If the biotechnology sector come with a warning label, it would read something like this:
“Biotech senior executives may experience some side effects, including sweating, dry mouth, insomnia, and increased anxiety — particularly if federal regulators reject your patent application. Some finance chiefs in the field have developed an insatiable appetite for capital. In rare cases, some biotech executives may end up being investigated by the Securities and Exchange Commission.”
Certainly, the alleged misdeeds at ImClone — which may land former ImClone CEO Samuel Waksal in jail — have heightened awareness of the vagaries of working in the biotech sector. Authorities at both the FBI and the SEC claim that late last year, the Food and Drug Administration informed Waksal that it rejected ImClone’s request for approval for Erbitux, the company’s much-ballyhooed anticancer drug. According to the FBI and SEC, Waksal immediately advised family members to sell their Imclone stock — before news of the FDA rejection was made public. Even Martha Stewart, the home and garden doyenne, has been dragged into the mud at ImClone: investigators are reportedly examining whether Stewart solicited inside information from Waksal.
While industry insiders say the high drama at ImClone is an isolated incident, they also point out there no such thing as an isolated incident in the biotech sector. “It’s hard not to be grouped together,” says Dennis Winger, CFO at Applera Corp. “In biotech, if one of the major companies has the flu, everyone at least ends up with a cold.”
Not everyone gets better, however. Typically, senior executives at a biotech often struggle for years just to take the startup from early drug discovery stages into later-stage development and clinical trials. Even then, nothing is a sure thing — as the FDA’s nixing of Erbitux proves.
Moreover, biotech companies — essentially research projects disguised as corporations — require huge amounts of investment capital. That’s problematic, since few biotech companies have any revenues.
Thus, finance chiefs in the sector must constantly make the rounds between public and private investors, scaring up cash where they can. When a biotech’s clinical trials drag on, and cash begins to run out, strangers (that is, executives from global pharmaceutical corporations) often show up, bearing cash gifts. In many cases, biotech CFOs have been faced with an impossible choice: accept the money, but give up management control; or rebuff the offer, but risk running out of operating capital.
As biotech CFOs confide, once a deal is struck with a corporate investor, years of hard work may end up benefiting a faceless multinational corporation . What’s more, executives at an acquirer — all warm and friendly during negotiations — may change their stripes after a deal closes. Once in power, new owners generally have a desire to assert greater management control — and biotech CFOs often find themselves looking for work.
Certainly, deep-pocketed pharmaceutical giants hold all the cards right now. These days, investment capital is flowing out of the biotech sector and into the pharma sector. Indeed, the Amex Biotechnology Index is off 39 percent year-to-date. Celera Genomics, which is in the index and is a publicly traded Applera subsidiary, saw its own stock price slip from triple-digit highs two years ago. Shares are now barely in the double digits.
Conversely, up until 2002, pharmaceuticals were making money hand over fist. The Dow Jones Pharmaceutical Index, which is comprised of industry behemoths like Johnson & Johnson, Merck and Pfizer, was up about 33 percent from 2000 to 2001.
Admittedly, even pharmaceuticals are down in this down year — the Amex Pharmaceuticals Index is off 25 percent so far. But that’s still better than the performance of publicly traded biotechs.
Moreover, global pharmaeceuticals have endless streams of revenue to finance their vast operations. Notes Steven Cohen, current CFO at Genome Therapeutics and former controller at Abbott Laboratories: “I never thought about the cash as Abbott’s controller. “You thought about budgets and hitting that bottom line PnL that you have in the plan.”
The same cannot be said for many biotech operations. “At GENE,” concedes Cohen, “we’re not so encumbered by PnL, but by the sources of cash.”
Analysts Get Cable
To prime the cash pump, CFOs at most publicly traded biotech companies must convince analysts of the merits of their businesses./p>
That can be a tall task. Just ask Applera’s Winger. Although Applera does have a cash-positive subsidiary (Applied Biosystems), Winger says, “trying to get our story out is a challenge.” Why? Celera is still in early-stage development. And like other early-stage biotechs, it’s more susceptible to stock swings when the biotech market as a whole is out of favor.
Compounding the problem: scores of biotechs have changed business plans of late, making it difficult for analysts to keep up. “Being a sell-side or buy-side analyst in the biotech sector is one of the hardest jobs,” asserts David Greenwood, CFO at Geron Corp., who comes from an investment banking background. “If you’re following cable television, you’re following a couple companies and they all look alike. If you follow a dozen biotech companies, you are following a dozen distinctly different biotech companies.”
In fact, Kevin Starr, CFO at Millenium Pharmaceutical, says he spends roughly 30 percent of his time with Wall Street analysts and investors to make sure Millenium’s story is clear. “We would like to lose a little bit of the genomics label,” he says, noting that the term is often misunderstood.
Being misunderstood seems to be part and parcel of the biotech business. The science involved in developing new wonder-drugs is by nature complicated stuff. So, too, is figuring out the right time to scarce up some cash. “You can go through three to four years where the capital markets are basically closed,” Winger says. “Trying to time those has been a continual challenge for the industry, for CFOs, and we’re going through one of those troughs right now.”
Alliances with big drug companies are supposed to smooth the ride. But Cohen says such partnerships can also be detrimental to the sector’s stocks, which often trade in lock-step with peers — and parents. “You can get a double whammy because we rely a lot on the pharmaceuticals for funding,” he notes.
Finding alternative sources of capital comes with its own whammies. Cohen, for example, recently negotiated a convertible note for the first time in his career. Genome Therapeutics, which had $70 million in the bank at year-end, needed to cover Phase 3 trial costs for a newly licensed compound this year.
While the convertible is plain vanilla, Cohen says negotiating terms for the note required great care. “Convertibles can have a lot of onerous provisions,” he explains. “And with pricing resets there can be death spirals.”
Indeed, Winger, who negotiated one of the sector’s first convertible note in 1991 while at Chiron Corp., would advise against such a deal today. That convertible, used to fund a Hepatitis C drug, provided Chiron with some financial stability.
But given the volatility in the sector, Winger says CFOs at cash-consuming, profit-less biotechs are asking for trouble issuing convertible bonds. “It’s nuts. Some of these bonds are so far under water, there’s no way they’ll be converting.”
That doesn’t look likely to change any time soon. Biotech CFOs say they’re still feeling the fallout from the ImClone meltdown in late December.
As Greenwood points out, potential investors and biotech suitors generally meet during December at the JP Morgan H&Q biotechnology conference. That conference which tends to be a launching pad for good biotech news. “With the Imclone news coming in late December, it sort of took the winds out of the sails,” Greenwood says. “The timing of it could not have been more unfortunate.”
Cohen agrees. “When you add the other issues from ImClone — the questionable measurements and how the company looked at statistics — that impacts us all,” he says. “It hurts the credibility of the whole sector.”
Before ImClone, credit — not credibility — was the biggest concern for biotech finance chiefs. Not anymore. “I can’t tell you how disappointing the ImClone news was” says Greenwood. “Two steps forward and 15 steps back.”