Earnings season for the third quarter is wrapping up. The reports tend to be pretty boring for companies that don't have a product on the market yet. Occasionally, you get an update on when to expect clinical trial data, but for the most part, the financial GAAP disclosures can be ignored.
Except for one number, of course: how quickly a company is burning through its current nest egg of cash.
No biotech that I know of has been able to take its IPO cash through to the launch of a drug. Every company has to raise additional capital at some point. The secret to successful investing in biotech is to find companies that have enough cash to get to their next value inflection point. If a company doubles or triples in value because of positive clinical trial data or an approval by the Food and Drug Administration, then the next raise of capital doesn't affect shareholders nearly as much.
Approval of MannKind's (NASDAQ:MNKD) inhaled insulin Afrezza has been a long time coming. The company received FDA rejections in 2010 and in 2011. It's on track to complete the necessary studies for its new Dreamboat inhaler next year.
MannKind ended the quarter with just $2.1 million, but don't freak out just yet. In the last month, it raised $92 million in a secondary offering. And it has a $120 million line of credit with its billionaire founder, CEO, and namesake Al Mann.
The company is burning through about $25 million per quarter, which is expected to accelerate as it completes the clinical trials and prepares for a launch. But it should be able to fund operations into 2014, perhaps even lasting long enough to get through the FDA approval.
Sarepta Therapeutics (NASDAQ:SRPT) had an eventful third quarter, presenting solid phase 2 data for its Duchenne muscular dystrophy drug eteplirsen. The biotech raised money both before and after the data release to give it a nest egg of $57.4 million. With a current burn rate of $7.8 million per quarter, the cash would last quite awhile. But expenses will increase as the company ramps up manufacturing and prepares for a phase 3 trial. Unless it finds a partner, Sarepta will almost certainly need to raise capital again before a launch.
One possible pathway to a quick approval could come from an accelerated approval in which the FDA issues a conditional approval based on phase 2 data with an understanding that the company will run a phase 3 trial to confirm the initial result. That would get Sarepta generating revenue sooner, but more importantly, should boost the share price, making another capital raise less dilutive to shareholders.
Verge of approval
Exelixis (NASDAQ:EXEL) brought in about $425 million in the third quarter thanks to a capital raise and a milestone payment from its partner Daiichi Sankyo. All told, Exelixis is sitting on a $675 million pile of cash as it prepares for the launch of its cancer drug cabozantinib, which should be approved by the FDA before the end of the month.
I seriously doubt the revenue from cabozantinib will be enough to get Exelixis to cash flow positive, though. The first approval will come for patients with medullary thyroid cancer, a relatively small opportunity. I think investors should be happy if Exelixis can cover its cost of goods and sales costs while marketing the drug for just medullary thyroid cancer; that's something that Dendreon (NASDAQ: DNDN) hasn't been able to do with its prostate cancer drug Provenge. Of course, Provenge's unique (read: expensive) manufacturing process is a chief culprit, causing Dendreon to shutter manufacturing capacity in an attempt to lower its break-even point to $400 million in annual sales. .
There might be some profit left over, but Exelixis will still have a large research and development bill as it runs costly clinical trials testing the drug in other types of tumors such as prostate cancer. That's the situation Seattle Genetics (NASDAQ:SGEN) finds itself in, bringing in nearly $50 million in revenue in the third quarter, but it wasn't enough to cover expenses, which included a $41 million R&D bill.
Fortunately, Excelixis' large pot of gold should last awhile.
Getting to the next inflection point
Investors don't have to look for biotechs that have enough cash to get them to profitability; the companies just need to have enough cash on hand to get to the next value-increasing point, where they can raise additional funds without diluting shareholders more than necessary. Owning a slightly smaller portion of a much larger pie is perfectly acceptable.
Of the three companies profiled here, Exelixis looks like it's in the best shape. Sarepta will be fine if the FDA allows it to seek an accelerated approval. Al Mann won't let MannKind go bankrupt, but investors could get another substantial dilution if the biotech has to raise cash again before the approval of Afrezza. The best hope might be that the valuation runs up in anticipation of an approval; shares are substantially lower than where they were before the last two FDA decisions.