Monday, September 19, 2011

Cash Crunch

Cytos Biotechnology, a Swiss-based company and a 16-year veteran of the biotech funding wars, announced last month that it has hit its wall. It laid-off  nearly 90% of its staff; the CEO resigned; and it shut down 4 of its 5 research programs. All due to a common problem for biotech companies in the last 3 years—not enough cash (combined with a looming convertible bond payment in early 2012). The company hopes to cut enough costs to survive and renegotiate. Cytos is keeping its most promising, later stage program going—CYT0003-QbG10 (just rolls of the tongue, doesn’t it). This program has shown promise in the treatment of allergic rhinitis and allergy-related asthma. The Cytos example, while somewhat extreme (perhaps they left it a bit late), certainly mirrors what most companies in this universe face—a lack of financing whether you are public or private. High expectations—or yielding to the pressure to set them—has run several companies aground. Dendreon’s recent retrenchment is only the latest example.

Price Waterhouse Coopers issued its overview of the financial outlook for biotechnology and healthcare companies last month. Despite continued quarter over quarter gains in the number of deals and funds invested into deals, year-over year venture capital funding has slowed to a very thin trickle. As the trend continues, alternatives are looming larger as Big Pharma’s internal venture funds and non-profit disease foundations are stepping into the gap. Vertex’s first collaboration with the Cystic Fibrosis Foundation in 1998 was a forerunner but we have seen more recent deals with a focus on rare or orphan disease, like spinal muscular atrophy (SMA). The SMA Foundation has bankrolled the SMA programs at ISIS Pharmaceuticals and PTC Therapeutics. These types of investments are not limited to biotechnology—Novartis is partnering with the Foundation to launch a study in 2013. 

Another source—which potentially provides a win/win for all parties—is the pharmaceutical venture fund. Big Pharma has (on the whole) deep pockets. Investment can enable early access to promising technologies and compounds. And a competitive advantage, perhaps in feeding their pipelines. With traditional VC’s shifting their focus from the long-term to early stage programs or technologies with a timeline closer to three years rather than until the promising company is purchased or goes public. Good business in these markets, but bad news for the promising biotechnology idea.

There was an upswing of M &A activity in the first half of this year, which saw some promising private companies acquired by established pharma and biotech players. This means venture capitalists got an exit strategy and now have cash on hand to invest. All is not lost, despite the challenges.

This crunch shows no substantive signs of abating any time soon. I say, time to get even more creative. Cutting staff and R&D projects is only one way.  Any group still has to bring in more revenues and investors. There are still great ideas out there—find them and invest wisely. We, as an industry, have long taken the following two approaches:  1) great tech, let’s see where it works, or 2) great molecule, let’s chase down every possible disease to which it could apply. Every once in a great while, the scattershot approach pays off. (Vertex, with its hit-out-of-the-ballpark Incivek, is a fine example. Anyone else remember the book The Billion Dollar Molecule?) But, it is no longer a model that often or truly works in the new normal of biotechnology. Good ideas still get traction but there is no question that the biotech universe is shrinking. There are other factors at play than cash but cash is a key player. This industry is needed. So, how do we ensure that the promise is realized?  In this economy, we are evolving, but there are options coming forward that provide some hope.