It’s Getting Harder for Bio/Pharma to Raise Money
Contract Research Organizations (CROs) and Contract Manufacturing Organizations (CMOs) may not be feeling it yet, but the downturn in external financing for early stage bio/pharma companies is real. Two recent articles in the financial press underscore what has been happening.
Bloomberg chronicled the challenges early stage public companies are facing as they go out for further funding beyond their initial public offerings (IPOs). The article highlighted the plight of two bio/pharma companies, Aldeyra Therapeutics and Ovascience, whose stock prices took big hits when they floated secondary public offerings of their stock on May 26th. The shares of Ovascience went down 30% on the day of the offering while those of Aldeyra fell 10%.
The Bloomberg article noted that the number of secondary offerings from bio/pharma companies is down 40% in 2016 vs. 2015, 64 offerings vs. 106 in 2015; but the amount raised is down 70% from $9 billion to $2.6 billion. There have been half the number of IPOs, 8 vs. 17, but the amount raised, just $483 million by Bloomberg’s count, is down 75%.
An article in the New York Times described how the balance of power has shifted from entrepreneurs to investors in the venture capital world. According to the article, VC firms have been able to demand much tougher terms from companies they are investing in, including lower valuations and the hiring of more experienced executives. The article focuses on Internet companies, but the pinch is being felt across the start-up spectrum.
It’s not surprising that CROs and CMOs may not be feeling the impact of the funding downturn quite yet. After the 2008 global financial crisis, it took two years for IND filings and Phase 1 clinical trial starts to reflect the funding decline. Companies used their remaining cash to get candidates into the clinic as quickly as possible in hopes of demonstrating proof-of-concept, the prerequisite for licensing deals and more external funding. The most recent downturn in external financing is barely a year old, so it could be a while before CROs and CMOs really feel the pinch.
This is a good time for service providers to focus on resurrecting their business development skills. After several years of just answering unsolicited external inquiries, they will soon have to be prospecting for new business and selling the customer on why they should use them rather than a competitor. As they were in the last downturn, new business development skills will be a key to sustained success.