The flip side of the hot IPO market? A chill could trigger a sudden cash crunch in biotech, followed by more deals
Over the last 5 years biotech IPOs and follow-ons have raised a tsunami of cash totaling some $128 billion, according to a new estimate out from Leerink. And these newly coined public players have been spending money fast.
Geoffrey Porges says that by the end of Q3 $85 billion was burned in pursuit of their goals. And with $43 billion still on the books, he’s raising a red flag for the cash crunch that may be awaiting a large segment of these drug development upstarts as early as 2019.
Looking at the 222 biotechs that remain in the group after accounting for buyouts and failures, Porges found that they were collectively spending $3.5 billion a quarter at last look. That burn rate could extend out a reassuringly long way: 3.5 years to be exact. But 3 out of 10 of these companies have less than 18 months of cash — a figure that is likely to hit 50% a year from now.
That could prove a problem after the new public companies in the industry developed a $14 billion per year appetite for spending.
Without a hot market to turn to for more money, Porges is looking for a return to alternative sources of cash — which may help heat up the deal market for major players who have been waiting for valuations to cool down.
By this time next year, the financing needs of these companies will be acute, and just keeping their current development plans funded will require additional capital of $3-4bn per quarter. With capital markets now effectively closed to new issues, investors are likely to find companies in the sector increasingly nervous about capital during 2019. Other less traditional sources of capital, including restructuring, asset sales, royalty financing and convertible debt, will be much more actively considered during the coming year, assuming capital markets remain in their current volatile state.
Of course, nothing keeps going up forever. The best of these companies will start preparing for leaner days, before the cash runs low.
Slightly less than half of Porges’ cohort of companies has less than 2 years of cash on hand now, with 61% holding enough money for less than 10 quarters and 30% at 3 years-plus.
This means that without further capital, and assuming constant, not growing expenses, then by the end of Q3 2019, or one year from now, 45% of these companies will have only one year of cash, and ~60% will have only 18 months of cash available.