Cancer Drug Developers Trade Below Liquid Assets With No Respite In Sight

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(Bloomberg) — The biotech-stock selloff has run so far that many companies are now worth less than the amount of cash they have in the bank.

Nearly 200 such North America-based companies have negative enterprise values, meaning that their liquid assets are worth more than their market values, according to data compiled by Bloomberg. Small- to mid-cap companies researching new cancer treatments like Harpoon Therapeutics Inc. or TCR2 Therapeutics Inc. are among those that have fallen the most: according to Truist analyst Asthika Goonewardene, 53% are trading for values at or below their cash levels.

“No subsector has been spared contraction,” he said. 

The rise in interest rates has been particularly brutal on growth-stock valuations, helping to drive the closely-watched SPDR S&P Biotech ETF to an 18% drop in April. It’s down some 57% from its February 2021 peak.

The scale of the drop in the biotech sector would seem to provide a floor — since in theory a rival could buy a company with a negative enterprise value, shut it down and still come out ahead. During more normal times, many biotech companies trade at a premium on speculation that they will be targeted by competitors interested in securing new drugs for their pipelines.

Oncology companies are trading at a median of 0.7 times enterprise value to cash, compared with a 1.1 times for those pursuing other diseases, according to Goonewardene’s analysis. 

But the pursuit of tumor-killing drugs is a risky affair, requiring large cash outlays, even if the enthusiasm and demand for new treatments had pushed up valuations in the past. 

Moreover, takeovers are now taking a back seat to partnerships, and an influx of stock offerings from companies that were at ever-earlier stages of development have increased the risk of investing in the industry.

With macro-economic worries about inflation and rising interest rates on top of that, some don’t expect a rebound any time soon.

First quarter earnings did little to assuage investor sentiment. “The messaging from potential acquirers is still suggesting no urgency,” said Goldman Sachs Group Inc. strategist Asad Haider. He said even the drop in valuations may not be enough because of “lofty seller expectations.”

Merck & Co. Chief Executive Officer Rob Davis indicated the company was in no rush to takeovers on the drugmaker’s first quarter earnings call.

“There are some smaller players that have cash challenges,” he told investors, “I think that’s where you could see the movement first, but fundamentally, we’ve not seen a change in the landscape yet. We’ll have to continue to watch.”

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