HERE WE are peeking out from the bunker and all we see is biowreckage. The AMEX Biotechnology Index is down about 30% since the beginning of the year and last year’s high-flying genomic stocks are lying there smoldering with the likes of Amgen and Immunex. What’s a CEO to do?
Well, for one, don’t despair. In this case, what looks broken does not need repair. The entire market has gotten crushed and young genomics companies could do very little to avoid getting taken down with the rest of the market.
Second, don’t let your company’s share price keep you from doing what you set out to do. I believe that the second biggest distraction to management (after responding to nonsensical calls from shareholders) is watching the stock price. There is nothing any CEO can do to stir a rally! The dynamics of the market are like a moving train. You are just one of the cars.
Of course, no one can predict when the bull will return and I, for one, don’t pay close attention to predictions. But when it does return, don’t expect the market to return to the “irrational exuberance” of the past two years. Having said that, I do think the market will recover sector-by-sector and I believe that healthcare, including genomics, will be one of the first to recover.
Biotechnology and biopharmaceuticals are on the cutting edge and will be the engine that will drive drug discovery. Genomics will continue to feed the industry with tantalizing new targets and as the genomics space evolves it will give industry the knowledge of how to use these targets. So, don’t despair, don’t allow yourself to be distracted. Take your eyes off the screen and continue to build real shareholder value by building your business.
However, if you need cash, you need to think about the best ways currently available to raise money. You should forget about a public offering, initial or secondary, at least for now. That means you’ll need to go for another private round. There are still many sophisticated investors who are very interested in putting money to work in the sector. But do not expect investors to pay last year’s prices.
Company values have been reset for the foreseeable future and you will have to learn to live with this reality. You need to be prepared to get a lower valuation for your company than you probably would have gotten last year. Some companies have even been forced to do “down rounds.” That means they raised money at a valuation lower then they did in the preceding round. Remember, there may be public companies trading at valuations lower than yours, therefore, investors have the option of putting money to work in already-public entities.
What form of deal structure can you expect? Anything and everything. Convertible preferred stock, convertible debentures, and warrants are just several examples. No two deals are alike. Don’t get fixated on dilution. If your company succeeds as you plan, then the dilution will be nominal. But if do not have the cash you will never achieve your goals. Investors are judging the companies on a case-by-case basis. Fundamentals count. Do you have a product on the market? How close is your first product to being launched? How robust is your pipeline? Have you had any setbacks? Have you lost any partners? How much cash do you have on your balance sheet? What is your burn?
PIPEs (banker-speak for Private Investment, Public Equity, or a private investment in a publicly traded company) and other private placements are being completed. Many of the criteria for these transactions are similar to those for private companies, though one major difference is that they are a public entity so the investor will be very interested in how your stock trades. Structures can take many shapes and forms, don’t be afraid to be creative.
Don’t wait to raise money. If you only have cash to sustain your business for 12 months or less, don’t wait. If you are approaching that level, start preparing to go out now. Don’t wait for the market to recover. The market will eventually recover, but if you wait too long you might not!
Ira Leiderman is managing director of the Palladin Group, a New Jersey-based investment management firm. He was previously a senior healthcare banker at Gerard Klauer Mattison. You can e-mail Ira at [email protected] .
TrendSpotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets affect the genomics industry. The column appears every Friday. Next week Robert Goldberg, a senior fellow at the National Center for Policy Analysis, will offer his thoughts about how the political battle in support of genomics is shaping up.
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