A near decade-long run of cheap money appears to be coming to a close, and most of the biotech sector isn’t well positioned for the new reality.
BioCentury’s analysis shows that two-thirds of biotech companies could be facing a cash crunch in 2019 if the markets remain difficult.
While investors don’t expect capital availability to be a problem, they think the rising cost of capital might mean employing alternative financing structures to help biotechs extend their runway.
According to 14 buysiders and bankers contacted by BioCentury, most of the financial market issues facing the biotech sector in 2019 have nothing to do with the fundamentals of the industry, as a confluence of macro-economic forces have driven a shift toward a risk-off sentiment. 4Q18 was one of the worst quarters for biotech indexes in over 16 years, and investors see little reason to think the sentiment will change in the near term.
“There’s been a perfect storm in having a crappy macro market, specialists re-trenching and short of cash, and the generalists are gone.”
The only potential silver lining investors see is the string of M&A events that kicked off 2019 that could draw investors back to the sector, and they think the template is more like Eli Lilly and Co.’s $8 billion deal for Loxo Oncology Inc. than the $74 billion takeout of Celgene Corp. by Bristol-Myers Squibb Co. But short of an M&A spending spree, which is always hard to predict, buysiders expect cost of capital may be one of the most important areas of focus this year.
The top tier of companies have raised enough capital to weather nearly any storm. 2018 saw the biotech sector setting records in the total amount of money raised in venture and IPOs, while the amount raised through follow-ons is second behind 2015.
But most of the sector didn’t participate in the cash grab; BioCentury’s analysis of public biotech balance sheets shows that about 40% of loss-making companies have one year of cash or less.
“There’s been a perfect storm in having a crappy macro market, specialists re-trenching and short of cash, and the generalists are gone,” Omega Funds’ Otello Stampacchia told BioCentury. “Companies should have refinanced six months ago, minimum.”
That advice rings even more true as the U.S. government shutdown persists, meaning the SEC is unable to review or approve registration documents. The result is that there haven’t been any IPOs or follow-ons completed since the shutdown started on Dec. 22.
With straight equity follow-ons expected to be particularly punitive in a down market, investors said companies may need to consider alternative financing options, such as private investments in public equities (PIPEs) or other structured financings, as ways to extend their cash runway.
Crossover investors in particular may be looking to add positions through these options as their returns on private investments have shrunk.
And while there was little concern overall about capital availability, foreign private investment into U.S. biotechs -- in particular from Chinese