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We all know that the majority of the small biotech companies are in the midst of the worst cash crunch in decades. Staffing is being cut, programs mothballed, and some companies have chosen to go into hibernation mode to wait out the storm. In a CNBC interview, BIO President and CEO Jim Greenwood estimated that 50% of the publicly traded biotechs have less than a year’s operating cash and 25% are down to less than 6 months.

The public markets are effectively closed to these issuers. Many of the VCs are hesitant to extend additional funds since there is no clear exit strategy. What does this mean for the future of these development stage companies? Many small biotechs are now left with only one viable option: obtain funding from Big Pharma on whatever terms are available. This funding may be in the form of a partnering agreement or an outright enterprise sale.

While at first glance seeking funding from big pharma appears to be a traditional approach, the current financial landscape has altered the relative negotiating position of each party. In years past, biotechs unable to cut a favorable deal could go back to their investors for an additional tranche of funding that could provide sufficient liquidity to move research programs into the next phase and hopefully enhance the program’s value. It was a case of “Pay me X $$$ for a phase II program today or potentially pay me a far greater sum for a phase III program at a future date”. Many small biotechs no longer have the luxury of employing this approach.

Anecdotal reports are circulating concerning delayed deals and a sudden hardening of negotiating positions on the part of big pharma. Perhaps these behemoths are sensing a unique opportunity to capture a massive amount of intellectual property at fire sale prices. I fear this potential short term advantage may be pressed too far and could potentially alter the biotech landscape for the foreseeable future.

The current situation reminds me of a game I used to play in biology class called Predator and Prey. Whenever the wolves pushed their advantage against the rabbits too far, the carnivores would pay dearly in the next round due to a lack of sustenance. If the current trend plays out as feared, VCs may eventually come to view the biotech space as less desirable due to what they perceive as unfavorable exit values being offered by the major drug companies. In essence, big pharma’s current negotiating advantage may be killing off its future external research pipelines. This prospect is especially troublesome since many of the large drug producers are in the process of dramatically downsizing their internal research labs.

The next year will be telling. I am estimating that 25% or more of the current public biotech companies will either shutter operations or combine with another entity. If big pharma does not create a privately funded version of a biotech TARP program, it may end up losing the VC research subsidy that it has come to depend on over the past 30 years.

Disclosure: The author is long ZIOP, PARD and MITI in the biotech space. No short positions.

Source: Will Big Pharma Misplay Their Advantage?