5 Things Biotechs Should Do to Take Advantage of The Boom
We are currently enjoying a much needed resurgence in the biotechnology industry. The industry has been the best performing sector in the stock market for the last two years and it appears it will be again this year. This performance has enabled companies to raise capital, either publicly or privately, in record amounts. We expect the industry to raise more than $4 billion this year. The performance of the stock of companies that have executed initial public offerings is quite impressive. The average stock prices of the 23 life science IPOs through July are up over 50 percent from their offering price (on average) with only four trading below their offer price.
We have seen this enthusiasm before. When Genentech went public in October 1980, the stock rose from $35 a share at the offering to $89 per share in the first hour of trading. Likewise, when the New York Times ran an article in 1998 discussing the emerging field of angiogenesis and the possibility of curing cancer in a short time frame, the biotechnology sector benefited in a very positive way. The completion of the human genome project at the beginning of the last decade is another example of a time point when investor enthusiasm was high which enabled the industry to raise significant capital.
Since the extraordinary success of the current bull market will probably not last forever, we as an industry, need to prepare ourselves for a pullback at some point. When the markets have paused in the past there were many companies that traded below their cash or had less than one year of cash in the bank which amplified the downturn in the sector.
Given the better capitalization of the industry and the extraordinary advances in the scientific underpinnings of the sector during the last decade, it makes sense to examine the lessons learned the last time the industry and stock market took a pause. These are some observations from past history and some steps that companies may want to take to prepare for when the markets are no longer at all-time highs:
1. Focus on Cash Management: We often have been too lax when a company has a healthy amount of cash on its balance sheet. For example, time and again we have seen companies who have, for example, $50 million of cash and are not challenged about spending until there is just a few million of it left. The management team and Board of Directors go into crisis mode and end up scrambling to keep the company afloat. We need to be honest about the likelihood of success with our products and plan for potential downside scenarios well in advance of critical milestones. Board of Directors should proactively request management to run these scenarios as part of the strategic planning process.
2. Reassess Governance: During the last decade most companies have matured in terms of the science and the advancement as a company. Companies should constantly reassess whether the right skill set is in place at the Board of Directors and the management level to guide these increasingly complex businesses. For example, a company preparing for commercialization needs a different skill set than one in its infancy.
3. Be Bold: Given that industry capitalization is at an all-time high, now is a good time for companies to think about leveraging their stock as a strategic asset to build out pipelines or execute other creative transactions. It should be very clear whether a company will only develop resources internally, or implement a licensing or M&A strategy.
4. Re-think Infrastructure Needs: As an industry we have built a substantial infrastructure to support the companies in their development. We need to opportunistically work with each other in order not to duplicate efforts. The word “ecosystem” comes to mind. Large pharmaceutical companies are aggressively outsourcing activities such as clinical trials to manage their overhead. Biotechnology companies should also determine what functions could be outsourced in a cost effective manner.
5. Consider the Options: All too often, the Board of Directors are presented with lack of options as it relates to the development of a company. This can be improved if the management and Board of Directors work closely together to fully explore strategic issues for the long-term and make appropriate tactical decisions in the short term.
This is an exciting time for patients, companies and investors in our industry. We have been able to attract interest from a wide range of investors. Now is a good time to reassess the structure and development of the industry in order to continue to be able to deliver new innovative products to patients who desperately need them irrespective of the status of the financial markets.