Thursday, July 10, 2008

SGX: A Formula For Deals to Come?

The math that led to Tuesday's $64 million takeout of SGX Pharma by Eli Lilly is actually pretty simple.

Set aside the biotech's structure-based drug discovery platform and its existing deals with Lilly and Novartis, and for that matter, it's early stage pipeline of small molecule projects. After all, the market certainly had.

As of Tuesday, SGX was trading at a discount to its existing cash reserves--meaning investors believed the company was worth less than the number on its own bank balance. At the end of the most recent quarter SGX had about $31 million on the books. It's market value prior to the Lilly announcement was $28 million.

This wasn't always the case, but following a hit the company took when its lead project SGX523, a MET inhibitor in Phase I, showed dose-limiting toxicities earlier than expected, investors took flight. (Attn subscribers: our sister publication "The Pink Sheet Daily" elaborates here.)

And SGX was burning through about $7 million in cash per quarter, giving it about a year's worth of fuel at the existing pace. Recapitalizing the company wasn't impossible, but it certainly would have been dilutive. The choice between painful dilution vs acquisition for about twice the firm's market value was probably a no-brainer. The math is the math, and SGX had a partner that valued its platform willing to step in and buy it at a decent premium--though still very cheaply.

SGX is hardly alone in lacking the funds necessary to push its development candidates through to value inflection points or market-nudging events. According to recent data compiled by analysts at Rodman & Renshaw, a whopping 82 public biotech companies are trading with less than one year of cash (nearly 50 of which have less than six months worth of capital); an additional 83 firms have less than two years worth of cash. What's more--like SGX--at least 33 companies are trading at valuations less than their existing cash reserves.

There plenty of creative alternatives for companies looking to raise cash in tough markets, but most are only open to those firms with later-stage development compounds or marketed drugs or relatively robust royalty streams. We wrote about an increasingly popular strategy, royalty/revenue financing, in this recent IN VIVO feature.

That's a lot of dilution and creative financing--or a lot of fire sales--coming down the pike.

image from flickr user frozenchipmunk used under a creative commons license

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