Biotech Values

[DewDiligence]

Biotech Firms Cutting Back As Capital Grows Scarce

[This is best read in conjunction with #msg-33838374, #msg-33749911, and #msg-33720220.]

http://www.boston.com/business/healthcare/articles/2008/12/01/biotech_firms_cutting_back_as_capital_grows_scarce/

›By Todd Wallack
December 1, 2008

The pain on Wall Street has spread to the hub of the Boston-area biotech industry, Kendall Square in Cambridge. Small and mid-size biotechnology firms are slashing jobs, cutting salaries, and shrinking their offices as it becomes increasingly difficult to raise capital.

"It's a horrific time," said Michael Greeley, a general partner with the Boston venture capital firm Flybridge Capital Partners, which invests in early-stage companies. "It's pain unlike any other period [biotechs] have seen."

Nationally, biotech companies raised $8.2 billion through the first nine months of the year, down 54 percent from the same period in 2007, according to Burrill & Co., a San Francisco life sciences investment firm. Though venture capital funding has slipped only slightly, companies have been able to raise far less through stock offerings, partnerships, and loans because of the turmoil roiling the financial markets. [The reason for this is discussed in #msg-33838374.]

To survive, Massachusetts biotechs are taking dramatic steps to conserve their existing reserves.

For instance, CombinatoRx Inc., a Cambridge biotechnology company that is years away from marketing its first drug, said recently that it will cut 80 jobs, or two-thirds of its workforce, to enable the company to operate for at least four more years without raising additional cash.

"There is no point in doing anything halfway. You have to be aggressive," said chief financial officer Robert Forrester, adding that CombinatoRx will be able to continue its core research work. "Access to capital has completely dried up, and none of us are sure when it will be available again at a price that is acceptable.

"Saving six months [of cash] doesn't make a difference," Forrester added. "If you are going to cut, you might as well cut to a level that makes a fundamental difference in the business strategy."

In Woburn, Cambria Pharmaceuticals Inc. recently eliminated some development programs to focus on its most promising potential drugs. The company, which is looking to develop therapies for neurological ailments like Lou Gehrig's disease, cut six of its 14 jobs, sublet half of its office space to a clean-energy company, and began working on raising additional cash from its existing investors [i.e. a “rights offering” such as the one implemented by PRW (#msg-33583337, #msg-33719204)].

"You can probably throw a stone in any direction and find a CEO who is doing the same thing." said chief executive Leo Liu.

Other examples abound.

Biopure Corp., of Cambridge, cut most of its staff last month and slashed salaries to keep the company alive while it tries to raise money. Pro-Pharmaceuticals Inc., in Newton, has cut managers' salaries 75 percent in the past few months. And in July, Acusphere Inc. cut one-fourth of its staff, or 24 people, and asked managers to take a 10 percent pay cut. The Watertown company has since raised $20 million in a deal with another biotech, Cephalon Inc.

Some may not survive the downturn. More than one-third of the country's 370 publicly traded biotech companies worth less than $1 billion have less than one year's cash, and 22 have less than six months' cash remaining, according to the Biotechnology Industry Organization, the industry's main trade group.

And investors have pummeled some small biotech stocks, "turning micro-caps into nanocaps," as one observer put it. [Meanwhile, the nanocaps have become picocaps.]

Of the more than 80 life sciences companies in Massachusetts, at least two dozen have stocks trading at or below $1, suggesting doubts about their ability to survive.

But biotech companies with drugs on the market, such as Biogen Idec Inc. and Genzyme Corp., both based in Cambridge, already have substantial revenue and don't need to raise outside cash.

In fact, Genzyme said third-quarter sales rose 21 percent, to $1.2 billion. The company is moving ahead with plans to expand its Allston drug manufacturing plant and is building a new one in Framingham. Genzyme has 4,400 employees in Massachusetts, including 225 it has added this year.

Even so, Genzyme spokesman Bo Piela said the company has been more cautious in its hiring "because of the economic uncertainty."

Still, biotechs are often said to have nine lives. Advanced Cell Technology Inc., a Worcester embryonic stem cell company, for instance, warned in mid-July that it would run out of money by the end of that month, unless it curtailed its operations or raised additional funding. But it has been able to prolong its life by closing some offices, slashing payroll, and raising $1 million from an Irish investor, Transition Holdings Inc.

And NitroMed Inc., a Lexington company that struggled to turn a profit with a heart drug aimed at blacks, signed a deal a month ago to sell its old business and engineered a merger with Archemix Corp., a Cambridge biotech.

The deal also enabled Archemix to become a public company, after it was forced to scrap its initial public offering because of the stock market turmoil.

"The folks in this industry are really smart," said Robert Coughlin, president of the Massachusetts Biotechnology Council. "They always figure out a way to survive." [I interpret this to mean the individuals survive and resurface somewhere else even when their companies go under].‹