Although biotechnology stock prices and equity offerings have beenhammered in recent weeks, no one can forget that the industry hasreceived a record infusion of capital in the last four quarters _ about$5.2 billion in initial public offerings and follow-ons between July1995 and June 1996. That bolus of cash, combined with a newdominant business model built on partnering, could lengthen the lifeof both new and old companies indefinitely.
Analysts said they aren't particularly worried about survivalprospects for the flock of newly public companies (55 since January1995) because the new collaborative model is less expensive than thenow-obsolete fully integrated pharmaceutical company (FIPCO)model. And more mature companies with later-stage products indevelopment can now negotiate with potential partners from aposition of relative strength rather than one of cash-poor desperation.
These new realities are in sharp contrast to those that dominated theindustry in the years immediately following the 1991-1992 financingboom. Then, FIPCO ruled the day and cash burn rates skyrocketed asquickly as companies pocketed their offering monies. San Francisco-based Recombinant Capital Inc. estimated that the median annualizedburn rate of a sample of 100 biotechnology companies was $6 millionin June 1992. By September 1994, the median for the same group offirms had more than tripled, to $18.8 million. Likewise, in June 1992these same 100 firms had enough cash to survive for an average of6.7 years. By September 1994, the average survival time had droppedto 1.8 years.
The phenomenal 1995-1996 financing window has already begunchanging the survival index statistics for scores of publicbiotechnology companies still struggling to reach profitability.
Recombinant Capital, which now tracks the survival times of 150public firms in the sector, reported in April 1995 that 50 percent ofthe firms in its sample had less than 18 months of cash left. As of thismonth, that percentage had dropped to 35, reflecting the fact thatmany firms can now breathe easier. But will companies plow throughthis fresh pile of money with abandon? Analysts said no.
Biotech Still In `Thrifty Mode'
"The industry is in a much more rational, thrifty mode than it wasfour years ago mainly because the business model has drasticallychanged," said Meirav Chovav, a biotechnology analyst at SalomonBrothers Inc. in New York. "The new model of collaboration is muchless expensive in terms of cash burn."
Chovav predicted that, rather than lapsing into lax spending habitspost-offering, biotechnology companies today will continue toaggressively pursue deep-pocketed partners for lead products andmay use any extra cash to fund new programs. The FIPCO fantasy ofbecoming the next Amgen Inc. has been replaced by theoverwhelming fear of becoming the next Synergen Inc. The companyfailed when its lead product for sepsis did not prove effective in aPhase III trials.
The risky realities of drug development have dictated the outlines ofthe new business paradigm, according to Chovav. Taking a singleproduct from the lab through Phase III trials takes between $100million and $200 million, she estimates. That's more than manycompanies can raise in the equity markets prior to reaching themarket.
"If you go it alone, you have to put all your eggs in one basket, spendall your money on the one product," she said. "When you put all youreggs in one basket, you run the risk of becoming a Synergen."
In contrast, a company that has five different product programs goingsimultaneously _ with all five licensed out or developed viacollaboration deals _ has the strength of diversity. Some havequestioned whether this new model, which calls for integrating on theresearch and development side of the business up to Phase I, II or IIIand then partnering around that core, will produce the samemouthwatering returns for investors as a successful FIPCO.
Tim Wilson, an analyst at UBS Securities, in New York, said it does."FIPCO is dead and that's not bad news," he told BioWorld Today."With a successful product, a royalty deal works quite nicely indeed."Wilson cited Laval, Quebec-based BioChem Pharma Inc., whichreceives a royalty of between 12 percent and 15 percent on its AIDSdrug Epivir (3TC) from marketing partner Glaxo Wellcome. He alsonoted the 50-50 profit splitting deal between Eli Lilly & Co., ofWhitehouse Station, N.J., and Centocor Inc., of Malvern, Pa., forCentocor's drug, ReoPro.
Recombinant Capital's records offer further proof that the new modelhas taken hold. Alliances, particularly between U.S. biotechnologycompanies and European pharmaceutical companies, are goinggangbusters: during the 18 months ended June 30, 1996, Europeanpharmaceutical companies invested $2.6 billion in 52 Americanbiotechnology companies. That's $1 billion more than the $1.6billion they invested in 32 biotechnology companies during theprevious 24 months. The combination of undercapitalized, discovery-based biotechnology companies and pipeline-poor, marketing-savvypharmaceutical companies offers an irresistibly synergistic newmodel for both.
Wilson said he is mystified as to why U.S. pharmaceutical companieshave not jumped on this bandwagon. "I'm amazed at the arrogance ofsome U.S. pharmaceutical companies like Merck and Pfizer whohave hardly cut any deals with biotechnology companies," he said."That's a very strange decision."
Still Survival Of The Fittest
Of course, even with a new business model, biotechnologycompanies will continue to spend and need money. "It will still be thesurvival of the fittest," said Chovav. But, strangely, the massexpiration of hundreds of cash-starved companies that some analystspredicted in the wake of the 1991-1992 excesses has never reallyoccurred. That's because, according to Chovav, biotechnologycompanies tend to die very slowly and quietly. "Management cantrim and trim and trim operations while waiting for a better day," shesaid. "Because most biotechnology companies have no debt, which iswhat usually causes the spectacular events like bankruptcy filing,they can hang on and on."
Wilson said he believes that the current correction in thebiotechnology sector is due to broader market pressures and to thefact that prices were truly getting overheated. "Quality control [fornew offerings] crashed some time in late 1995, early 1996," he said."Some very questionable companies went public while at the sametime some very fine companies went public but at ridiculousvaluations." Just as in 1991-1992, those kind of giddy binges lead tounpleasant purges. But due to a leaner, meaner business model, fatbank accounts and maturing products, biotechnology companies willlikely navigate their way through this downturn handily. n
-- Lisa Piercey Special To BioWorld Today
(c) 1997 American Health Consultants. All rights reserved.