Earnings releases and their associated conference calls for developmental-stage drugmakers are usually pretty boring. Occasionally, a company will save something interesting for the release, but in general, they're pretty much a snooze-fest.
Not this quarter.
Cash has always been a crucial component to developing drugs, but the credit crunch has taken it to a new level as managements talk up a storm about how they're going to survive the crisis. Dilutive financing just isn't a good option in this slumping stock market.
More drugs than cash
You'd think that Exelixis
And boy do they have a lot of potential drugs -- nine to be exact. Management seems confident that their discussions with "multiple pharma companies about partnerships for several of the compounds" will come to fruition in the next few months; they're guiding to end the year with at least $200 million of cash, but only had $135 million in the bank at the end of September. While I think a deal is likely to get done soon, the company isn't under a gun. Exelixis does have a currently untapped $150 million line of credit, which should keep it from having to take a lowball offer out of desperation.
CEO George Scangos recently said, "Companies that don't have a lot of cash or assets to generate cash" are in trouble. Obviously he doesn't rank his own company among them.
And let's not forget, Fools, not only will a new partnership help infuse the company with cash, but it'll also cut its burn rate since a licensing deal will likely fund further clinical development of the drug -- definitely a good thing with its first drug still some time away from market.
Got it done already
In contrast to Exelixis, fellow Rule Breakers pick Vertex Pharmaceuticals
Vertex is sitting on a pile of cash $920 million high. From selling its royalty stream for Glaxo's HIV treatment Lexiva to additional trips to the secondary-offering well, Vertex has been grabbing cash left and right. Just in time, I'd say.
In case you're wondering -- and you wouldn't be the only one -- most of that stockpile is tucked away in short-term, government-guaranteed securities. It's unlikely we'll see a huge write-off, like Bristol-Myers Squibb
Stepping in for a rescue?
While I've highlighted two companies that look like they're in a good position, even in this buyers' market, for pipeline drugs, there are certainly enough health care companies out there that are trading near their cash levels. Here are a few I found using the CAPS screener:
Company |
Recent Price |
Cash Per Share |
---|---|---|
Supergen |
$1.24 |
$1.33 |
Helicos BioScience |
$0.89 |
$1.15 |
Arena Pharmaceuticals |
$3.07 |
$3.10 |
Nabi Pharmaceuticals |
$3.58 |
$3.08 |
Lexicon Pharmaceuticals |
$1.39 |
$0.80 |
Javelin Pharmaceuticals |
$1.54 |
$0.69 |
Source: Motley Fool CAPS.
Now you could buy those companies hoping that a pharmaceutical company will come in and scoop them up, but that just sounds like gambling to me. A much better choice would be to buy a pharmaceutical company like Novartis
Pfizer
The well-run drugmakers will make it through the credit crunch though. Smart investors just need to find developmental-stage companies that can manage their money well or invest in large pharmaceutical companies that can hopefully spot a bargain when they see one.