Beyond Borders: Global biotechnology report 2010

Turbulent financial markets
and the impact on biotech
The biotechnology industry and financial
community are inextricably linked, and for
good reason. Biotech R&D is exceptionally
expensive and time consuming, making it
one of the most capital-intensive industries.
Since the vast majority of biotech
companies have no operating revenues,
raising funding is a constant and unrelenting
focus of management and boards.
Much has changed since Genentech’s
remarkable and historic IPO in 1980. On
the first day of trading, the Company’s
shares soared from the US$35 offer price
to more than US$80 — an unprecedented
performance at the time. A cascade of
public biotech offerings soon followed
(Cetus, for instance, raised an astonishing
US$122 million in 1981), fueled by
exuberant coverage in the lay press about
the new world of molecular biology.
Reporters talked breathlessly about “magic
bullets” that would develop new cures for
diseases ranging from cancer to diabetes,
while new technologies promised to make
R&D far quicker and cheaper.
Today, reality reigns supreme, and accessing
capital has become far more challenging
and expensive for earlier-stage companies.
The turmoil in financial markets has taken
a toll on biotech firms, but the situation is
not completely dire. We need to place the
current situation in context and understand
how it has affected longer-term capital
market trends to understand this impact.
One of the most significant consequences
has been the virtual closure of the
traditional IPO market for emerging
venture-backed companies. This is not
solely attributable to today’s unreceptive
markets for offerings of younger, stillunprofitable
companies; rather, it also
reflects some longer-term, industry-specific
trends. First, the market performance of
biotech IPOs in recent years has largely
been abysmal. Second, a typical biotech IPO
provides only enough capital to extend the
R&D “runway,” but not enough to bring a
company to profitability and self-sustaining
cash flow. This has caused many former IPO
investors to back away and focus instead
on private investments in public companies
(PIPEs). These financings are executed in
a very short time frame, and at a smallto-moderate
discount to the company’s
share price. PIPEs give firms sufficient
capital to propel them to important valuecreating
milestones — which has often
driven significant post-offering market
price increases. Investors get “instant
gratification,” and since success breeds
imitation, the PIPE markets have been
noticeably robust.
Big pharma’s role in providing biotech
companies with fresh capital for
R&D — and giving venture investors a
pathway to liquidity — has been vital.
The two sides have a naturally symbiotic
relationship: pharma companies have been
capital-long and opportunity-short with
respect to their internal research programs,
while biotech firms have been short of
capital but rich with research opportunities.
This will likely continue, not least because
of the abundance of important prescription
drugs scheduled to go off-patent between
2010 and 2015. But here, too, things have
changed in the current market environment.
In the early 2000s, big pharma players
frequently acquired biotech firms outright.
Today, acquisitions are instead most often
structured as sequential payments — even
though the pharma buyer owns 100% of
the company, the deal includes a series
of contingent milestone payments. The
Fred Frank
Peter J Solomon Company
Vice Chairman
upfront cash consideration may equate to
one-to-two times the investments in the
biotech company to date, while milestone
payments account for the vast majority
of the announced “acquisition price.”
Such transactions represent a new model
of shared risk that we will likely see in
most pharma-biotech transactions. While
pharma-biotech deals will continue, a
mature, balanced relationship is evolving
to reflect the comparative strengths of
the participants.
In summary, remember the quote from
Walt Whitman: “Traveling roads all even and
peaceful you learn’d from joys and prosperity
only,/But now, ah now, to learn from crises
of anguish ...” Let’s hope these crises of
anguish are sculpting a viable, mutually
beneficial accommodation — especially
so since the ultimate beneficiaries
are patients.
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