Friday, February 27, 2009
Dozens of biotech companies will go bankrupt this year.
The overwhelming majority of biotech companies make no money. So they depend on public and private funding to keep the lights on.
But the recent carnage in the markets has scared investors away from anything risky. And a cash-burning biotech stock, with profitability a decade away, is about as far away from U.S. Treasuries as you can get.
The numbers tell the real story. Year-to-date, the biotech industry has raised only $3.6 billion, well behind the $13.6 billion companies had raised by this time last year. At this rate, we're on pace for the most abysmal fundraising year in more than a decade.
And right now, more than 50% of publicly traded biotechs have less than a year of cash on the books.
To preserve cash, companies are cutting staff and slashing expenses. For the few biotechs with decent drug candidates, selling the drug rights for cash and royalties is an option. Unfortunately, the rest are headed into bankruptcy. Here's why...
Because funding is tight, companies with drugs lacking meaningful data will not find partners. And with share prices so low, they won't be able to raise cash without massively diluting shareholders. What's left is a crushing debt load and high cash burn – a recipe for bankruptcy.
Just like the bungling automakers in Detroit, the biotech industry is overdue for a massive housecleaning. Management can no longer use companies as their own scientific playground.
I believe at least one-third of the industry doesn't deserve to exist. And I couldn't be happier to see this turn of events. If worthless biotechs get the boot, investors will allocate funds to well-run companies with realistic products, making the industry healthier and more profitable over the long run.
That'll take awhile to happen. If you want to profit from the situation today, you need to find companies with dwindling cash reserves, shoddy science, and questionable management... and sell shares short. (For my FDA Report subscribers, I have made the task easier with our "Biotech Crash List.")
Here are two companies that are hanging by a thread:
For three years, Discovery Labs (DSCO) has been trying to get its drug, Surfaxin, approved by the FDA. The drug works without question. However, Discovery has struggled to meet manufacturing requirements. In fact, the company has failed three times in four years... for the exact same reason.
Discovery shareholders have lost more than 80% since 2006. And I expect the pain isn't over. Even if Surfaxin wins approval, I don't have any confidence the company will know how to sell it. With cash running low, any tiny hiccup will cause the shares to collapse another 50%.
Savient (SVNT) has only one drug: Puricase, a gout treatment. The company is hoping to win FDA approval this year. But back in October, the company disclosed that in two Phase III clinical trials, eight patients on Puricase experienced severe cardiovascular side effects (heart attack, heart failure, or abnormal heart beat). No patients on placebo experienced such effects. I expect the FDA to demand another clinical trial. Any delay will likely mean a 50%-90% haircut for Savient shareholders.
If you're looking for the next "biotech crash," I'd start with these two. But weak biotechs are lining up to fall into their graves... It shouldn't be hard to find many more over the coming months.
Market balks at Obama's health care plan... Big Pharma firms Novartis and GlaxoSmithKline hit new lows.
For-profit educators, also hit by Obama reforms, end rally... ITT Education drops 6%, Career Education down 7%.
Gold falls back from $1,000... nearing $940.