Even When Money is Easy, Rules of Biotech Finance Still Apply

Opinion

Xconomy San Diego — 

Last month Juno Therapeutics closed a $250 million IPO, bringing the total raised since it was founded in Seattle in 2013 to close to $600 million. The money is earmarked to support more than ten clinical trials over the next 12 months. Last year, 133 biotech companies around the world raised $11 billion in initial public offerings, eclipsing the previous record of 66 IPOs and $7.6 billion set the previous year.

If anything, the private markets have been even more generous. In Boston, Moderna Therapeutics earlier this week announced it had raised an additional $450 million from private investors—breaking records and bringing its cash hoard to $950 million since 2011 to fund a fusillade of trials for an RNA drug platform that remains shrouded in secrecy.

Industry managers have learned well the first law of biotech finance: When the money is there, take it. Now they must show that they have learned the corollary: Spend wisely, because you never know when the money will come again. That is not as easy as it might appear.

In creating the easy-money economy, the Fed also created $18 trillion in national debt. When that comes due and the Fed draws in the monetary reins, a biotech company with no recurring revenue and a long, expensive and uncertain path to approval (to say nothing of market risk) takes on a different look.

Maintaining discipline when your investors and the world expect you to revolutionize the treatment of disease will require a level of self-control that will test the most seasoned industry veterans, given that, as one CEO put it, “We are surrounded by insurmountable opportunity.”

One simple solution is for management to assume that the cash has to last ten years and apportion it accordingly. However, even biotech investors are impatient. Drip-feeding a company for a decade looks more like a long-term employment program than a value-maximizing plan “in our lifetime” for investors.

The group that gets to the finish line first often wins the biggest prize. With real money, a biotech team can do studies in parallel like big pharma (who do have recurring revenue, lots of it). Time is the enemy. Management doesn’t have to live hand-to-mouth waiting for the data from one study to raise money for the next. But the other enemy is risk. While biotech may be operationally similar to big pharma, it is a different business with a very different risk profile.

Biotech managers with pharma pedigrees can easily confuse the two. So spending wisely has a corollary of its own—Avoid potentially fatal risk. With big-company-style clinical development, managers don’t have the forced discipline of learning from initial mistakes before graduating to the next level in the labyrinth of drug development. Early cancer immunotherapies failed, despite extensive spending in clinical trials, because the technology was incomplete. No amount of cash could have saved them. When the problem is systemic, parallel trials simply reproduce the problem.

At best money can only reduce financing risk. A manager tries to match his burn rate to the total risk without knowing what it is. Full-time employees are cheaper than outsourcing and easier to control, but come with fixed overhead costs. Whether a team has to respond to opportunity or setbacks, or stretch to the next milestone or market window, it is much easier—and more fun—to make a small company large, than a large company small.

Two additional rules define the boundaries of the biotech playing field:

You have to spend money to make money; holding still is not an option. Even experienced managers can find themselves caught in a trap that in many cases is unavoidable. “I had to spend the money to develop the technology. Now that I know what to do, I wish I had the money to do it.” The best CEOs raise funds even in difficult markets, but investors pay the price.

Hence, the final law—Don’t run out of money.

In the past, easy money has not brought out the best in the biotech industry. The 2000 venture “vintage year,” fueled by cash generated in the Internet Bubble, turned in the worst performance in the last 20 years. Vast sums invested in genomics and other “omics” returned precious little to investors. For many reasons this time is different, but the laws of finance still apply.

Standish Fleming is a 29-year veteran of early stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK). Follow @

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