Financing Growth in a Slump


As Seen in CFO Studio Magazine Q4 2016 Issue



The timing couldn’t have been worse. It was the morning of September 21, 2015, and Andrew Einhorn, CFO for EdgeTherapeutics, a biotech firm, was prepping for the first full day of the company’s IPO roadshow, when he heard the news: Presidential hopeful Hillary Clinton had declared war on escalating drug prices.

In a Tweet that sent biotech stock prices tumbling, Clinton stated that price gouging in the specialty drug market was “outrageous” and that she was going to lay out a plan to take on overcharging such as Turing Pharmaceuticals exemplified when it raised the price of Daraprim from $13.50 to $750 per pill.

“What followed in the days after the Tweet was the worst sell-off in biotech since 2008, and we were on the road meeting with our investors,” Einhorn told audience members at the 2nd annual CFO Innovation Conference, in May at MetLife Stadium in New Jersey. Although Edge Therapeutics ended up going public in a deal that “was priced quite well,” the increased scrutiny on drug prices is one of a few factors that weakened the biotech and pharma IPO markets in late 2015. According to Einhorn, in 2016 there have been just seven deals raising $600 million total, which is down 60 percent from the same period in 2015.

So what are IPO investors looking for in a softer market? Less risk, for one. “There’s been a trend toward investing in later-stage programs, whereas in frothy markets, a lot of early-stage deals got done,” he said.

Because of the fickle investment market and increased pricing pressure, biotech and pharma companies must scrutinize costs across the board, said fellow panelist Jim Mastakas, Senior Vice President and CFO at Amneal Pharmaceuticals, the industry’s fastest-growing manufacturer of generic drugs. “Lenders are all of a sudden saying, ‘Hold on, we’ve gotten too comfortable here. . .’ and are being more vigilant in questioning pricing and costs,” he said.

Brian Zietsman, President and CFO of Enteris BioPharma, a privately owned company backed by a venture capital firm, told audience members that Enteris has had to provide a highly detailed accounting of future costs every time it asks its investor for more equity.

“We’d come up with a number that is bare bones. . .and our investor would turn around and say, ‘Well, you have 60 percent of your ask.’ That obviously puts us under a lot of pressure.”

In response, Zietsman said, the company has sped up the research process and reduced costs by eliminating rats from its pre-clinical experimental models, focusing only on dog models at this time.

Indeed, improving speed is one way to help clamp down on costs, said Einhorn. “Time equals cash,” he added. “We need to keep in mind the levers we can pull if, for example, enrollment in our clinical trial takes longer than we think.”

At Halo Pharma, a privately owned firm that provides services and products to pharma companies, cost control is all about managing customer expectations, said Barry Lederman, CFO. Halo works with some pharma companies that are early in the development process and are not attuned to the reality of a cost-sensitive market. While these companies could turn out to be very profitable customers for Halo, he said, “it becomes a very challenging situation.”

Einhorn said CFOs who focus on cost controls will be in a better position when the investment market rebounds: “When that window opens back up, you want to be able to go through it.”

Melinda Ligos

Copyright 2017