BIO report: Tightening cash pushing small cap US biotechs to alliances
Market signals are mixed but the take-home message from the Biotechnology Industry Organization (BIO) was clear: Alliances are now essential for capital formation among biotechnology companies with mergers and acquisitions increasingly more attractive.
“It is evident from the strong partnering activity at this event that there is an increased intention on the part of biotechnology and pharmaceutical executives to creating alliances,” said John Craighead, the head of business development with BIO in his presentation during the opening session for BIO-Europe 2008.
The good news among the overwhelmingly bad news for publicly traded companies is that the U.S. biotechnology indices have outperformed the broader market, stumbling but avoiding the vertiginous drops seen in other industry sectors.
Year-to-date (as of mid-November) the Standard & Poor index was down 35%, the NASDAQ 100 was down 38% and the Europe, Australasia and Far East index was down 42%.
Meanwhile the Nasdaq Biotech index was down only 13% while the AMEX Pharma index has dropped 22%.
Craighead showed how the sector was saved by the trading in the largest of biotech companies which have gained in recent trading and that these companies account for 88% of the total market capitalization for biotechnology of approximately USD 350 billion.
Smaller companies have suffered from the flight of investor confidence, however, he reported, showing that Small Cap Biotech is down a mean average of 42% year-to-date and that only 13% of the companies, of 95 of 714 global biotech stocks, have escaped losses.
Among 387 U.S.-based companies, cash is tight, Craighead said, with 54% saying they have two years of reserves but fully one-third reporting only enough cash for one year.
While this sounds alarming, looking back five years shows that consistently one-third of companies have managed with less than a year’s worth of cash reserves. The problem in the current market is valuation, he said.
Currently one-third of biotech companies are priced below their cash value, which over the past five years has been true for about 6% of all companies.
Under these conditions, mergers and acquisitions are suddenly looking more attractive, he said, with the potential for enhancing capital efficiency, liquidity and valuation.
However, the risk is that while this alternative seems attractive, it may not be a real possibility. The hardest pressed companies may seek an M&A deal as salvation, but such deals normally average between nine to 12 months.
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