Still strapped for cash

The beginning of April marked the end for Irving, Texas–based DelSite. Although the company had FDA clearance for a phase 1 trial of its GelVac nasal powder H5N1 influenza vaccine, it had spent several months fruitlessly seeking funding to pay for the work. It found none, so on April 2, it announced its filing for bankruptcy protection, setting itself up for liquidation. Equity holders are expected to get nothing.

DelSite is the third biotech firm to go bankrupt this year, according to figures from biobusiness magazine BioCentury. If that pace continues, 2009 will surpass the eight companies that went belly up last year (Nat. Biotechnol. 27, 3–5, 2009).

In fact, a host of indicators suggest this year is shaping up to be worse than 2008. Ernst & Young has tracked the 'cash runway' of biotechs for years and usually finds between 20% and 25% of public companies have less than a year's cash. But Nature Biotechnology examined the most recent earnings reports (fourth quarter 2008 and first quarter 2009) of 355 global public firms that most closely met our definition of a biotech company and found that ∼39% of them have less than one year's worth of cash. The increased percentage is driven for the most part by the plight of microcap firms (Fig. 1).

Figure 1: Percentage of biotech firms operating with less than one year's cash, segmented by market cap.

Microcap, <$250 million; small cap, $250 million to <$1 billion; midcap, $1 billion to <$5 billion; large cap, ≥$5 billion.

The shrinking market caps and depressed stocks have kept the exchanges busy with delistings, particularly NASDAQ. Eleven biotech companies have been delisted for regulatory issues or noncompliance through the first four months of this year, meaning 2009 could see >30 companies removed from the exchange (22 were removed for these reasons in 2008.)

The lack of investment has firms dumping programs to save on R&D and cutting staff, too. Over the six-month period leading to the end of March, BioCentury data show some 30 firms closed R&D programs in non-core areas. Restructurings so far in 2009 far outstrip those of previous years (Table 1).

Table 1 Public companies restructuring

These numbers paint an unpleasant picture, but it is still hard to draw long-term conclusions about the health of small biotechs. On one hand, it's quite likely that investors' value perception of biotech has changed permanently. Yet, it's also true that the need for biotech's strongest offerings (innovation and healthcare products) has not diminished. Regardless, the vaults will not open tomorrow, or next week, or even the third quarter, so biotechs should prepare for a trip through the desert.

That isn't to suggest massive death. “We don't think all those firms with less than a year of cash will disappear; we actually think the industry is quite resilient,” says Glen Giovannetti, the global biotech leader at Ernst & Young, noting the restructuring and pipeline reduction happening across the sector. Still, there will be firms who “run out of options and end up shutting doors,” he says. In fact, he expects more liquidations and bankruptcies “this time around” than in previous low times.

Exactly how many isn't clear, but if nearly 40% of public biotechs are in a cash crunch, Giovannetti estimates 20–25% of these could go under in the next 12–18 months. If that's the case, the international biotech sector could lose 25–35 more firms. The longer the economy languishes where it is, the higher that number could rise.

Many argue that the downturn is in effect culling the weak—Darwinian principles applied to biotech—and Giovannetti agrees, saying a “stronger cohort of companies” will come out the other side. The question is, are we looking at simple Darwinian selection or a mass extinction of microcaps similar to a cataclysmic event?