When Biotechs Run Out of Cash… Or Go At-Risk (ISTA, VNDA)
Investors are in love with biotechs right now and it is hard to argue against it with the attractive pipelines that can be purchased. Throw in a cheap US Dollar that allows foreign buyers to buy at a 25% to 35% discount, and the argument grows even stronger.
But there are many biotech zombies that have imploded to nothing but cash, a few employees, and a hope and prayer to find the next drug candidate being shopped around on the cheap. There is a second group second group of troubled biotechs that have product candidates but are on the race to zero cash.
Enter, Ista Pharmaceuticals (NASDAQ: ISTA)…
ISTA Pharmaceuticals stock is down almost 14% today after the company shares were downgraded at Jefferies with a new UNDERPERFORM rating. Jefferies is growing more and more concerned that ISTA is on a path that will make it run out of cash by early-2009. The research note also notes that the holders of $40 million in convertible debt may use their rights to PUT the securities back to the company. That would only chew up more liquidity.
ISTA isn’t a biotech zombie though. The company has two product candidates in teh development pipeline. In fact, Jefferies believes these could make the company attractive to a more speculative buyer. This would likely generate higher shareholder returns rather than investing in this for looking at an independent company.
Unfortunately, the liabilities at the end of last quarter were $73.561 million versus total assets of $60.03 million (with only about $35 million available in raw cash and equivalents). Some companies go zombie and trade at a discount to cash prices because of the cash burn rates that will take it under book value.
Vanda Pharmaceuticals (NASDAQ: VNDA) yesterday imploded to the point that it trades well under its perceived net cash value. That is because the longer review and extra trials are likely to erode that cash faster than a lotto winner out of the trailer park.
JON OGG
JULY 29, 2008