Management Is Doing Its Part

After a lead drug at a biotech fails -- be it a clinical trial or a Food and Drug Administration rejection -- a cost-cutting effort is almost guaranteed to follow. Arena Pharmaceuticals (Nasdaq: ARNA  ) cut staff after lorcaserin was rejected on its first attempt. Ditto for MannKind (Nasdaq: MNKD  ) after its second FDA rejection. Getting to the finish line is most important.

So when Chelsea Therapeutics' (Nasdaq: CHTP  ) Northera got rejected and it became clear that a return trip in front of the FDA firing squad wasn't going to be quick, management had to do everything possible to reduce its cash burn. The company ended the first quarter with less than $52 million.

Interestingly, "everything possible" includes management taking a 25% pay cut. That, Fools, is not something you see every day.

Many biotech management teams appear to be more interested in lining their pockets with funds raised through secondary offerings than making sure drugs get approved. Cell Therapeutics (Nasdaq: CTIC  ) , for instance, has burned through $1.5 billion of investors' capital but doesn't have a drug approved in the U.S. yet; Pixuvri is approved in Europe, but the prospects aren't outstanding.

That isn't to say Chelsea's management took one for the team and left everyone else safe. About 35% of the rest of Chelsea's employees are going to move to part-time status. Performance bonuses have also been halted until Northera is approved.

Again, getting to the finish line is most important. The cost-cutting measures, which also include transitioning patients from a safety study to an alternate-access program, will save the biotech $6 million at a time when every dollar counts.

While management's decisions should be applauded, it doesn't appear that it will be enough to get the company through to its next FDA decision in the third quarter of 2013. With just $18 million to $20 million expected in the bank at year-end, the biotech will likely have to raise funds before the next FDA decision. Hopefully, the confirmatory trial will come out positive, shares will rise, and the secondary offering to raise funds won't be all that dilutive to shareholders.

Hopefully.

If you're looking for something a little less dependent on binary events for next year, check out the Fool's new free report, in which Fool analysts report their top pick for 2012. Just click here to grab your free copy.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.      


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 11, 2012, at 7:01 PM, oracleatdelphi66 wrote:

    Fool's comments can be thin on facts. In reference to Cell Thereapeutics' drugs: Fool forgets CTI has developed and marketed Trisonex and marketed Zevalin in the US. The recent EU approval of its drug Pixurvri also meets an unmet medical need in the EU. That could be good news for some sick people who have no alternatives.

    True enough, the company did do a recent financing, but it had an immediate need to close the acquisition of a brand new asset, Jak2 inhibitor pacritnib. The financing will also help fund the Pixurvri launch in the EU. Pixurvri sales have the potential to help make the company less capital market dependent. At the same time management is working toward reducing its monthly burn rate, and concentrating on its late stage programs which have the best potential for retun.--Dan Eramian, CTI

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