Biotech Financing in the Credit Crisis: Strategies for a radically altered landscape

Biotech Financing in the Credit Crisis: Strategies for a radically altered landscape

Introduction

Since the financial meltdown, the relationship between Pharma and Biotech has been turned on its head. Previously, pharma companies had no choice but to license Biotech drugs at high prices in order to fill their sparse late stage pipelines.

Scope

*Overview licensing trends up until the credit crisis

*Strategic analysis of biotech's funding crisis

*Insight into how the biopharma market is expected to change and adapt

*Recommendations and potential financial solutions for biotech

Highlights

While Pharma is likely to prefer acquiring biotech targets out right, rather than navigating the road of complex licensing agreements, Datamonitor expects that licensing agreements will remain among Pharma and self sufficient biotech companies. Although snapping up struggling Biotechs through M&A will be a priority for Pharma.

Biotech companies are tackling their funding crises on two fronts; firstly, by cutting costs and reducing their high cash-burn rates, and secondly attempting to access quick cash from external sources. However, this is becoming a tough task.

The lack of deals on the horizon, Biotech's funding crisis, and subsequent loss of confidence in the industry, have all led the market cap of non-profitable US biotech companies to fall by a third since September 2008.

Reasons to Purchase

*Understand how licensing trends have evolved in recent years, and what impact the financial crisis has had

*Assess how Pharma and Biotech's relationship has changed and the repercussions of this

*Identify cost saving and cash raising strategies in order to weather the funding crisis

CHAPTER 1 EXECUTIVE SUMMARY 4
Scope of the report 4
Key findings 4
CHAPTER 2 LICENSING TRENDS AND THE CREDIT CRISIS 9
Why has Pharma's R&D been in crisis? 10
Until the financial meltdown, licensing was becoming an increasingly expensive and complex option for Pharma 14
The credit crunch has given Pharma a stay of execution from its R&D crisis 16
Cash and time is on Pharma's side 17
Pharma has been given a stay of execution, but still needs to address its internal R&D crisis 19
Licensing deals made by Big Pharma continue to fall 20
The majority of Big Pharma are making fewer licensing deals 21
Pharma's competition to restock pipelines has driven up licensing costs in recent years 22
There has been a dramatic decline in $0-50m deals since Q1 2008 due to the credit crunch 25
Competition and high deal prices have traditionally led Pharma to license earlier-stage drug candidates 26
Pharma is now looking to license Phase III bargains from cash-hungry biotech companies 28
Oncology, anti-infective and CNS drugs remain popular in-licensing targets 30
CHAPTER 3 BIOTECH'S FUNDING CRISIS 32
Biotech funding options - then... and now 33
Biotech funding options - then 34
Biotech funding options - now 34
Traditional strategies to improve biotech valuations no longer apply 36
Financing deals are harder to come by 39
The death of IPOs - at least for now 41
The threat of delisting 43
Bankruptcy - a likely end for numerous struggling biotech 45
Selling - M&A, licensing and divesting 47
Companies will forgo licensing agreements due to the short window of opportunity 48
M&A - potential buyers 50
Biotech acquisition targets 52
M&A - announced and completed 53
Future M&A targets 57
Divesting - a less drastic alternative to a complete takeover 59
Reverse mergers have a poor track history 60
CHAPTER 4 FINANCIAL SOLUTIONS FOR BIOTECH 63
Biotech need to cut costs and raise cash fast 64
Putting Biotech on ice - to buy time, Biotech needs to spend less 66
Suspend any unessential R&D 67
Restructure and retaining only core personnel 68
Outsourcing where possible rather than carrying out functions in-house 68
Spin-out high cash-burning units 68
Merging with other biotechs to strip out redundancies 69
Selling - the company, assets, and royalty streams 69
Pay cuts for biotech directors 70
Funding strategies for Biotech 71
Government support - Pharma needs to lobby governments for cash 71
US - Biotech lobbying Congress for tax rebates 72
EU - UK Biotech lobby's government for cash 73
Novel investor strategies - more risk, but few alternatives 75
Grants - only companies with drugs in development for chronic, debilitative and fatal diseases will be considered 78
CHAPTER 5 BIBLIOGRAPHY 80
Publications and online articles 80
Datamonitor resources 89
Databases 90
Exchange rates 90
List of Tables
Table 1: Highest value US licensing deals made by the top 20 Pharma companies, Q1-Q3 2008 23
Table 2: Weaker investor confidence in US Biotech is reflected in IPO and market cap valuations, 2006-08 42
Table 3: Ideal target biotech companies - attractive pipelines, a year or less in cash left, and less than $50m cash on hand, Q4 2008 58
Table 4: US public biotech company divestment deals since September 2008 59
Table 5: Biotechs that could be potentially used as public shells for reverse mergers, Q4 2008 62
Table 6: EUROTRANS-BIO Biotech funding organizations 75
Table 7: Exchange rates, 2007 90
List of Figures
Figure 1: Global ethical sales for the top 50 Pharma companies, 2006-12 10
Figure 2: $115 billion worth of branded drugs from the top 50 pharma companies face patent expiry through 2012 11
Figure 3: Number of approvals for New Molecular Entities (NMEs) declining by an average of 1.5 a year, 2000-07 12
Figure 4: External factors affecting product portfolios in the pharmaceutical industry, 2008 13
Figure 5: The line between licensing and M&A is becoming increasingly blurred 14
Figure 6: Schematic of trends affecting Biotech-Pharma licensing deals 16
Figure 7: Cash and equivalents and short-term investments for top 20 pharma and biotech companies ($m), Q2 2008 18
Figure 8: Number of US licensing deals made by the top 20 Pharma companies, Q1 2006 - Q3 2008 20
Figure 9: Number of US in-licensing deals made by the top 20 Pharma companies, Q1 2006-Q3 2008 22
Figure 10: Number of US licensing deals valued at $0-50m, made by the top 20 Pharma companies, Q1 2006-Q3 2008 25
Figure 11: The rising cost of licensing deals, 2000-05 26
Figure 12: Mean deal value by phase of drug (phase linked to furthest developed drug if deal is for multiple drugs) of deals made by the top 20 Pharma companies, Q1 2006-Q3 2008 27
Figure 13: Proportion of US licensing Phase I and III deals made by the top 20 pharma companies, Q1 2006-Q3 2008 29
Figure 14: Proportion of US licensing deals by therapy area made the top 20 pharma companies, Q1 2006-Q3 2008 30
Figure 15: More than half of biotech companies analyzed have a year or less in cash, Q4 2008 33
Figure 16: The majority of traditional sources of finance are now closed to Biotech following the 2008 'financial meltdown' 36
Figure 17: Eight mistakes that hurt your biotech company's valuation 37
Figure 18: Number of US Biotech financing deals, Q1 2006-Q4 2008 39
Figure 19: Capital raised from Biotech financing deals has declined throughout 2008 40
Figure 20: Number of US IPOs in 2008 is at an all-time low 41
Figure 21: Needs and challenges that drive Pharma-Biotech deals are complementary 47
Figure 22: Pharma will forgo forming partnership agreements, prioritizing M&A 49
Figure 23: Pros and cons of M&As without prior partnership agreements during the financial crisis 50
Figure 24: The most attractive biotech companies are also in need of the most cash, Q4 2008 52
Figure 25: Ideal acquisition targets for Pharma are Biotechs with attractive pipelines, high cash-burn rates and limited cash on hand 53
Figure 26: Publicly owned US biotech company (market cap under $1 billion) acquisitions announced since September 2008 55
Figure 27: Publicly owned US biotech company (market cap under $1 billion) acquisitions announced since September 2008 56
Figure 28: Ideal target Biotechs - attractive pipelines, a year or less in cash left, and limited cash on hand 57
Figure 29: The top 20 Pharma could increase profits by $202 billion to 2013 simply by cutting costs 65