Monday, July 27, 2009

Biotech's Financial Troubles and CIRM's New Loan Program

The California stem cell agency is about to embark on an unprecedented, $500 million biotech lending program at a time when the industry finds itself in an “evolve or die” mode.

The loan effort has been sold to CIRM directors as a no-lose proposition that could generate $100 million in “profits” that could be plowed back into research. That would happen even with loan default rates as high as 50 percent, so the story goes.

However, all those predictions were based on assumptions from a different financial era – a time when the stock market was thriving, capital was flowing and optimism reigned.

Today, a much different picture is being painted by those who know the industry best.

The Burrill Report, published by the respected Burrill & Co. of San Francisco, today carried a piece by its editor-in-chief, Peter Winter – headlined “Evolve or Die” – concerning a recent report on the state of biotech. Winter wrote,
“In its 2009 Beyond Borders annual report on the biotechnology industry, Ernst & Young warns that the global financial crisis threatens to render the business models that have driven the sector to date unsustainable. According to Glen Giovannetti, Ernst & Young’s global biotechnology leader, the funding drought is placing these business models that fueled biotech’s growth since its inception under unprecedented strain.”
Winter continued,
“Currently, biotech finds itself caught in a financial crisis that has analysts speculating whether many biotech companies can recover. The situation that they find themselves is different this time because this crisis is deep-rooted, systemic, and persistent.”
Winter wrote,
“Those that do survive will have adapted to changes that are not only being brought about by the prevailing financial crisis, but also by several mega-trends that will shift existing paradigms and, in doing so, create new, sustainable business models, Giovannetti says.”
CIRM's lending program is supposed to target the riskiest biotech firms for loans – ones that cannot find conventional or even venture capital financing. Some CIRM directors who support the loan program find comfort in the belief that lending the money is better than just giving it away in the form of a grant.

They point to lending plans to give CIRM stock warrants in the recipient companies and a stake in any IP that is developed. What hasn't been fully discussed is the total collapse of a loan recipient. In such a case, the warrants would be worthless. And also in such cases, IP can sometimes vanish and computer files disappear, leaving CIRM holding a multimillion-dollar, empty bag.

CIRM is currently looking at three firms that will evaluate the business models of the loan applicants. Assuming that Burrill and Ernst & Young are correct, that evaluation will be trickier than ever, raising questions about whether both CIRM and the evaluators it hires can step outside of the box. Doing so may pose uncomfortable financial risks for a state-funded agency. But it may also be the only way CIRM has any hope of securing either a scientific or financial return on its $500 million in high-risk loans.

(Editor's note: You can find a host of links to information on the biotech lending program, including its financial assumptions via this item. No business plan, however, exists for the effort.)

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