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Living to fight another day, as potential investment spark looms.
The pace of biotech company restructurings has become so brisk that Fierce Biotech is now publishing a Layoff Tracker to keep up.
While the XBI (biotech) index is down 45% from its highs in early 2021, that does not begin to tell the story for many earlystage biotechs who went public during the heady capital markets of 2021 and 2020. For many in this class, stock prices are down 80% to 90%, and there are currently over 150 companies in the sector now trading below cash. While burning through cash to reach critical value inflection points, without advance notice, the music stopped and the door to accessing the capital markets shut—loudly and abruptly.
While we are clearly living through an innovation renaissance and the fundamentals of the industry are quite strong, we are also in the deepest and longest correction that we’ve seen in the biotech indexes since their inception. For context, coming into this correction, the XBI rose about 78% between early 2020 and February 2021. The markets were certainly frothy, and many companies went public without human clinical data, which, historically, is unprecedented and likely was unwise. The correction began with a rotation out of expensive growth stocks, such as biotech, into value stocks, formerly beaten down by the lockdown but sparked now by the reopening trade ushered in by the availability of COVID-19 vaccines.
As interest rates tick up and inflation rockets ahead, the valuations for long-date risky assets such as biotech, especially early stage biotech, get severely punished. The market shifts to rewarding the revenue- and cash-generating companies in the sector. In fact, while the XBI is down nearly 27% year-to-date, the S&P drug index is up about 7%, and money continues to rotate into large-cap pharma as the markets walk a wall of worry about earnings, the Fed’s campaign against inflation, and the war in Ukraine.
So, what’s a cash-guzzling biotech to do? Well, restructure, of course, cut the burn—ring-fence core assets—and cut costs to live to fight another day in the hopes of reaching data-driven valuation inflection points, more receptive capital markets, and a lift to valuations.
By Fierce’s count, there have been 42 restructurings and layoffs in the sector just this year, with more being announced every day.
Other options for staying power are reverse mergers between cash-strapped public companies and private companies.
Dramatically lower stock prices for many biotechs may make them more attractive takeover targets for the larger companies, for whom M&A, licensing, and strategic partnerships are key pillars to their growth strategies. This pillar has newfound urgency fueled by looming patent expirations over the next several years for current large blockbuster drugs. Last year was one of the slowest in a decade for biopharma M&As, but, according to Ernst & Young’s most recent annual Firepower report, pharma companies are sitting on record purchasing power to fund deals.
According to analysts at Leerink, the top 18 biopharmas could have about $1.7 trillion in dry powder ($500 million of that in cash on hand) to fund their growth objectives through business development. Johnson & Johnson topped their list with more than $200 billion; Pfizer and Novartis followed with $175 billion and $154 billion, respectively; and AbbVie, GSK, Bristol Myers Squibb, and Merck will each have more than $100 billion in firepower, according to the team. Companies such as Merck, J&J, Novartis, and Pfizer have made it clear that they plan to be more aggressive in business development. The current slump in target-company valuations and record buying power for the acquirers could catalyze a significant upswing in dealmaking, and could be just what the doctor ordered to spark a recovery and greater investor interest in the sector, putting an end to the current painful correction.
Can we find any green shoots for companies seeking to tap the capital markets? Well, we hear that crossover investors are looking to potentially lead financing for organizations with negative enterprise values and/or financing overhangs, and business development teams are aggressively mining this list as well. There are about 75 IPO deals that have been filed but not triggered. We hear that some of these may pull the trigger before Q1 numbers “go stale.” These deals will largely be underwritten by insiders most likely and could test the waters. Just getting them done may provide some comfort to biotech investors.
Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board