The global financial meltdown has created an unprecedented situation for the biotech industry. After having enjoyed more than 40 years of easy access to capital, the rules of the game have forever changed. The capital markets have permanently restructured, making capital more difficult and expensive to secure.

This environment is new and unfamiliar to the industry. Though biotechnology companies have experienced sharp market downturns in the past—and lived to tell the tale—the recent collapse of financial institutions has choked off the industry’s financial life-blood. Scores of private and public biotech companies are now at risk of running out of cash. 

In reality, the crisis is helping to accelerate changes already underway, which are being shaped by such forces as globalization, healthcare reform, and climate change. In order to survive the next 12 to 18 months, companies will need to quickly adapt to these changes, or run the risk of closing their doors.

“Remember that cash is king and companies must do all they can to access capital and conserve cash,” says G. Steven Burrill, CEO of Burrill & Company. “This includes seeking partnerships for greater opportunities in value creation, looking globally for both financing and market opportunities, and restructuring and refocusing to cut costs and maximize portfolio value.”

In order to survive this turbulent period, biotechs will want to consider the following:

Seek partnerships for value creation:
For smaller biotechs, the key to successful drug development often involves finding a valued partner. Biotechs typically rely on larger pharmaceutical partners for the cash and expertise needed to reach the most complex and expensive stages of clinical testing and, ultimately, the marketplace. Look for partners that can spread the risks and costs of formulating, testing, and selling a new drug in a way that can help keep your company alive, and also help validate your company’s innovation to shareholders and potential investors.

Licensing transactions have been the mainstay of the biopharma industry. But some industry observers now believe that M&A may become more frequent at the expense of licenses in 2009, if an entire company can be bought for the price that a single program commanded in earlier years. While opportunistic M&A will certainly grow, the relative simplicity of implementing a partnership, compared with an acquisition, will continue to favor licensing transactions in many instances.

Bear in mind that product partnerships will continue to get done, but in a buyer’s market, only those opportunities that are particularly strategic will be considered. “Smaller biotechs’ recently growing leverage in negotiating advantageous deal terms will decline, while option-based approaches that keep much of the program risk with the originator will increase in popularity,” Burrill says.

Conserve capital:
It will be a painful time for many, as companies are forced to make tough choices. To conserve cash, consider putting R&D projects on hold, selling them, or eliminating them altogether to focus on projects that management believes will yield the most value. Many of your colleagues have already made some hard decisions.

According to the Burrill Report, more than 170 North American companies over the past six months have officially announced they were restructuring in response to the tough economic environment. Among them is San Diego-based Sangart, a privately held biopharmaceutical company focused on the development of oxygen-therapeutic agents. Sangart’s restructuring—typical of the survival strategies being implemented by many companies—managed to reduced the company’s burn rate and refocus its business units on pursuing further clinical trials for its lead product Hemospan, which is designed to effectively target oxygen delivery to tissues that are insufficiently oxygenated.
 
“Our recent successful Phase III clinical studies of Hemospan provide a platform from which to conduct the pivotal clinical studies that will be necessary to establish the clinical benefit of treating patients with Hemospan,” says Brian O’Callaghan, Sangart’s president and CEO. “The decision to reduce our workforce, which was difficult but necessary, will enable us to focus our resources on these upcoming clinical trials.”

Go into virtual mode:
In order to adapt to the difficult environment, companies will also need to explore new business models. One possible model involves operating as a virtually integrated entity. This includes developing a network of third parties that provide services such as contract development and manufacturing and sales, all supported and managed by lean, in-house “coordinating” departments. This operating model can help companies not only avoid significant delays resulting from recruitment, training, and infrastructure creation, but also move your product development to its next stages. Another plus? It can also minimize the amount of cash required for this progression.

Examine your options:
For the foreseeable future, cash will be expensive to access. This knowledge should lead your company to consider crafting financing deals in non-traditional and creative ways. Some alternatives to consider include turning to registered direct offerings (RDOs)—public offerings that are sold by a placement agent on a “best efforts” basis, rather than a firm commitment underwriting. The RDO is marketed and sold much like a PIPE (private investment in public equity) transaction to a selected number of accredited and institutional investors. However, since RDOs are fully registered transactions, shares in those offerings can be sold to anyone.

Other alternatives include selling future product royalty streams and selling options to promising compounds (See “Playing the Field” story on alternative financing in this email blast for more on the topic).

Engage in global arbitrage:
While financial markets and potential partners at home may be lukewarm about the value of technologies and products, emerging markets may place a much greater value on them. Smart companies will look outside their borders. They will also think strategically about the different value their products may hold in different markets. Consider the case of Ted Daley, president of Novato, California-based based Raptor Pharmaceuticals, who realized that that one of his clinical-stage products was ideally suited for Asian markets. The product Convivia is indicated for ALDH2 deficiency—a genetic deficiency, which can lead to a condition commonly known as alcohol intolerance, or Asian Flush. Currently there are no approved treatments for the condition, which is highly prevalent among East Asians. Today, Daley’s Raptor is actively seeking partners with clinical and commercial operations in Asian countries to continue the development of this product candidate.

Another company thinking globally is Rockville, Maryland-based OriGene Technologies, which used $6.5 million in private equity financing to acquire the assets of privately held Shenzhen P&A Biotech, a China-based manufacturer and provider of monoclonal antibodies to the research community. With this acquisition, OriGene completes the establishment of its technology center to develop genome-wide monoclonal antibodies to all human proteins. And with OriGene’s China monoclonal antibody production capacity, the company believes it can produce several thousand high quality monoclonal antibodies per year.

Keep the faith:
Overall, the next 18 months will be a very tough for the industry. There is no guarantee of survival. As a result, companies will have to be very creative about employing the most appropriate strategies for their particular situations to ensure they will still be standing when markets do return. One thing that industry analysts do seem to agree on: when the dust finally does settle, the industry will be much stronger, with higher quality companies and programs, going forward.