The Chinese lunar calendar consists of 12-year cycles – and each year is named after an animal. Legend has it that Buddha summoned all the animals to come to him before he departed from the earth. Only 12 showed up to bid him farewell, and as a reward he named a year after each one. Interestingly, the bear was a no-show – but that’s probably because he was already on Wall Street, terrorizing investors right and left.
He must like it there, because in recent years he’s made it his home. And his power grows. In 2002, scores of small-fry biotech companies fell prey to his grasp. Many of the larger firms, however, managed to wriggle through his paws with barely a scratch. But there’s no denying the overall effect on the biotech sector: Financing is down, stock prices are down and most companies have shifted into survival mode. |
2002 was one of those years we’d all sooner forget. It was jammed with unsettling, nerve-wracking events end-to-end -- accounting scandals, white-collar crimes of the highest order, a faltering economy, terrorist acts around the globe and threats of war with Iraq, or maybe North Korea. No wonder investors shunned the stock market – life was risky enough without it. And, as we round out the first month of the new year, uncertainty still reigns.
2002 was especially tough on the biotech sector. The ImClone Systems Inc. and Elan Corp. plc debacles, product blow-ups, FDA setbacks, even the raging debate on stem cells and cloning – together these events virtually ensured that investors would steer clear of all things biotech.
Well, nearly all things biotech. For, amazingly, the sector still managed to raise about $10.9 billion in 2002 – not the best year in biotech’s history, but very respectable given the circumstances.
Yet, not all companies participated in last year’s fund-raising. The larger firms, especially those already profitable or well on the path to becoming cash flow-positive, were able to attract considerable amounts of cash, either through selected follow-on stock offerings, private placements with institutional investors or debt financings. Moreover, an impressive number of start-up firms garnered early-stage funds from venture capital investors. But the remainder – which account for the vast majority of companies in the biotech universe – found it exceedingly difficult, if not impossible, to find any money at all.
It’s not the first time that the biotech sector has been split in two, with a wide gulf separating the “haves” from the “have nots.” But this time around, we’re facing a crisis. Over the course of the last 12 months, eight public companies and two private firms filed for bankruptcy protection or liquidation and another five found themselves in serious danger: This is more than the total number of bankruptcies in biotech’s entire 27-year history.
|
Chapter 11
(reorganization)
(Date)
|
Chapter 7
(liquidation)
(Date)
|
In Jeopardy
(Date)
|
|
Advanced Tissue
Sciences
(10/02)
|
American Biogenetic
Sciences
(9/02)
|
Demegen
(1/03)
|
|
Gliatech
(5/02)
|
Cogent Neuroscience
(12/02)
|
Immune Response
(11/02)
|
|
Organogenesis
(9/02)
|
Enchira Biotechnology
(1/03)
|
Northwest Biotherapeutics
(11/02)
|
|
ZymeTx
(11/02)
|
Nexell Therapeutics
(12/02)
|
Ortec International
(4/02)
|
| .
|
UroMed (d/b/a
Alliant Medical Technologies)
(5/02)
|
Palatin Technologies
(10/02)
|
| .
|
Xanthon
(9/02)
|
|
Moreover, the prolonged bear market has wreaked havoc on biotech stock prices. As each day progresses, it seems, yet one more firm falls out of compliance with listing requirements (usually the share price or total stockholders’ equity, or both) for the Nasdaq Stock Market or the American Stock Exchange. In 2002, 37 publicly traded firms received noncompliance warnings and/or delisting notices from these exchanges. Some of those companies initiated successful efforts to regain their status, but by the end of the year, 26 outfits had switched exchanges – seeking a home in the Nasdaq SmallCap Market or even on the OTC Bulletin Board. A handful voluntarily delisted their stocks.
Fortunately, many biotechs haven’t reached this stage yet, and they are doing everything in their power to stay afloat until the next financing window opens. In 2002, 68 companies – including 12 not based in the U.S. – initiated restructuring moves intended to conserve cash. Some companies had to tighten their belts twice over the course of the year.
No doubt, more cost-cutting moves and stock delistings will follow. For there’s little reason to believe that the window will open any time soon. Historically, the financing peaks have lasted 4-5 quarters, while the troughs separating them have stretched for 12-13 quarters. It’s now been eight quarters since the last peak and – especially given the current state of the markets – it could well be another year before money flows freely once again.
Thankfully, however, the wellspring hasn’t dried up entirely.
Biotech companies in the U.S. and abroad raised nearly $10.9 billion in 2002 (not counting revenues and payments coming from corporate collaborations). That sounds like a lot, especially compared to the sector’s “early years,” when $4 or $5 billion was a princely sum, indeed. But the industry has matured since then, and long-time observers figure that it now requires about $12 to $14 billion just to keep the biotech sector on an even keel. In that light, even $10.9 billion is not enough. And one single transaction – Amgen Inc.’s $2.82 billion convertible notes offering – accounted for 26 percent of the cash raised by all companies last year, leaving about $8.1 billion to be shared by the rest.
Not surprisingly, there were few public offerings in 2002. Five biotech-related companies completed IPOs: ZymoGenetics Inc., Ribapharm Inc., DOV Pharmaceutical Inc., Canadian firm YM Biosciences Inc. and BioDelivery Sciences International Inc. Together, they raised $206 million. (Proceeds from Ribapharm’s offering went not to the biotech but rather to its parent, ICN Pharmaceuticals Inc., and are not included in the tally.)
Companies selling stock in follow-on offerings did somewhat better: 14 follow-ons were completed in 2002 (all in U.S. markets), garnering a total of $864 million. That brings the total amount of public financing to slightly less than $1.1 billion, a mere 10 percent of all funds raised in 2002. In contrast, public financings accounted for 24 percent of the cash raised in 2001 and 59 percent in 2000.
Given the lack of an IPO window, it’s encouraging to realize that venture capital firms continued to pour money into the biotech sector in 2002. All told, they contributed nearly $3.5 billion to young private companies, in the U.S. and abroad. That’s down from 2001 levels, when VCs invested about $3.9 billion, but on a par with the roughly $3.5 billion they invested in 2000.
As we’ve seen consistently over the years, public companies generate most of their cash in down markets by turning to private sources. In 2001, private financings of publicly held companies accounted for 49 percent of all money raised. In 2002, that number increased to 58 percent – or about $6.3 billion.
Shelf Registrations 4Q 2002
|
Company
|
Number
Of Shares Or Total $ Value (Date Filed)
|
|
Amylin
Pharmaceuticals
|
$175M
(common stock) (11/02)
|
|
AtheroGenics
|
$75M (common
stock) (11/02)
|
|
BioMarin
Pharmaceutical
|
$150M
(common stock) (12/02)
|
|
Cell Genesys
|
$150M
(common stock, preferred stock, depositary shares, debt securities and
warrants) (12/02)
|
|
GenVec
|
$25M (common
stock, preferred stock and warrants) (12/02)
|
|
La Jolla
Pharmaceutical
|
$125M
(common stock) (11/02)
|
|
Lexicon
Genetics
|
12M shares
common stock (11/02)
|
|
VaxGen
|
$150M
(common stock, preferred stock, debt securities and warrants) (11/02)
|
These financings span the gamut – from standard private placements to convertible debt offerings. And many of those deals involved pre-registered shares, which can be literally sold overnight. Biotech firms have come to appreciate the flexibility that shelf registrations permit, for the shares can be used in public offerings and private financings alike. In 2001, 36 companies filed shelf registrations, with 15 of them in the fourth quarter alone. In 2002, there were only 25 shelf registrations, no doubt because financing, public or private, was even harder to come by last year.
However, there’s reason to believe that investors are again willing to buy selected biotech stocks. In the first month of the new year, two biotech companies sold pre-registered shares in public offerings. Amylin Pharmaceuticals Inc. raised a whopping $175 million in its financing and Antigenics Inc. hauled in $62 million.
That’s an encouraging sign, especially for biotech firms that are already in fairly good shape. But it does little to assuage the fears of the scores of companies that ran into trouble last year. These firms are in desperate need of cash, yet their stock prices and valuations have sunk so low that investors find them unattractive. (At the end of December 2002, 23 percent of the 233 companies we track were trading below cash. You can find the details in the Signals article, “Financial Snapshot For December 2002: Down, But Not Out.”)
Realizing this, many companies resorted to cost-cutting measures intended to stretch their existing resources as far into the future as possible. Generally, these moves included a consolidation of operations, staff layoffs (including upper management, in a few cases) and the shelving of early-stage R&D programs in favor of more mature product development efforts. For several, this meant channeling all resources into one clinical-stage drug candidate and holding back the rest in hopes of finding appropriate development partners.
For some companies, however, restructuring wasn’t enough. Even as they pared expenses to the minimum, their stock prices continued to fall, eventually sinking below the $1 per share minimum bid price required for continued listing on the Nasdaq National Market. (At the end of December 2002, the stocks of 18 percent of the 233 companies we track closed at $1 per share or less.)
Faced with this situation, a company has several choices. It can agree to delist its stock from a major exchange and apply to trade on the SmallCap Market or the OTC Bulletin Board. (A few firms take this course voluntarily, before they receive an official warning.)
Or it can appeal Nasdaq’s noncompliance determination and present its plans to come back into compliance. Those plans might include securing new equity financing or effecting a reverse stock split – or both. But neither is a guarantee: Financing might not be available, for one thing. And history has proved that reverse stock splits don’t always work to a company’s advantage. They may, indeed, boost the stock price to acceptable levels, which will attract traders once again. But if the market didn’t like the stock to begin with, then upping the price probably won’t help.
All told, about 100 biotech companies (mainly in the U.S.) underwent some significant change in 2002 related directly or indirectly to the sorry state of the financial markets. As mentioned earlier, these included bankruptcies, noncompliance warnings, actual delistings and massive restructurings.
The particulars are as varied as the companies themselves. Three cases, however, serve to illustrate the situations in which companies found themselves, and how they dealt with it.
As we know, one clinical trial blow-up can exact a heavy toll on a company’s stock price. And three or four negative reports can crush it. Just ask IntraBiotics Pharmaceutials Inc. The Mountain View, CA company went public in March 2000, at the height of the genomics bubble. Then, its shares went for $15 each; at the end of December 2002, they were trading at 29 cents.
In between lies a tale of clinical setbacks and missed endpoints. The first occurred in March 2001, when the company announced that the rate of patient enrollment in its Phase III trial of ramoplanin oral (a glycolipodepsipeptide which it was testing in cancer patients infected with vancomycin-resistant enterococci) was so slow that it couldn’t complete the trial by year-end. That information dropped IntraBiotics’ stock by about 30 percent.
A month later, the company reported preliminary Phase III trial results on its other lead product, iseganan HCL oral rinse, an antibiotic peptide drug being tested for its ability to prevent oral mucositis in cancer patients undergoing high-dose chemotherapy. The news – that the product missed its primary endpoint (due to a dosing error by a third-party vendor) but met its secondary endpoint – lopped another 20 percent off the company’s stock price. But the firm was encouraged by the final analysis of the Phase III data – which trended towards efficacy in the primary endpoint – and decided to conduct another Phase III trial.
In late May 2001, IntraBiotics initiated a massive restructuring plan so it could focus on developing iseganan (which was also in a Phase III trial for treating oral mucositis in radiotherapy patients). The company reduced its workforce by 71 percent, delayed further development of two early-stage clinical programs, amended its agreement with Biosearch Italia SpA on ramoplanin, terminated some of its R&D collaborations and consolidated its operations into one facility. It was still sitting on cash reserves of $66.9 million, which, together with a reduced burn rate, should have been enough to carry it through 2002.
But then, in early May 2002, the company discovered that iseganan had failed to meet both its primary and secondary endpoints in the radiotherapy trial. Investors trashed the stock, which dropped by nearly 70 percent on the news. In late September, there was more bad news: Iseganan had also failed to meet both endpoints in a chemotherapy trial – and the stock lost another 71 percent.
That ended IntraBiotics’ efforts to test iseganan in oral mucositis. It also caused another major reorganization – including a 70 percent reduction in the workforce – in an effort to reduce the burn rate even further. Before its first cost-reduction efforts in May 2001, the company had been burning $15-$20 million per quarter. Now, it’s aiming to reduce its operating expenses to $1.5 million per quarter in 2003. As of the end of September, it also had about $35 million in cash, enough to fund operations for 12 months, according to SEC filings.
Meanwhile, IntraBiotics’ stock has traded well below $1 per share ever since September 30. Not surprisingly, it received a warning letter from Nasdaq on November 12. To avoid delisting, the company has until February 10 to achieve compliance – a minimum bid price of $1 for 10 consecutive trading days. The stock closed at 26 cents on January 23. Time’s a-wasting.
ISTA Pharmaceuticals Inc.’s lead product candidate also suffered a serious blow in the clinic, but so far it hasn’t been fatal. And this firm, unlike IntraBiotics, has been able to reverse its fortunes.
In late March 2002, ISTA announced that Vitrase, a highly purified form of hyaluronidase for treating severe vitreous hemorrhage, had failed to meet its primary endpoint -- clearing an eye hemorrhage enough to allow diagnosis or treatment of the underlying cause of the bleeding -- in two pivotal Phase III trials. The bad news sent the Irvine, CA company’s stock into a tailspin, shearing 62 percent off its price to land at a dangerously low 91 cents. (When ISTA came public in August 2000, the shares were priced at $10.50 each.)
But there was some good news, too – at least ISTA thought so. For Vitrase demonstrated efficacy in both secondary endpoints – production of visual acuity in patients and a decreased hemorrhage density.
The company had already initiated a rolling NDA submission in January (which included the non-clinical pharmacology and toxicology section). Given the Phase III results, and following a discussion with the FDA, ISTA decided to include a clinical section based on a secondary endpoint, improvement in visual function.
Meanwhile, the company was running low on money (it had about $4.1 million in cash and short-term investments on September 30, 2002 but had already burned $16.9 million for the first nine months of the year) and its stock was in the basement.
By mid-September ISTA had secured a commitment for $44 million in new financing -- $40 million in equity and a $4 million bridge loan convertible into common stock. To revive its stock price, the company also planned to effect a reverse split. All these propositions had to be approved by the stockholders – which they did, but not before Nasdaq had sent the company a delisting notice.
All’s well that ends well, though, for the stock is now trading in the $7 range and back in full compliance with Nasdaq rules, the company has a fresh infusion of cash, and in mid-December the FDA accepted ISTA’s full NDA for Vitrase.
While clinical setbacks obviously hastened the decline in IntraBiotics’ and ISTA’s stock prices, overall market pressures had already been forcing them south. In fact, even biotech companies with no negative news – clinical or otherwise – watched in dismay as their stocks tanked.
That was certainly true for pharmacogenomics specialist Genaissance Pharmaceuticals Inc., whose shares debuted at $13 in August 2000. Two years later, when the New Haven, CT firm announced restructuring plans, its share price had slid to $1.11.
Genaissance hadn’t raised any money since its IPO: On June 30, 2002, it still had $42.2 million in the bank, but was also burning a lot of cash (about $30 million on an annualized basis, exclusive of a non-recurring charge of $6 million related to the write-down of excess equipment in its DNA sequencing facility). And, realizing that the capital markets may stay closed to biotech companies for quite some time, in August the firm implemented cost-saving measures intended to allow it to reach break-even in 2005. These included a 20 percent reduction in the workforce, a realignment of top management and a plan to partner all of its internal product development programs.
That didn’t halt the stock’s decline, though, and by August 7, the price had dropped below $1 – where it stayed for months. Not surprisingly, Nasdaq issued a noncompliance letter in mid-September, giving the company until December 18 to get its stock back above $1. Well, Genaissance’s stock did break the dollar barrier on December 5 – the same day that the company said it had achieved a milestone in its pharmacogenetics alliance with Johnson & Johnson Pharmaceutical Research & Development. That announcement barely moved the stock price, but it was enough. By December 20, the company was back in compliance.
And it’s stayed there, more or less. Yet, the stock still hasn’t hit even $2 a share, despite the fact that in the last month or so Genaissance signed four new agreements with powerful partners – Pharmacia Corp., Millennium Pharmaceuticals Inc., Bayer Diagnostics and Becton, Dickinson and Co.
It’s a sign of the times. With some notable exceptions, Wall Street just isn’t ready to dive back into biotech yet. And, when it does choose to invest this coming year, it will no doubt go for products over platforms every time. |