Life-Sciences Firms Need Kiss Of Life
Companies explore variety of options to raise cash in a capital-starved environment
November 10, 2008
The credit crisis has left small, development-stage companies in the life-sciences sector short of capital and dreading the prospect of failure.
Rodman & Renshaw research states that 113 biotechnology companies only have enough cash to last them less than a year, compared with 68 companies in that position in the first quarter of this year. John Borer III, a senior managing director and head of investment banking at Rodman, says his firm has been receiving "more calls than ever from companies needing help."
David Schulman, a partner at Dechert who represents life-sciences companies, says many firms are feeling the heat. "Many biotechs are scared out of their minds," he says. "These companies will have great difficulty getting new financing on anything other than onerous terms. These companies are suffering because they don't know where or how they'll be able to access capital"
Besides numerous private players, Borer estimates there are 300 micro- and small-cap companies dedicated to life sciences. These companies constantly return to the capital markets because they need cash to burn during product research cycles, development and clinical trials. They generally opt for enough capital to last until the next leg of a development cycle comes to an end.
Given that the high yield, initial public offering, secondary and follow-on offering markets are all essentially closed, the only options for life-sciences companies are private investments in public equity (PIPEs) and other private placements, says Borer. However, PIPE activity has slowed down due to declines in stock prices. As of Oct. 9, 86 out of 344 companies with stock prices worth less than $1 per share, and facing potential de-listings from Nasdaq, were biotechs.
"The budgets to actually perform clinical trials and do business haven't deflated, whereas market valuations have," says Borer. "If you raise capital to run a company for an additional 18 months, you're going to be selling a larger part of the company."
James Lebovitz, another Dechert partner, says Nasdaq's rule requiring shareholder approval for stock issuances of more than 20% has deterred private placements among life-sciences firms.
About 75% of Schulman's life-sciences clients are European. A few of Schulman's publicly-traded European clients are conducting rights offerings, but their share prices are at historic lows. Some of his other clients are outsourcing non-core and core technologies, and others simply won't make it. One of Schulman's clients is even going to pledge all its assets to a financial institution as a secured loan.
Small life-sciences companies cannot opt for corporate restructurings because they usually have no debt, says Borer, adding, "It's almost impossible to restructure a cash-burning development company. Other than device companies, there's not much likelihood of that being the popular way to go."
As a result, small life-sciences companies can opt for help from bigger counterparts. Large US and European biotechnology firms such as Genentech have been setting aside capital to make acquisitions of small companies, which can supplement their drug development pipelines. Big pharmaceutical companies such as Pfizer are worried about profitable drugs becoming eligible for reproduction by generic drug companies.
"The mid-cap and large pharmas don't have a shortage of cash, but they need new pipeline drugs because for many of these companies their existing drugs are going to expire in the next three to five years," says Schulman. "Imagine that you have a wealthy uncle. The good news is that your uncle is wealthy, but the bad news is that his job which generated that wealth is drying up and he has to find another job."
In order to avoid having to sell to large acquirers, some life-sciences firms are opting for "standby equity lines," whereby hedge funds and other institutional investors charge haircuts for financing facilities and take equity stakes in the companies.
Many of the financing providers are hoping the life-sciences companies they work with will not want to draw down any capital, but rather use it as a shield against potential takeovers. "They may not draw down the money, but they may be able to look someone in the eye and say, 'I'm not running out of money, so go take advantage of someone else,'" says Schulman.
Another option is to receive capital infusions from private equity firms. Dechert advised Whole Foods Market on its agreement to sell $425 million in preferred stock to Leonard Green & Partners, which was announced on Nov. 5. Leonard Green will end up owning 17% of Whole Foods.
While none of the parties on this deal are part of the life-sciences industry, several of Dechert's private equity clients are considering such investments in publicly-traded biotech firms due to historically low stock prices, says Schulman.
Some reasons for optimism
In spite of gloomy market conditions, there is some cause for a positive outlook. President-elect Barack Obama's administration will likely place a greater emphasis on preventive healthcare, which would benefit life-sciences companies with molecular-diagnostic or genetic-analysis platforms, says Isaac Ro, an analyst at Leerink Swann.
In addition, while the amount of venture capital raised for US life-sciences companies decreased over the past year, venture capital-raisings rebounded in the third quarter.
According to Dow Jones' VentureSource database, US healthcare companies received $152 million in venture capital financing during the third quarter, compared to $153 million in the third quarter of 2007. The sector received $168 million in venture capital during the second quarter of this year, compared to $190 million in 2007's second quarter.
Biopharmaceutical companies received $70 million of venture capital during 2008's third quarter, compared to $72 million in the year-prior period. In the second quarter of this year, biopharmaceutical players received $81 million in venture capital, versus $96 million in 2007's second quarter.
(c) 2008 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
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