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COVID-19 pandemic, the challenging capital-markets climate in biotech, and a more innovative and specialty treatment focus has increased reliance on the finance arm as a key strategic cog.
Over the past three years, the pharmaceutical industry has gone through several impactful changes. During the early months of the COVID-19 pandemic, investors flooded the industry with money, allowing new companies to emerge and conduct multiple rounds of clinical trials while still being confident that more funding would be available. Over the past year, however, things have changed and funding is harder to come by. This has put the role of chief financial officer in the spotlight.
Morgan Brown is CFO at Clene, a clinical-stage biopharmaceutical company working on treatments for neurodegenerative diseases. According to Brown, life sciences organizations are searching for new qualities in CFOs.
“Companies are looking for more contribution from the finance team on the whole, and the CFO specifically to be more strategic in nature, to really partner with the other c-suite executives and help them effectively operate the business,” he says.
Brown also elaborates on how the changing industry is impacting the role of the CFO in ways not directly connected to finance. “Although not specifically related to CFOs, I think the distribution of drugs isn’t going to be the same old retail-pharmacy model that we’ve seen in the past,” he explains. “It’s going to be more innovative and specialty pharmacy-based and at-home delivery.”
Justin Thacker, CFO at Aristea Therapeutics, says that the role has changed quite a bit over the past three years, with the past 12 months impacting the job significantly. “With the pandemic, obviously, working remotely has changed significantly for me and the teams that I’ve been involved with,” he tells Pharm Exec. “[Though] we were always moving to more automation, the pandemic pushed that along quite rapidly.”
Shane Kovacs, CFO and chief operating officer at Olema Oncology, believes there’s been a “dramatic shift in the tone of the capital markets as it relates to the biotech sector.” This can have big implications for CFOs since access to capital plays a large role in the success of biotech companies, Kovacs notes, and the past decade saw one of the largest booms the biotech sector has ever seen. Unfortunately, things have changed over the past 12 months.
“[As] we have witnessed across many historical periods of enthusiastic expansion in other industries, the pendulum likely swung too far in the positive direction by early 2021,” he says. “There were many examples of new companies being formed by licensing technology and IP out of academia that then catalyzed on the relatively easy access to capital with successive private-round financings followed quickly by an IPO. Pre-money valuations for biotech IPOs that historically struggled to achieve the $200 million mark were now going public with valuations exceeding $500 million and, in some cases, greater-than-$1 billion unicorn valuations.”
Kovacs explains that these companies were able to grow very quickly due to having access to the capital.
Pharm Exec financial columnist and Editorial Advisory Board member Barbara Ryan recently described how the biotech industry peaked with investors in early 2021. The previous year, biotech and biotech IPOs provided consistently large returns for investors. Since that time, however, the biotech industry entered the longest bear market in its history, leaving many companies struggling to find further funding.
Investors are learning the difference between biotech and the tech industry, Kovacs points out. New technologies must undergo periods of trial and tribulation before being approved, and many new biotechnologies never make it to the approval stage. This creates a much longer business cycle than the tech industry and requires more capital before becoming cash-flow positive.
“Over the past 12 months, we have, unfortunately, seen a complete reversal of this investor enthusiasm for the biotech sector,” says Kovacs. “Valuations are now at all-time lows with many companies trading at or even below their cash balances. New equity offerings and IPOs have fallen off a cliff. The big question looming over the heads of biotech boards and management teams is, ‘How long will this last?’”
Shoreline Biosciences' CFO, Vanessa Jacoby, notices similar trends as well.“With the volatility of the market, I think capital is becoming sparser and you have to, again, navigate the trade-offs,” she tells Pharm Exec. “What is important to your organization? How do you focus? What are the products that are more likely to make it to the clinic, and what are the unmet needs that we’re trying to solve here?”
According to Jacoby, due to the volatility of the markets, CFOs are focused on making sure that their companies are well-resourced and can deliver the goals of the wider organization. Even if the markets become less volatile, those goals will remain the same.
She adds that the pandemic likely caused a good amount of capital to flood the industry. Over the past months, however, interests have changed, and she believes that many generalist investors have moved on to different sectors.
“It’s a cyclical process,” says Jacoby. “You have a lot of resources, and then they decline, and you have to do the best that you can, always with the goal in mind to bring drugs to patients.”
Ryan describes the current market as the “steepest and longest bear market in biotech industry.” In June, she wrote that investors moved away from high-risk and slow-growth companies. As fears of a recession build, however, she predicts investors may return to the biotech sector and the growth it produces.
Kovacs also has noticed capital shifting away from riskier investments and moving toward more reliable, fixed-income ones.
“In this environment, a strong CFO needs to recognize the uncertainty of access to equity capital even with the achievement of successful business milestones,” he says.
Brown adds, “These past 12 to 24 months have been very interesting, for sure. We get banker presentations constantly trying to pitch their services.”
He describes 2021 and 2022 as “extremely challenging” for pharma and biotech companies. Organizations with a market cap less than $10 billion saw average stock price declines from 17% to 30%, while even companies valued at over $10 billion have seen negative returns on their stock.
“Because of that, I think the equity markets have been extremely challenging over the last year-and-a-half,” says Brown. “There are more public life sciences companies than there ever have been. There are more companies out there that are trying to secure capital for their various clinical trials and commercial needs. Stock prices are at all-time lows, with investors sitting on the sidelines not knowing where the bottom is.”
Thacker adds, “For life sciences companies, the primary challenge for CFOs has always been around capital, raising cash when you can, serving it, and spending it wisely. That certainly hasn’t changed, but at the same time, that’s really not unique to the biotech industry. However, the current market dynamics have brought on some unique challenges.”
He explains that for many of the companies which went public over the past couple of years, finding capital was considered “easy money.” After obtaining their initial round of funding, many organizations expected the following rounds to be just as easy.
Bear markets, like the one biotech is currently in, are challenging for life sciences companies that don’t bring in revenue and rely on venture capital and public markets for funding.
“It’s been tough for about 12 months,” says Thacker, “and there’s no signs of that subsiding any time soon.”
This means that companies must look at how much money they have available and decide where they can cut costs. This may include delaying programs or reducing head count and working with a leaner team.
The new capital climate means it’s time for CFOs to re-examine what risks they need to take. “It’s almost like a little puzzle that you’re trying to match resources to the goals of the organization,” explains Jacoby. “With the geopolitical risks right now, it’s where can we do clinical trials? Where can we build, and where can we guarantee enrollment?”
According to Kovacs, many traditional responsibilities, such as budgeting, forecasting, and scenario planning, were downplayed for CFOs while capital was readily available. Important operational aspects, such as understanding the key drivers for a company’s profit and loss (P&L), will take on more importance when the bear market hits. “Many companies in the sector are also considering the breadth of their pipelines and where they should best be allocating their capital,” he says. “This is an important role for a CFO, and understanding the value drivers longer term and making trade-offs can add significant value.”
Brown adds, “You still have to be able to identify risk and take risk. I think it’s become even more imperative in today’s markets. You look at things like the supply chain. I look at our business and things that were so readily available—things that we never had to think about…we’re having to take a lot more risk because those things aren’t being delivered in the timelines they once were.”
While the risks have changed, Thacker says the way that CFOs are calculating risk also has changed. According to the executive, this used to involve ensuring that companies were leveraging all of the value that they had access to.
“There are some other challenges that impact the finance function indirectly, [such as a] new supply chain—a lot of the materials for manufacturing the clinical trials materials is hard to come by,” says Thacker. “Getting slots within third-party manufacturers is hard to schedule if you don’t do it well in advance. Also, [for] vendors for preclinical studies, it’s hard to find the resources to conduct the studies.”
When funding was easier to come by, companies were more willing to run studies that weren’t focused on the primary indication. Now, says Thacker, CFOs have to stay focused and plan further ahead.
“The risk is getting a little bit too far ahead of yourself,” he adds. “Trying to conserve cash and making sure that you have the resources if a study is delayed might mean that rather than doing all the studies you had planned, [you’re] calculating whether it makes sense to push some back a few months or maybe a year until you have some certainty with your primary studies, or making sure you have the infrastructure in place. How long can we get by with the status quo before we really need to make a change? With supply chains and vendors, you always needed to reserve slots or have studies scheduled well in advance, which is still the case, but that upfront lead time has grown tremendously. Often, you’re having to put down deposits while waiting for things that aren’t going to happen for months, if not close to a year.”
A changing workforce
Companies expect CFOs to partner with the other c-suite executives to effectively run the business and its culture, as opposed to just being the “numbers guy,” says Brown. This means that the role has become more involved in handling the changes brought about by the growing number of remote workers, which has been particularly challenging for the pharma industry. While companies are eager to take advantage of a much wider, national talent pool, there are also many positions that must be performed on-site.
“How do we look at equity across employees, and how do employees look at equity if we allow certain groups to be more flexible and other groups less flexible?” asks Brown. “How do we ensure that the culture is maintained throughout the organization and still provide flexibility depending on the function that people perform?”
There are benefits to reap from the new work model. Clene’s home offices are in Salt Lake City, but the company has manufacturing facilities in Maryland. According to Brown, hiring remote workers has allowed the company to bring on staff members that may not have been able to relocate to the Salt Lake area.
“It has been difficult to search for talent and then navigate the new normal, which is people having this expectation to work from home and have a more flexible work schedule,” adds Jacoby. “Yet we have lab jobs, so we have to find a balance. We [need to be] flexible enough to attract talent and grow the company.”
However, the increased number of remote workers has created other problems. According to a study by the Cybersecurity and Infrastructure Security Agency (CISA), cyberattacks or incidents cost companies across all industries anywhere from a few thousand dollars to over $1 million. During a period when margins are tight, this means that organizations must find the funds for expanded cybersecurity training.
“With everyone working remotely and everything being done online, the cybersecurity risk has elevated quite a bit,” says Thacker. “The bad actors were always evolving and getting more sophisticated, and certainly that’s not stopping. The focus on cybersecurity has expanded quite a bit.”
Amid this changing landscape, biopharma CFOs are trying to adapt. After nearly a decade of reliable funding, investors are less confident. While this alters how specific decisions are made, the core responsibilities remain the same for CFOs, particularly those tasked with the role at emerging and clinical-stage biotechs. Even with supply chain issues, geopolitical conflict, and a changing workforce, it’s still the job of CFOs to make sure that their companies are fully funded so they can run clinical trials and bring new products to the market.
Mike Hollan is an Editor for Pharm Exec. He can be reached at firstname.lastname@example.org.