2009 Financial Markets Preview: Weathering (nuclear)winter

By Steve Edelson

& Mike Ward

Senior Editors

The burning question going into 2009 is how to survive it. It's unclear whether the capital markets will even be relevant, and if so, how.

Financing activity by public and private biotechs was slashed 55% in 2008 compared with 2007. In dollar terms, this means biotechs raised a total of $13.6 billion in 2008, down from $30.4 billion in 2007.

Last year's take was the lowest since 2002, when biotechs raised a total of $11.9 billion. The fourth quarter saw a mere $2 billion added to biotech's coffers (see "Funding Falloff," A2).

The financing numbers for public companies are even worse: with venture investment down "only" 21% in 2008 - and accounting for 39% of the total money raised - public equity financing amounted to only $5.7 billion, a 58% falloff.

For the companies that did tap the public markets in 2008, stock performance by and large was in the red. The six IPOs last year saw their valuations dip a median of 56%, while the 21 follow-ons had a median valuation decline of 38% (see "IPO Performance," A2, & "Follow-on Performance," A3).

There were some notable bright spots for biotech. First, relative price stability in companies valued at $1 billion or more - the two highest market cap bands tracked by BioCentury - enabled the sector to outperform the broader markets in 2008. The BioCentury 100 Index shed 20% for the year; the Amex Biotech Index (BTK) was down 18% and the NASDAQ Biotech Index (NBI) was off 13%, compared with a 41% drop in the NASDAQ Composite and a 34% slide by the Dow Jones Industrials.

"Biotech was actually a stellar performer in 2008, which will go down as one of the top years in the history of the industry in terms of relative performance," noted Buzz Burlock of Origin Capital Management. "This realization will eventually result in capital flowing back into the sector both on the public and venture sides."

That is the optimistic view. If companies valued above $1 billion were able to beat the markets in 2008, the microcaps - companies valued below $200 million - were crushed. That tier dipped 67.4% in valuation last year.

Moreover, microcap membership has expanded. Of some 580 stocks tracked by BioCentury at the end of 2008, about 435 public companies (75%) are valued at less than $200 million, compared to 391 (63%) of 620 listed companies at the end of 2007.

Indeed, 375 (86%) of the 435 microcaps are valued below $100 million, and 312 have market caps below $50 million.

With valuations for some assets so low, market watchers are expecting VCs to continue to invest in neglected public companies. But whether the venture community has enough dry power to push total public equity financing to more recent levels - for example, to the $9.8 billion average raised through IPOs, follow-ons and PIPEs during the five years from 2003-07 - is not obvious.

And if VC appetite for private companies continues, the advice is to pursue inside rounds with existing investors.

Meanwhile, caution flags are up for those who are counting on M&A to escape their pain. Takeout valuations weren't robust in 2008 and the capacity for deals in 2009 doesn't look to be any greater.

For most companies to survive, according to Street watchers, this means hitting the brakes on non-core programs, putting fewer shots on goal, and focusing on assets that can be partnered sooner rather than later.

Public prognosis: frozen pond

Given the confluence of crises gripping the markets, everyone polled by BioCentury was reluctant to engage in much crystal ball gazing. However, there was unanimous agreement on one point: companies that must raise capital are going to face a tough time.

Robert Rynd, director of the biotechnology corporate advisory services team at Thomson Reuters, said there was an outflow of more than about $700 million of investor money from the biotechs tracked by his firm between Sept. 30 and the

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