|  |
Financing Slows to A Trickle
Raising money is tough these days: A slumping housing market, the credit crisis, the near-collapse of savings and loan firm IndyMac Bancorp – not to mention rising oil prices and a falling dollar – have each played their part in turning investors’ concerns into downright fears for the health of the economy.
As a result, all market sectors have suffered – and that includes the biotech and specialty pharma segment. Financing was down sharply in the first quarter of 2008, and the second quarter was even worse. In the first three months of 2008, these firms raised about $3.7 billion from all sources (excluding revenues and payments from corporate partners). That turned out to be the worst first-quarter haul since 2003, when companies raised about $1.6 billion.
In the second quarter of 2008, companies raised even less (about $2.17 billion), bringing the half-yearly total to a paltry $5.9 billion – 68 percent less than the roughly $18.6 billion that companies raised in the first half of 2007.
Once again, we see that this year’s total (so far) is the smallest amount of money raised since 2003, when companies managed to attract slightly more than $5.5 billion in new funds during the first half of the year.
Venture deals were least affected by the financing crunch – but even here, they were off 28 percent from the year-ago period. High-ticket financings ($50 million or more) have been less common than they were a year ago: In the first half of 2008, five private firms reaped at least $50 million from venture investors, while twice that many finalized big-ticket financings in the year-ago period.
This year’s crop includes Merrimack Pharmaceuticals Inc., whose lead biologic therapy is in clinical trials for rheumatoid arthritis. The company reaped $60 million in a Series F round in June. And molecular diagnostics developer and IPO-hopeful XDx Inc. raised $61 million in a Series F, also in June. Specialty pharma EKR Therapeutics Inc. raised $50 million in a Series D round in March; inflammatory disease specialist Taligen Therapeutics Inc. raised the first tranche of a $65 million Series B in February; and biomarker discovery company Tethys Bioscience Inc. attracted $54 million in Series C financing in January.
Public offerings (both initial and follow-on) took the biggest hit, with financings down by 79 percent from the first half of 2007. Indeed, IPOs have all but dried up this year – with one company (cardiac cell therapy expert Bioheart Inc.) debuting on U.S. markets and three more firms going public overseas (cancer drug-maker Molmed SpA in Italy; molecular diagnostic specialist Genera Biosystems Ltd. in Australia; and drug delivery expert PCI Biotech AS in Norway). Together, they raised a mere $105 million.
Even follow-on public offerings failed to excite investors this year: Only nine follow-ons priced in the first half of 2008, together bringing in $605 million. Compare these figures to those for the first half of 2007, which witnessed the pricing of 23 IPOs (16 in the U.S.) for a total of close to $1.5 billion and 23 follow-ons for a total of about $2 billion.
History has demonstrated time and again that public biotech companies have access to a wide selection of financing vehicles that don’t depend on public investors – and of these, the most lucrative have always been debt financings. In 2007, 12 firms raised at least $100 million each through such offerings; all together, these dozen deals hauled in about $8.2 billion in new debt – less than the $9.9 billion raised in 2006 but far greater than the amounts raised in the three previous years ($5.1 billion in 2005 and $6.8 billion in both 2004 and 2003).
In 2008, so far, only four companies have managed to raise at least $100 million each by selling convertible debt: Led by Biogen Idec Inc.’s $1 billion sale of senior unsecured notes in February, the total raised through June 2008 was nearly $1.5 billion.
The most popular financing vehicle this year appears to be the committed equity financing facility (CEFF), through which a private investment firm such as Kingsbridge Capital Ltd. promises to provide each of its biotech clients with a certain amount of money through the purchase of newly issued shares of the client’s stock over a certain amount of time (three years, for instance). The biotech company has the power to determine the timing and amount of these financings. Importantly, committed equity financing is minimally dilutive, a welcome assurance for the biotech’s existing investors.
The CEFF (and its variations) have played a small part in biotech financing for years, but they seem to have taken on a major role in 2008. In the second quarter, for example, Jazz Pharmaceuticals Inc. secured a three-year, $75 million CEFF with Kingsbridge – giving it the flexibility to access the cash as needed.
Also in May, Discovery Laboratories Inc. set up a three-year, $60 million CEFF with Kingsbridge and Somaxon Pharmaceuticals Inc. inked a three-year, $50 million CEFF (also with Kingsbridge Capital) as well as a $15 million secured loan agreement with Oxford Finance Corp. and Silicon Valley Bank.
Kingsbridge Capital isn’t the only investment company that’s signing up biotech clients: In late June, ZymoGenetics Inc. received a $100 million funding commitment from healthcare investment firm Deerfield Management. And in mid-May, AIDS vaccine developer GeoVax Labs Inc. secured a 25-month, $10 million financing commitment from institutional investor Fusion Capital Fund II LLC.
While biotech companies are known for their abilities to create innovative ways to raise cash, they are still impeded by this year’s financing drought (which actually began in the fourth quarter of 2007). If it continues for the rest of the year, many companies will find themselves in deep trouble. Some are already there. (For the current financial details of 227 public companies, see the Signals article, “Financial Snapshot For June 2008: Dire Straits.”)
On the other hand, the biotech and specialty pharma stocks could rally and end the year with a bang. After all, we’ve been caught by surprise before. Sometimes it takes but a single event to turn the tide of investor sentiment. For instance, in June 1995, Cephalon Inc.’s announcement of stunning Phase III trial results for Myotrophin, its now-defunct drug candidate for treating amyotrophic lateral sclerosis, did far more than boost the company's stock by 75 percent in one trading session. It also lit a fire under investors -- and kicked the financing window wide open for the next 12 months.
And, in the fall of 1999, it was Evotec BioSystems AG’s Neuer Markt-based IPO that triggered the genomics bubble of 2000 -- though many would not have predicted it at the time. However, eight days later Symyx Technologies Inc.'s shares jumped 60 percent on their first trading day, and by the time Tularik Inc. came public (in December, a month after Evotec) it was obvious that biotech was sizzling again.
More recently, exciting clinical results from Genentech Inc.’s cancer therapy Avastin – coupled with FDA approvals of Millennium Pharmaceuticals Inc.’s multiple myeloma drug Velcade (the first proteasome inhibitor) and AstraZeneca plc’s lung cancer drug Iressa (the first small molecule inhibitor of EGFR) – fueled the biotech sector’s recovery in the spring of 2003.
Will Roche’s very recent surprise bid for Genentech launch a sustained rally for biotech stocks? Well, the Swiss pharma’s July 21 offer to buy out Genentech for $89 per share ($43.7 billion total) certainly boosted the stocks of mature biotech firms like Biogen Idec, Gilead Sciences Inc., and Celgene Corp.
But we’ll have to wait to see whether the Roche/Genentech deal is enough to rekindle investors’ love affair with the biotech/specialty pharma sector in the months to come.
originally published 07/24/2008 |