Biotechnology funding troubles	January 2009

By Steven Niles

The economic crisis, the change in administration in Washington, and uncertainty about reimbursement has created a perfect storm of funding challenges for small emerging and biotechnology companies. Many biotechnology companies are going to have to cut costs and prioritize products. To avoid undervaluing themselves, companies that require cash are going to need to be strategic as they try to track down capital.

“When economic times get difficult, the younger or early stage pharmaceutical, biotech, device, and diagnostic companies tend to get nervous,” says Diane J. Romza-Kutz, chair, life sciences practice group, Neal Gerber Eisenberg (ngelaw.com). “They tend to try to create deals a little earlier than they should.”

Market conditions are changing dramatically in the new economic reality.

“I’ve been in the life sciences/pharma industry for 24 years, have run specialty pharma companies in the past, and now I’m in the position of funding them, and in my 24 years, I’ve never seen a cycle like this before,” says James A. Datin, VP and managing director, life science group, Safeguard Scientifics (safeguard.com), a public holding company investing in growth-stage life science companies. “What we’re hearing is that 80% of the biotechs in the United States today, public and private, have less than a year’s worth of cash. That’s going to force massive consolidation. A lot of these companies have always had an adequate or unlimited supply of funding. Investors don’t have the capital to do that. Redemptions are being called. They’ve seen valuations drop on average by about 40% in the last two months in the biotech space.”

At the same time, big pharmaceutical pipelines are not strong enough to support growth, so the appetite for mergers and acquisitions will remain healthy. Because the primary impact of the credit crunch on the corporate world is the loss of cheap debt, analysts with Datamonitor believe that large pharmaceutical companies could see a net positive, as they tend to be cash-rich and have not taken on significant debt.“Pharma companies are not only expected to weather the financial storm successfully but to also use this period to exploit their unique cash strength by embarking on an acquisition spree,” says Dr. Chris Phelps, head of company analysis, Datamonitor (datamonitor.com).

Although the credit crunch could strengthen the hand of large pharmaceutical organizations, Datamonitor analysts see the outlook as far from positive for small biotechnology companies. This will create a shift in the balance of power. In recent years biotech’s access to funding from other sources of capital meant that pharma’s need for access to biotech products increased significantly, while biotech’s need for pharma funding diminished. Now with the current credit crisis, biotechnology companies’ ready access to capital and funding has vanished and these companies will be forced to accept less favorable terms for licensing deals, Datamonitor analysts say.

“Under the cover of the credit crunch, big pharma will swoop repeatedly to acquire substantial biotech targets,” Dr. Phelps says. “Perhaps the clearest example of this intent is that Pfizer currently holds well over $25 billion in cash and short-term investments. It may well be that the credit crunch provides big pharma with exactly the opportunity it needs to rebuild its ailing pipelines.”

Pharmaceutical companies will be looking for later stage opportunities, according to Mr. Datin. “When good clinical data becomes available, they’ll pay up for it,” he says. “We’re going to see deals get done at better prices. We’ll see a lot more public company transactions take place because the public companies have been beat up so badly. Usually they trade at a premium to private, and now because they’ve been discounted so much, it’s actually the opposite.”