COVER STORY WOE IS ME An overall dismal year for stock markets and the economy contributed to a decline in biotech shares as well. Co. Biotech, he notes, has not been immune to broad economic issues, corporate scandals, concerns over Iraq, and movement out of technology stocks.
BIOTECH COMPANIES GET LEAN AND MEAN A shortage of capital is driving cost cutting, deal-making, shutdowns, and consolidation ANN THAYER, C&EN HOUSTON
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have always relied on outside money to support R&D until they become self-sustaining. And they raised more than $ 10 billion in 2002, making it the fourth most prosperous year ever for industry financing. Still, the operating environment of the past year has been extremely harsh. The companies' response has been unprecedented cutbacks in staffing and R&D programs, increased consolidation, and even outright bankruptcy On the surface, cash flow into the industry looked great, but further inspection proves otherwise. Two companies—Amgen and IDEC Pharmaceuticals —raised over 30% of the total
PHARMA BUSINESS
through convertible debt offerings. Whereas these two companies were funding the expansion of already successful biopharmaceutical businesses, a few other profitable companies and many more small, unprofitable ones raised another $2 billion in debt. Debt offerings were on the rise, but private and public investment declined; stock offerings in 2002 brought in half as much as in the previous year and just 7% of what was raised in 2000. In that record year, $32 billion poured in around the time the human genome sequence was being completed. Abright spot in 2002 was venturecapital investing, up 12% to $2.7 billion. "The industry is going through some pretty significant restructuring and revaluation as a result of prolonged bear markets," says G. Steven Burrill, chief executive officer of the merchant bank Burrill &
THESE CIRCUMSTANCES have broadly marginalized the industry Burrill explains. For example, nearly 40% of biotech companies have stock values below $2.00 per share, and 20% have values below $1.00 and face delisting. Some 25% of companies are trading at a value less than their available cash per share. And many have less than a year's worth of money to fund operations. "From a market perception, the industry's at a value point that's possibly the lowest it's ever been," Burrill points out. However, macroeconomic factors, rather than sector-specific issues, have depressed biotech stock values the most, Burrill and other analysts contend. Larger market trends beyond the industry's control are driving investment behavior, leading to lower trading volumes and money being pulled out of the market, particularly from higher risk investments such as biotech. "The gap between apparent value and actual value is extremely high, but the industry has probably never been stronger," Burrill concludes. He and others hold this opinion based on the number of products on or coming to the market, the maturity of management, the state of technology, the number of disease targets, and an improving regulatory picture. Biotech companies are falling into different camps—the "haves" with product sales or capital reserves left over from the 2 0 0 0 financing bubble, and the cashstarved "have-nots" looking for financing. However, even the successful or more financially comfortable companies are paring down operations to conserve resources, because the general expectation is that a recovery will not occur until 2004 or beyond. The industry has gone through cycles before, but this one differs in how quickly the financing window closed and howprolonged the downward trend has been, explains Scott
Almost every publicly traded company that's not growing extremely rapidly... is involved in reductions in force and cost control/'
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COVER STORY FINANCING Money flow has fallen off from record high level seen in 2000 SOURCE 1$ MILLIONS)
1996
1997
1998
1999
2000
2001
2002
$369 $688 $670 $6,490 $440 Initial stock offerings $1,465 $445 2,414 2,539 979 Follow-on offerings 521 5,805 12,651 1,601 977 537 1,433 4,061 1,741 907 PIPEsa 1,283 Debt/other public 1,288 1,262 1,520 5,728 4,848 5,251 352 1,084 449 569 2,397 2,688 Venture capital 800 2,872 184 9 Other private 184 84 203 178 103 $5,320 $5,613 $4,013 $10,696 $32,005 $11 $10,448 TOTAL a Private investments in public equity. SOURCE: 3urrill & Co
Morrison, U.S. director for life sciences at the consulting firm Ernst & Ifoung. ''What's also unique is how aggressively companies have taken action to reduce their cashburnrates,"he adds. 'Almost every publicly traded company that's not growing extremely rapidly— all but the Amgens and the Gilead Sciences ofthe world—is involved in reductions in force and cost control." He says that more than 60 companies announced cutbacks in the second half of 2002.
gan health care conference. It was "a year in which Wall Street skepticism overwhelmed optimism and where corporate management had to take hard looks at business plans and make tough decisions." Celera Genomics, in a position similar to Incyte's, has also tried to shrink spending by cutting staff on the D N A sequencing side of its business. Likewise, Millennium Pharmaceuticals —with about $450 million in 2002 revenues, about $1.3 billion in the bank, and $680 million in longterm debt—laid off about 100 researchers in December to be more "product-driven." Despite having substantial partnerships, CuraGen has restructured to curtail earlystage work, reducing staff by 25% (128 people) and postponing construction of a new lab. It has cash and investments worth about $430 million. The list of those with at least some cash
that nonetheless are tightening their belts includes Inhale Therapeutic Systems (now Nektar Therapeutics), Alkermes, ArQule, andTexas Biotechnology Not surprisingly, companies facing a cash shortage—such as Deltagen, GenVec, Incara Pharmaceuticals, and EntreMed—have been trirnming operations as well. What Incyte, Celera, Millennium, and CuraGen also have in common are stock values under $10 per share. These are only 4% of their peak share prices in 2000 for all except Millennium, which is at astill paltry 11% of its peak. Even Amgen, the most successful biopharmaceutical firm, hit a low in2002 at 60% belowits 2000 high of $78.
BY THE END OF 2002p the industry's market capitalization was offat least 40% from the start of the year and off more than 50% from its 2000 high, Burrill reports. Consequendy biotech companies have been unable to turn to the stock market to raise money In 2002, only three companies had initial public offerings (IPO), compared with 67 in 2000. Morrison suggests the biotech market "THE REACTION HAS been to act quickly will open again after the shares of estaband assume it's going to be a tight couple of lished companies recover. "When the flagyears,"Morrison says.Tb decrease spending, ship companies like Amgenhave abadyear, many companies are focusing on their lead it's hard for investors to think about inprojects and compounds while cutting out vesting," he says. "It takes awhile for them earlier stage research programs. They have to get accustomed to coming back into the also slowed investment in newlaboratory famarket. cilities and manufacturing. "First we'll see the later stage compa"There isn't adequate risk capital to invest nies come back gradually, then in high-risk projects," Morrison there will be follow-on stock notes. "They have to prioritize ALLIANCES offerings, and then an opening and do what's practical." Large pharmaceutical p
