Know Biotech Cash Burn So You Don't Get Burned

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Guess what -- if you're an upstart biotech company, chances are you've issued shares more than once to help cover development costs. This means that investors interested in this space need to watch the rate at which biotech companies spend their cash on hand, also known as cash burn.

When these public offerings happen, they are generally done in a way that allows company to have enough cash to get through to the next stage of a drug's development, like the completion of a clinical trial or a review from the Food and Drug Administration. Once a company reaches these "inflection points," share prices will more than likely jump, and the company can reissue again while inflicting the least amount of harm on current investors.

Let's take a look at two companies that are in the middle of these inflection points: Dynavax Technology (NASDAQ: DVAX  ) and Ariad Pharmaceuticals (NASDAQ: ARIA  )

Hang in there
While the FDA agrees that Dynavax Technology's hepatitis B vaccine Heplisav has proven immunogenicity, the FDA's Vaccines and Related Biological Products Advisory Committee voted in November that it would still like to see more data regarding the safety of Heplisav before it can move forward with FDA approval.  

After the company's recent issuance of 17.5 million shares back in early May, it still has $24.65 million in cash and $123.6 million in marketable securities on its balance sheet as of its last earnings release. Dynavax has been able to slow its cash burn, but it's still running through money pretty fast. As of this last earnings release, the company had gone through about $38 million in the past nine months, down from around $42 million the same time a year ago. The company predicts these are sufficient funds to keep it in business for the next 12 months.

If Dynavax can get Heplisav on the market within these next 12 months, it's possible the company can prolong the life of that $148 million. There is a lucrative opportunity in the hepatitis B market (about $700 million, according to the company), but Dynavax is up against already established treatments like GlaxoSmithKline's (NYSE: GSK  ) Energix-B and Twinrix, and Merck's (NYSE: MRK  ) Recombivax-HB. Investors will be happy to hear that the company can survive that long on this most recent issuance. It should give management adequate time to replace CEO Dino Dina, who announced his intention to step down back in May once a replacement was found. Since the last public issuance of shares, the company's share price is down almost 50%.

There is much greater opportunity, though, in Dynavax's other two pipeline treatments for asthma and multiple autoimmune and inflammatory diseases. The company estimates each of these markets at a much loftier $15 billion for each. These drugs are both in phase 1 of clinical trials, and it will be quite some time to market -- if they get through the clinical phase trials at all.

A (MY)Ariad of good news
Thanks to FDA priority review for Ariad's ponatinib, the company might be able to bring this chronic myeloid leukemia to market sooner than expected. The encouraging news from this week's announcement that 57% percent of patients in the phase 2 trial showed a major response to the drug following a year of treatment should also be a good indication for both leukemia patients and investors.

A good gauge for the CML market is Novartis' (NYSE: NVS  ) Gleevec, which generated $4.7 billion last year. Like ponatinib, Gleevec is a BCR-ABL tyrosine kinase inhibitor. While Ariad hopes that its version will be able to deliver better results than Gleevec, Novartis also upgraded its CML treatment because Gleevec goes off patent in 2014.

Ariad had its last public issuance back in December of last year, in which the company netted $243 million on a 24.725 million share issuance. If it doesn't make any major changes to its operations, then Ariad will probably continue to spend about $11.6 million per month (which is the average burn rate calculated over the last 12 months). With $141.6 million in cash and an additional $65 million in marketable securities on hand, it should be able to hang on for another 18 months using this cash.

With the FDA decision for ponatinib due sometime in March, the 18-month buffer might be enough cash to keep the lights on until the drug goes to market. The company might also be receiving another source of revenue by then as well.

Back in May 2010, Ariad transferred almost all fiduciary responsibility to Merck for its joint venture on ridaforolimus, a treatment for metastatic soft tissue or bone sarcoma. In exchange, Ariad will receive milestone payments for successful development for the drug as well as structured royalties for sale of the drug. Ridaforolimus did not pass an initial FDA application, and further study was needed to determine the efficacy of the drug. If Merck can get this drug up and running, though, it will certainly help pad Ariad's balance sheet.

What a Fool believes
As fellow Fool Brian Orelli noted, a biotech company doesn't need to have this cash carry it all the way to market; it just needs to raise enough to get to the next inflection point in a drug's life (such as a completion of a clinical phase trial). Barring any major expenses, though, it looks like Ariad and Dynavax might have enough cash on hand to carry themselves until their treatments hit the market. This should be encouraging for shareholders in these companies since they will be able to keep the lion's share of profits should these companies pass muster with the FDA.

As you can see, Merck has its fingers in many pharmaceutical pies. It's almost hard for the world's second largest drug maker to not have a large influence on these smaller biotech companies. Investors may find that it's hard to understand such a giant in the space. That is why we have brought in the doctor to help. Motley Fool analyst Brian Orelli, Ph.D, has put together a premium report to help you navigate the workings of this drug giant. You can get your own copy of this report by clicking here!

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