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Bankrupt Biopharmas Are Rare. 2019 Has Some Worried That’s Changing

Six years ago, Bind Therapeutics was flying high, with little idea how hard it would soon crash.

Headed into a public stock offering in 2013, the biotech, founded by top MIT and Harvard researchers, generated buzz with its lofty scientific ambitions. Company executives believed its nanomedicine platform, while only through Phase 1 tests, represented the next advance in cancer therapies.

Those dreams came undone within three years. As its experimental therapies struggled in clinical testing, Bind was punished by the market, and debt repayments forced the company into bankruptcy in 2016.

Bind may be a cautionary story in today’s life sciences ecosystem, one that features biotechs going public at earlier stages and with heightened ambitions.

While bankruptcy is a rare outcome for biopharmas, 2019 has bucked that trend with an uptick in Chapter 11 filings. Eleven companies have declared bankruptcy so far this year, compared to an average of four per year during the past decade, according to a review of data tracked by the firm BankruptcyData.

That increase may forewarn of more companies falling to zero, especially at a time of rising legal and political headwinds for the sector. After a decade of booming growth, the ballooning ranks of newly public biotechs may struggle to withstand market pressures.

“I think there’s a turning point now,” said Andrew Hirsch, the former CEO of Bind, in an interview. “I think it’s not sustainable.”

Hirsch highlighted the rising prominence of early-stage platform companies, like Bind, going public in greater numbers and at larger valuations. That can bring steeper downside, he warned.

“Things aren’t always going to work the first time, that’s just the rule in this industry. A lot of times, companies are valued for perfection,” said Hirsch, now Agios Pharmaceuticals’ chief financial officer.

“If they are lucky and it works, that’s great. But if you have a setback because you’re doing novel things, the public markets can be a cruel place to be.”

Weighed down with legal, political threats

Biotech vastly outperformed the broader stock market over the past decade, and a steady inflow of capital supported more companies going public at rich valuations.

But those tides have turned. A leading biotech index has fallen more than 15% since peaking in the summer of last year, while the S&P 500 has ticked up nearly 13% in the same timeframe. The capital required for funding biopharma’s ambitions is leaving too, with one Wall Street firm calculating $8.7 billion in net capital outflows this year — rivaling a stretch in late 2015 and early 2016.

After years of outperformance, biotech has lagged the market for the past year

Investor anxiety is rising at a time when more companies are fighting for funding than in past decades. Evercore ISI analyst Josh Schimmer said this year he’s noticed a marked shift in investor attitudes.

“When they stumble, the markets are more unforgiving than ever,” Schimmer said in an interview. “They aren’t given second chances the way they used to be given. That may be a factor that does lead to a higher rate of bankruptcies.”

And small biotechs aren’t the only ones facing elevated bankruptcy risk. The weight of thousands of lawsuits related to opioid marketing has already taken down Purdue Pharma and Insys Therapeutics. Several others, like Teva Pharmaceutical, Mallinckrodt and Amneal, are at risk of joining them.

The legal uncertainty has made these companies perceived as “uninvestable,” SVB Leerink analyst Ami Fadia said in an interview. Additionally, many of these pharmas are highly leveraged and face issues in generating cash going forward, she added.

“It’s pretty obvious that some of these companies are at high risk of bankruptcy,” said Fadia, who covers several of these drugmakers including Mallinckrodt and Amneal.

To be sure, the effect of opioid liabilities is constrained to a comparatively small set of companies. But heading into an election year with drug pricing as a top issue, worries about capital fleeing the industry and a legal crackdown on opioid makers could be exacerbated by political threats as well.

Industry lobbyists have blasted HR3, the leading Democratic drug pricing proposal, saying it would trigger a “nuclear winter” by eroding the upside of biopharma’s high-risk, high-reward investment premise.

“If HR3 becomes law, it is lights out for a lot of very small biotech companies that are pre-revenue and depend on attracting capital,” PhRMA CEO Stephen Ubl said at a recent media briefing.

Industry-specific concerns, of course, come against the backdrop of fears of a broader economic slowdown. Financial analysts have flagged recession signals in the U.S., which, if materialized, would further squeeze the industry.

“It may be coming, in which capital itself is scarcer for companies,” said Bob Eisenbach, a lawyer at Cooley specializing in bankruptcies. “And when that happens, it puts pressure even on good companies.”

Into the ‘great maw’

Biopharmas are structured to avoid bankruptcies. Pre-revenue companies typically carry little debt and have little to restructure through a bankruptcy court if their pipeline fizzles.

Privately held biotechs that suffer clinical failures can also avoid bankruptcy by having their financial backers buy them out, saving face for those venture capitalists.

“It just disappears into this great maw of the biotech universe,” said Kevin Kinsella, a venture capitalist and founder of Avalon Ventures, referring to distressed biotechs in an interview.

Having launched more than 100 biopharmas, including prominent names like Vertex, Neurocrine and Onyx, Kinsella said he’s been lucky enough to avoid getting entangled in any bankruptcies.

“Someone absolutely failing, shutting the doors and turning off the lights, you don’t really see that a lot in our industry,” he said.

Drug companies, both young and old, derive value from ideas and hope more than tangible assets or resources. Just last year, early-stage platform companies like Moderna Therapeutics and Rubius Therapeutics went public with multi-billion dollar valuations despite lacking profits and significant clinical data.

2019 bankruptcies
  • 2/3: Novum Pharma
  • 2/6: Avadel Specialty Pharmaceuticals
  • 2/15: Aradigm
  • 2/17: Immune Pharmaceuticals
  • 2/18: Pernix Therapeutics
  • 3/21: Mabvax Therapeutics
  • 4/15: Achaogen
  • 5/20: Aegerion Pharmaceuticals
  • 6/10: Insys Therapeutics
  • 9/15: Purdue Pharma
  • 9/16: Sienna Biopharmaceuticals

But investor attitudes appear to have shifted. Rubius’ stock, for instance, has dropped more than 70% since its IPO. While up this month, shares in Moderna are 30% off their 52-week high in May.

Speaking generally about platform companies, Bind’s former CEO said market sentiment has turned.

“Investors have lost their appetite for companies going public with preclinical data,” Hirsch said.

“You’re probably going to see more of these situations going forward, where a company is preclinical, went public and is left on their own and has to raise additional money from the public markets and they flounder.”

Yet even floundering biotechs can persist for years, even decades. Long-standing industry veterans like Xoma, Novavax and Geron have survived in as-yet fruitless searches for their first drugs, suffering clinical failures along the way. Despite accumulated deficits exceeding $1 billion, these companies can find the necessary capital to keep chugging along.

“There’s always someone else who’s willing to bet the next discovery is around the corner, or the next asset, or if we get this clinical trial enrolled and finished, all will be good,” Kinsella said. “There’s always hope.”

Besides selling hope, biopharmas, like all businesses, have practical options to stave off bankruptcy. Restructuring and raising cash are the main focuses, turnaround experts said.

Corporate restructurings typically shrink the business, either by laying off employees, selling assets or killing off R&D projects. Raising capital can include licensing rights to experimental therapies, taking on debt or tapping the public markets for secondary stock offerings.

If those options are exhausted, M&A can be another way out for shareholders. Firms like Deerfield Management, Hercules Capital and Highbridge Capital Management often aid distressed biotechs in such endeavours.

Deerfield, for instance, reached deals to finance R&D costs for Dynavax and helped fund Melinta Therapeutics’ acquisition of an infectious disease business.

A last resort can be merging with another struggling biotech, or becoming the shell in a reverse merger for another company seeking an easy path to a public listing.

Both happened in just the past few weeks. Foamix Pharmaceuticals and Menlo Therapeutics merged into one dermatology company, while NewLink Genetics was the shell through which Lumos Pharma joined public markets.

These strategies act as moats that insulate a high-risk industry from bankruptcy. In recent years, they have worked tremendously well. Among the 333 biopharmas that have gone public since 2012, just 3% filed for bankruptcy while 6% became reverse merger shells and 10% exited via M&A, according to data tracked by Evercore ISI.

But with 2019 looking shaky for biopharma, some have begun to wonder how markets will respond.

Can biopharma weather the storm?

The last few years have featured “record levels of capital raising,” according to the investment bank Jefferies, which tallied 100 initial public offerings and 270 follow-on raises in 2018 and 2019 that drummed up tens of billions in cash.

At the same time, the number of public small and mid-sized biotechs has doubled in the past decade. There aren’t just more of these smaller firms; they also are worth more and consume more capital on average. From 2010 to present, these companies have seen their typical market values double, R&D budgets triple and cash burn rates quadruple, Jefferies found.

The annual burn rate for these biotechs, which includes market values from $200 million to $5 billion, has increased from $20 million to $80 million. Jefferies analyst Michael Yee credited that to free-flowing capital, more platform companies and an arms race in oncology.

Biotech’s impressive market performance has made that possible. A leading biotech index, for instance, outperformed the S&P 500 by 30% since the market bottomed out in March 2009.

But of late, biotech has struggled, creating a tougher environment to raise cash.

“The question is whether this is sustainable if market and macro conditions get tougher and political uncertainty gets more obvious, forcing companies to tighten their belts to ride out 2020,” Yee wrote.

2019 has brought an uptick in industry bankruptcy filings
Year # of biopharma bankruptcies % out of all bankruptcies
2011 5 4.2%
2012 7 5.8%
2013 5 5.1%
2014 4 4.3%
2015 2 1.7%
2016 4 2.7%
2017 1 0.7%
2018 6 4.4%
2019 11 7.5%
Credit: Data from Bankruptcy Data

Conditions have clearly worsened by some metrics, such as the amount of money invested in healthcare- or biotech-dedicated funds. Data tracked by a Piper Jaffray found $8.7 billion in investment has left such funds in 2019. Ten of the past 12 weeks have registered net capital outflows, a streak a Piper Jaffray analyst called “seemingly the new normal.”

Billions of dollars flowed out of biotech in 2015 and 2016, too, at a time when many biotech shares were falling and the prospect of a Hillary Clinton presidency had raised investor fears on drug pricing.

Biotech weathered that storm, with few companies entering bankruptcy, and has grown since. Going forward, a critical question will be gauging whether the sector is on a new trajectory or if it will emerge from this period relatively unscathed.

“Getting investor attention is harder than ever to begin with,” said Evercore’s Schimmer. “For a company that has faltered, even if they are doing the right thing, it’s a struggle.”