- The biotech market has been hit particularly hard by the current market downturn.
- In order to survive, public companies are contemplating M&A and liquidation.
- Private companies are hoarding cash and thinking about taking on debt.
2022 has been a rough year for the economy — and the biotech market was hit particularly hard.
The SPDR S&P Biotech ETF, a leading biotech index, has fallen 35% since the beginning of 2022 — and is 45% lower than June of last year. Public and private biotech companies have been scrambling to adjust to the market downturn, and some have had more success than others.
Some public companies are on the verge of bankruptcy, or debating whether liquidation or M&A are strategies that could give shareholders back some cash. Meanwhile private companies are delaying IPOs and hoarding cash, hoping to hunker down as the storm passes.
Insider has spoken to company executives, analysts, and investors to determine how bad this current biotech downturn is, and the different strategies companies can take that might just allow them to pull through.
Public companies are running out of cash — and some risk going bankrupt
When it comes to keeping a public company afloat, cash is critical. Companies running short on cash usually feel the worst effects of a market downturn, and this can be especially true for a company that has a high cash-burn rate. In May, analysts at Jefferies looked at company burn rates and found that 18 public biotech companies might not have enough cash to continue operations for much longer.
For other companies, there are more complex factors at play. Economic conditions, competitors, legal battles and more can all contribute to whether or not a company survives. Companies that are on shaky ground need to announce a "going-concern" warning — a note that company executives have substantial doubts about staying in business. With the help of accounting data firm Audit Analytics, Insider identified 13 large drug companies that issued these warnings.
When it comes to which companies will be able to pull through and which will go bankrupt, ultimately only time will tell. But we have some hints: A top credit-risk firm shared data with Insider showing the 10 biotech companies most likely to go bankrupt.
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Top biotech analysts say these 18 companies are set to run out of cash within a year
A top credit-risk firm says these are the 10 biotech companies most likely to go bankrupt
Some companies may turn to restructuring, M&A, and liquidation
Public companies facing bankruptcy and other financial struggles have several ways they can try to stay afloat, and even give some money back to shareholders.
One of the most common solutions is restructuring the company — often in the form of layoffs. After gene-therapy biotech Bluebird Bio warned investors that it had substantial doubts about continuing operations, the company decided to lay off 30% of its employees in an effort to reduce costs.
Another option companies have: M&A. Pharma giants ended last year with $500 billion in cash, and that cash could be a lifeline to smaller, struggling companies. It's a win-win situation: small biotechs get a bailout, while big pharma companies can add new treatments to their pipelines. Insider found that 10 companies are most likely to become takeover targets this year.
One company from the list, Biohaven, is already in the process of being acquired by pharma giant Pfizer. Other companies that want to find similar partnerships should do their best to become attractive targets to big pharma by focusing on science and the patients, four top dealmakers said.
For companies that are truly struggling, some investors have proposed a dramatic solution: liquidate entirely, and give cash back to shareholders. For companies that are trading at valuations below their cash level, liquidation could be an unconventional win-win situation — investors get a return on their investment, and CEOs can get cash to start a new venture.
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Investors are starting to push troubled biotechs to liquidate — and it might not be a bad idea
Private companies are hoarding cash and looking for deals while delaying IPOs
Private companies have a different strategy when it comes to outlasting the downturn. In normal times, some private companies might be in the process of going public — but that's unlikely to happen often this year.
Instead, biotech VCs say that companies need to grab as much money as possible and invest in strong leadership to survive the market downturn. One top VC said that going public right now would be "insane."
In fact, despite biotech valuations hitting a 10-year high in 2021, some companies might have to conduct "down rounds", which occur when startups raise capital at a lower valuation than they previously held.
There are other ways that private companies can get cash. Some experts have suggested that companies could carefully take on some debt — just enough to survive the next three to six months. They can also try to create partnerships on future drug royalties, or come up with a hybrid financing model.
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A top biotech VC shares the 3 criteria startups need to survive the market meltdown
Companies in hot fields like mRNA and cancer are still raising substantial funds
Not all private companies are struggling, however. Some continue to raise millions of dollars, especially in the fast-growing areas of mRNA and cancer. ReCode Therapeutics recently raised $120 million to continue its work in mRNA, while cell therapy startup Affini-T raised $175 million to fight cancer. See more examples of successful funding pitches below.
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The 24-slide presentation a first-time CEO used to raise $120 million to cure blindness