Pharma Giants Won't Bail Out Battered Biotech

"The stock market might be in the doldrums, but the biotechnology index has fallen off a cliff. One measure says it all: Dozens of publicly traded biotechs have dropped so much that they are now valued below the amount of cash they have in the bank.

Some healthcare investors have been pointing to that trend as a sign things have started to bottom. The argument goes that biotech has become so cheap that pharmaceutical companies -- staring down a patent cliff and armed with hundreds of billions of dollars of dry powder for acquisitions -- will come to the rescue. Indeed, a popular biotech exchange-traded fund, the SPDR S&P Biotech ETF, has rebounded by around 20% from its recent lows.

That analysis paints with too broad a brush. Many of the companies now trading below cash are likely to go out of business in a macroeconomic environment in which their key input cost -- money -- is rising. To an even greater degree than high-growth tech companies such as Shopify or Roblox, biotech struggles in a rising interest-rate environment because many companies don't have any real revenue streams and don't expect to have a product in the market for years. Sadly for both investors and patients, clinical trials move slowly.

That problem has been exacerbated by a biotech bubble in recent years as too many early-stage companies went public. In 2021, the peak bubble year, 111 biotechs had initial public offerings in the U.S., topping the previous peak of 91 in 2020. Some of those companies are still conducting preclinical trials, meaning they haven't even begun testing their therapies on humans.

Sio Gene Therapies, with its shares down 87% in the past year, is an example of a company trading at a negative enterprise value. Sio Gene's market capitalization is $27 million, even though it had $65 million in the bank as of the end of the first quarter.

But Sio Gene is anything but a bargain. The company has terminated its gene therapy licensing agreements with the University of Massachusetts, is quickly running out of cash, and has fired much of its staff. Because a company like Sio Gene is effectively locked out of the capital markets these days, it needs to find a buyer to bail it out. The company hired SVB Securities in late April to help it explore a sale. Whether it can survive in some form remains to be seen.

Sio Gene isn't alone. Fierce Biotech, a news outlet focused on the industry, started a layoff tracker this year, and it looks scary. In the first week of June, for instance, oncology biotech Atreca announced plans to cull a quarter of its workforce and stem-cell developer Athersys said it is cutting 70% of its staff. And the list goes on.

So when will the bleeding stop? For Les Funtleyder, a healthcare investor at E Squared Capital Management, the sector as a whole can't really begin to rebound until it is clear that the Federal Reserve is finished raising rates. As of now, traders are pricing in rate cuts later next year, so a recovery could start early next year, he says. Pharma companies, Mr. Funtleyder says, aren't particularly focused on valuations. What they are focused on is the science and whether the business is a strategic fit.

Of course the market rout leaves some solid biotech businesses trading at bargain prices. That means the deal pace will probably pick up this year, especially in the crowded oncology space. Ipsen has agreed to acquire Epizyme for $247 million, and Bristol-Myers Squibb said it would buy Turning Point Therapeutics for $4.1 billion. Both are cancer plays. While the Turning Point deal reflected a premium, the purchase price was still below last year's high. Much of the most recent strength in the biotechnology sector has been related to speculation that Merck & Co. might buy Seagen, a company that could fetch about $40 billion.

But pharma companies are looking for needles in the haystack, not the haystack itself. That means more pain could still be coming for biotech investors. Pharmaceutical companies won't be there to help." [1]

1. Pharma Giants Won't Bail Out Battered Biotech
Wainer, David. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 01 July 2022: B.14.