dark tunnel facing a biotechnology sector accustomed to record low interest rates, rising share prices in financial markets and free investors. While the crack of the easy money era has reached almost every sector, few are as exposed as the early stage pharmaceutical companies that rely on financial markets to finance their long and risky development cycles.
Nearly 200 listed biotechnology companies worldwide trade for less than the value of their cash reserves, according to investment bank Turia Capital, and are now making very difficult transactions to survive as financing deficits in public markets worsen.
Only nine biotechnology companies were listed in the U.S. this year, raising a total of $ 1 billion, according to LiveSay Capital, an investment bank specializing in corporate finance. Nearly 60 companies were listed in the same period last year, benefiting investors by up to $ 7.4 billion.
“For many biotechnology public company executives who want to raise capital, they may feel trapped in the Sahara, where they cannot get the money,” said Tim Opler, managing director of Turia Bank.
The San Diego-based Belite Bio was one of the few companies that successfully went public. The company, which develops drugs that target age-related diseases such as diabetes, raised $ 41 million in April and its inventory increased after U.S. regulators accelerated the development of one of its treatments. But CEO Tom Lane said he had the confidence to continue the listing just because his biggest shareholder was willing to support it.
“We were actually very worried,” Lin says. “The bankers tried to prepare us, and they told us that we might not get enough investors or a good price. But the most important thing is that our existing shareholders have a lot of confidence in our product line, they participated in the IPO. and also made investments. $ 15 million, and that gave confidence to new investors. “
For biotechnology companies that are listed and unable to rely on their existing investors, their remaining options include increasing shareholder equity at great discounts, taking out risky loans, monetizing future intellectual property license fees, and partnering with or buying large pharmaceuticals. companies.
“What we have seen in the few follow-ups that are being done is difficult pricing, a return on collateral transactions and low valuations,” says Mark Charest, portfolio manager at LifeSay Fund Management.
More than half of the listed companies that completed fundraising follow-ups during the quarter offered investors incentives to support their transactions.
Others turned to debt providers despite their lack of income to repay loans. Madrigal Pharmaceuticals acquired a $ 250 million debt facility last month to help market its most advanced candidate agent and fund a clinical development program for another.
The sudden change in the financial atmosphere is not without some winners, including companies like Royalty Pharma, which provide loans to biotechnology companies in exchange for a share of future revenue.
While the Nasdaq Biotechnology Index was down 26 percent this year and the broader S&P 500 was down 23 percent, Royalty shares held steady. Last month, Royalty increased the amount it plans to distribute annually from $ 1.5 billion to $ 2.5 billion over the next five years, in part to take advantage of the deteriorating outlook for many biotechnology companies.
But for some companies, even the most expensive financing options will be difficult, and more companies are likely to condemn Ginosia for collapsing.
“The quality of biotechnology companies in the public markets has declined in part due to the turbulent capital markets” over the past two years, Charest told LiveSci.
Many companies went public before reaching key development stages that would give a clearer indication of their chances of eventual success, leading to a series of disappointing clinical lectures that made fundraising more difficult.
Charist added: “If you fund the five best ideas out there, the majority will probably do well. If you fund 500 ideas, the number of the worst performers will be much higher.”
Biotechnology companies suffered test periods during the rally following the financial crisis of 2008. The S&P biotechnology index corrected – more than 10 percent lower than recent highs – in 2015 and 2018, but industry executives say it The slowdown is more severe if it sounds.
“This is the worst level of adversity I have seen in the industry over the past 25 years,” says Pierre Jacquet, managing director of healthcare at consulting firm LEK.
He also added, “It’s a storm and it’s likely that dozens of companies will return the money to investors. I see no alternative way out for some of these companies.”
Last week, the Zosano group in California, which is developing a therapeutic patch for migraines, applied for bankruptcy protection. In another sign of this pressure, the majority shareholder in Fort Biosciences, which develops drugs that target autoimmune diseases such as alopecia, called on management to dissolve the company and return its money.
Early stage drug companies are particularly vulnerable to market disruption because there are few easy ways for them to generate revenue or reduce costs during expensive clinical trials. Problems in the sector also provide a glimpse into the pressures that more companies face if tensions do not ease.
Top bankers and lawyers are divided over whether stock markets will calm down enough for IPOs to return in large numbers this year, but even the most optimistic of them do not expect to see a significant increase in activity before the usually quiet midsummer period.
“Part of the discussion (now with the IPO candidates) is what is your solution to the bridging loan if the IPO timeline does not go through?” said a senior capital market lawyer. If you list it now, it should be able to go public in three to six months. Now you have to ask, “How much is your bridging loan for next year?”
While conditions are somewhat less stressful for biotechnology companies that have not yet been launched, they at least give them the option to try money in the still cash-laden private equity industry. That desire was underscored by Apollo Management’s acquisition last month of a stake in Sovinova Partners, a European life sciences investment firm.
“It’s very surprising that Blackstone, Carlyle and Apollo have all invested in biotechnology companies and I’m sure more of that will come in the future,” says Turia’s Opeler. “It really reflects the popularization of biotechnology companies as an asset class.”
According to LiveSci Bank, there were about 120 private fundraising operations worth $ 9 billion this year, about 30 percent less than the same period last year.
Philadelphia-based Minerals Therapeutics raised $ 118 million this month, led by European private equity firm Andrea Partners and Boston-based investment manager RA Capital. The biotechnology company is developing a new treatment for high blood pressure, a condition that affects about half of adults in the United States, which means that the innovative treatment can be a great success.
“There is still funding available for companies that are well-assessed, that can generate short-term news flow, or that are well-funded to meet the next risk situation,” said Jacquet of LEK.
Some companies have also attracted the attention of major pharmaceuticals, which SVB-Lyrink estimates have up to $ 500 billion to distribute on mergers and acquisitions due to the collapse of the coronavirus pandemic.
Bristol-Myers Squibb agreed earlier this month to buy Turning Point Therapeutics, which is developing a new cancer treatment, for $ 4.1 billion.
However, most transactions were linked to promising drug production lines rather than rescuing new ventures with cash. There is little evidence that the sharp drop in valuations will bring M&A back into a sector where transactions fell to the lowest level in a decade in 2021.
“We follow science as a disease,” says Eliav Barr, global head of clinical development and chief medical officer at Merck, noting that the appeal of any goal lies in the drug or treatment the company develops, not the collapse in its share price. not.
Barr also said: “If you go down for discount products to the ‘Sale’ shelf to get a 50 per cent discount – there could be a reason. Just because it’s cheap does not mean it’s good for the company . “

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