Burn rate puts heat on biotech firms

More than a third of startups at risk of running out of cash

Some biotech firms are being forced to mortgage their future to keep the doors open during the credit crunch. For many, even drastic steps won't be enough to survive.

We first flagged the problem last month but didn't know how dire the fundraising situation was for biotech firms until we saw some hard numbers.

More than a third of small biotech firms have less than a year's worth of cash. About half of the publicly-traded ones, or around 100 companies, have less than six months worth. That's up from 40% a year ago.

Those numbers come from the Biotechnology Industry Organization this week , and were first reported in the Wall Street Journal.

Needing money to survive year-to-year is not that unusual for such firms, many of which are waiting to get drugs approved and thus have no revenue stream. 

But because biotech startups often have to raise capital on a yearly basis, the credit crunch has put at risk the usual fundraising and investing model for the industry. 

Sources of capital include standard offerings of debt or equity and more industry-specific means such as trading (potential) future royalty streams or licensing molecules and other research in return for investment.

With the window for stock offerings virtually shut and the credit market still frozen up, small biotech firms are going to be at the mercy of larger companies with cash stockpiles. 

"Our companies are unusually susceptible" to the credit crisis , BIO's Ellen Dadisman told me.

If the credit markets stay frozen, a sizable chunk of small, independent biotech firms may cease to exist.  Those that do survive may have to make some painful financial concessions to stay afloat.

That's bad news for drug innovation. It could also seriously erode the returns of venture investors who specialize in biotech. Those investors have always been a patient group, since biotech investments traditionally take seven to 10 years to bear fruit, as opposed to five to seven years for information technology.

If even patience isn't enough, we could see a rethinking of how VCs approach biotech investing.

(Image courtesy of img.timeinc.net)