Young, upstart pharmaceutical and biotech companies do one thing that almost no other industry does. They go years without generating any revenue. Thanks to investors, they can periodically issue shares to raise cash while their drugs are in development. Companies in this space like to raise capital when it reaches an inflection point like a successful clinical trial or FDA approval. Between these inflection points, though, these companies need to keep a close eye on the amount of cash they spend.
As the dust settles
It has been a bumpy ride these past couple of months for Peregrine, thanks to an on-again, off-again relationship with the phase 2 data for its flagship non-small-cell lung cancer drug bavituximab. After the back and forth about the efficacy during the trial, the company has concluded that the data showed enough promise that it can move onto phase 3 clinical trials. Peregrine is hoping to succeed where many others have failed, developing an effective treatment for NSCLC. Oncotheryon is one of the most recent examples of a company announcing it failed to improve survival rates for patients with NSCLC. Recently, Celgene's (NASDAQ:CELG) Abraxane, which was originally designed for treating breast cancer, was approved by the FDA as a treatment for NSCLC. According to research analysts, sales of Abraxane for the NSCLC indication could reach annual sales of $110 million, so there is a pretty strong market out there if Peregrine can get bavituximab through the FDA approval process.
In the company's last earnings report in October, Peregrine had about $24.4 million in cash on hand. Unlike some other small-cap biotechs, it does have a small revenue stream coming in from contract manufacturing agreements from its subsidiary Avid Bioservices. Based on this revenue stream, its current cash hoard, and its operational losses of about $7 million per quarter, the company predicts it should be able to go at least until October of this year before it needs to dip into the equity markets again. Considering that the average phase 3 lasts just over 30 months, it looks like Peregrine will need to raise capital before it can get through this new trial.
Riding a wave of good news
Keryx's management team is probably popping some bubbly somewhere. After announcing very good news regarding the results of its phase 3 trials for Zerenex, the company has seen its shares explode 136%. The drug, which is designed to reduce phosphate levels in the bloodstream, not only met its primary endpoints with strong statistical significance but some secondary ones as well. This also comes as great news to patients suffering from end-stage renal disease, who frequently have circulatory problems associated with elevated phosphate levels. While there are still a few hurdles left to pass, these signs bode well for Keryx. If the FDA does approve this drug, it could have a leg up on other chronic kidney disease drugs.
At its last reported earnings release, Keryx had about $20 million in cash to keep the lights on and was burning through cash at a rate just over $5 million per quarter for the past year . This is also not including any milestone payments from its sublicense agreements with Japan Tobacco and Torii Pharmaceutical. At that time, the company believed that could keep them going for the rest of 2013. But why waste a good time to do a public offering? Within 48 hours of Monday's announcement, Keryx went to the market and raised $55 million.
With a new stash of cash and some expected milestone payments coming up, Keryx should have plenty in the bank to get them through to a FDA decision.
For a small-cap biotech company that has yet to bring a drug to market, Ziopharm sure is busy. Not only is the company running two simultaneous phase 3 trials for palifosfamide on both metastatic oft-tissue sarcoma and small-cell lung cancer, it is also in phase 2 trials for its experimental IL-12 drug program. Palifosfamide, its leading drug candidate, is targeted at a couple of cancers that do not yet have a strong drug candidate. GlaxoSmithKline's (NYSE:GSK) Votrient has been approved as a second-line treatment for soft tissue sarcoma, but competition will more likely come from other pipeline drugs such as Threshold Pharmeceuticals (NASDAQ:THLD) TH-302.
At about $95 million in cash and spending almost $18 million a quarter over the past year, the company believes that it has enough in the bank to keep all trials running through the second half of 2013. Since both of the phase 3 trials are in the process of recruiting patients, don't expect this cash pile to keep the company running throughout the entire clinical trial. Unless Ziopharm can find a partner to help pay some of the bills, expect the company to ask Mr. Market for a few extra dollars later this year.
What a Fool believes
Don't expect these companies to use their current holdings to bring these drugs all the way to market, nor do they need to. Peregrine and Ziopharm are in the precarious position that they may need to float more shares in the middle of a clinical trial, which will mean they probably will not get the bang for their buck had they floated shares close to a successful phase trial. Conversely, since Keryx's just raised capital and its operational expenses are relatively low, the company should have more than enough to get them to a FDA decision.
While it is important for these companies to keep their budgets in order, it is far more important that these drugs pass clinical trials. The success of these drugs is the only mechanism for the companies to start generating profits.