My colleagues and I lead and support the finance function of more than 160 biopharma companies. This gives us an inside view of the conversations and questions dominating the leadership teams of life science firms over the past few weeks as the Covid-19 pandemic has changed just about every aspect of the U.S. and global economies.
Common themes have emerged, but none are more pervasive than “feeding the beast.”
The capital needs of biopharma companies are unrelenting, even in the best of times. The path is not unlike jumping from stone to stone to cross an unfathomably wide river: You raise just enough funds to reach the next inflection point, then ramp up for the next big jump. Questions about capital are constantly top of mind: How much is needed? How should it be efficiently managed? How and when should we raise more?
The emergence of Covid-19 has made even more perilous what is already a daunting journey.
My advice: Don’t panic. There’s a decent blueprint for getting through this uncertain time.
Shore up the runway
The first step is to discern what you can control and what you cannot. List and prioritize what needs to be done for the business. From that list, identify which elements are within your control, like matching consulting engagements with workflows and balancing lab supplies and consumables with expectations for current and future lab productivity.
Wherever possible, alleviate the burden of fixed costs, keeping in mind that not everything you view as “fixed” truly is. Start with contracts: Can you negotiate with the landlord for relief? Have you reexamined vendors for the opportunity to renegotiate?
Except for programs focused on Covid-19 vaccines and therapies, the clinical studies of nearly all biopharma companies have ground to a halt. Deals with contract research organizations can easily range up to $50 million or more for a single study. Contract research organizations facing widespread work stoppages are looking for ways to maximize their billable hours wherever they can.
Now is the time for companies sponsoring clinical trials to take a strategic approach to renegotiation. Above and beyond saving money, aim to restructure contracts to incentivize performance, account for risk, and get a better handle on exposure upfront to minimize surprises later. A phased approach to starting, executing, and completing a clinical trial can be structured with payments based on results versus the passage of time.
To paraphrase Andy Grove, a former Intel CEO, good companies will survive crises, great ones will be improved by them. This forced slowdown affords the leadership teams of biopharma companies the opportunity to reexamine all aspects of the business and refocus on what is truly essential to the company’s mission and vision. Reassessing skunk works projects, eliminating inefficiencies in lab operations, reprioritizing programs — efforts like those will not only sharpen a company’s focus but determine future necessary spending.
Know what you need
The odds are good that your company needs capital. The questions are: how much and by when? When assessing the timeline to your next financing, think about value creation. Most life sciences companies create value by generating clinical data, something the suspension of clinical trials has made nearly impossible. And when clinical trials get the green light to resume, restarting them won’t be as easy as flipping a switch and will take significant work — and time.
With that in mind, be realistic about clinical timelines. You will kill your credibility with any investor if you claim that Covid-19 will not slow your trial enrollment. Be honest with your company and with third parties about the risks to timelines and what you’re doing to mitigate them (see: Shore up the runway).
In the absence of new data, there might be other things you can do to demonstrate value. Can you undertake additional preclinical or ex vivo studies? Can you refocus team time to analysis of the literature? Are there strategic opportunities to pursue, such as the acquisition of intellectual property or technology amid the current market value dislocation? In short, explore all means to prepare the company to jump through the window of opportunity when it opens.
Finally, it’s essential to make sure that your current investors will support your company, both financially and strategically, before you can approach new investors and other potential constituents. Determine together whether the company will maintain an aggressive posture, become more conservative, or something in between. And find out what your existing syndicate is doing for its other portfolio companies and how or if it can help.
Look outside
Once you have squared things away internally, you’re in a better position to look to the capital markets. We break down investors into three categories: 1) true venture investors who gravitate towards startups and Series A opportunities; 2) public funds that will crossover into late-stage private opportunities; and 3) stage-agnostic opportunity funds that invest in science rather than stage. Today, though, the accessibility of investors doesn’t necessarily align with these categories. In the wake of Covid-19, we have seen investor behavior generally split among three groups:
- Those who look after only their portfolio companies
- Those who focus on their portfolio first and then selectively look at new opportunities
- Those who take the view that there’s never a better time to invest than a period of complete market dislocation.
There are also other paths to consider. For public companies, an at-the-market offering is an excellent vehicle for raising capital in smaller increments over time. For private companies, countless grants are available from state and federal governments, foundations, and others. And all companies should explore partnership opportunities as much for cash generation as for offsetting profit and loss — saving capital by having someone else do the work.
While the Covid-19 pandemic has slowed the overall pace of biopharma companies pricing IPOs, the biopharma sector has remained a bright spot. Most offerings are being led by current investors. There are challenges, to be sure, notably the disadvantages of an all-virtual process, from drafting the documents required to go public to substituting video-based roadshows for in-person meetings. Fortunately, investors in this space understand the long development cycle and tend to look to longer-range milestones than to quarterly metrics, and so are less sensitive to current volatility. If your company is considering an IPO, or already planning for one, keep moving forward your readiness efforts, since proper preparation ideally takes at least six months.
Lean on the community
The biopharma sector is often referred to as an ecosystem. It’s a term that has never been more fitting. In the past two weeks alone, I have participated in video forums and virtual town halls with hundreds of biopharma CEOs, clinical and regulatory experts, venture capitalists, bankers, attorneys, and consultants, all for the purpose of exchanging knowledge, asking questions, offering suggestions, and even sharing laughs as we navigate today’s uncertainties together. We are peers and friends — and yes, competitors — with a shared passion for the life sciences and the opportunity to each run a leg of the marathon from lab to clinic to market to patient.
Now more than ever, lean on this community.
Gregg Beloff is co-founder and managing director of Danforth Advisors LLC.
Nice write up Gregg. Interesting times to learn and grow from. The resulting three investor mentalities are worthy of note. The third being exciting but not at the expense of the first two. Give my best to the rest of your team and be safe.