When cash is worth more than the assets

A biotechnology company’s funding position is often the figure that takes centre stage, but for a select few in the sector, their cash balance draws attention for all the wrong reasons.

According to EvaluatePharma's Peer Group Analyzer there are currently 42 companies which have negative enterprise values, characterised by their shares trading below cash levels. While the majority of these are micro or nano cap stocks there are a few substantially sized companies, including a few household names.

Of the six companies that have a market capitalisations of over $50m, more than half of them have reached the point where their cash is worth more than their assets due to clinical failures or setbacks.

Rule breaker

The exception, however, is Adolor. The group is currently swimming in cash due to a number of positive factors. In June, it received regulatory approval for Entereg, its treatment for postoperative ileus, triggering a $20m milestone payment from licensing partner GlaxoSmithKline. Adolor has also been adding money to its coffers thanks to a collaboration with Pfizer to develop its two early-stage pain drugs ADL5859 and ADL5747.

So rather than looking distressed, Adolor is in a strong position to use its cash pile to make what would be sensible additions to its pipeline, given that the two pain drugs are all that it has in development. In-licensing more products would also reduce its dependence on Entereg, which currently accounts for all of its value. It could also give the shares, which have slumped by 42% since Entereg's approval, a hope of revival. 

Because Adolor does have so much cash and because the value of Entereg to the company is $212m according to EvaluatePharma’s NPV Analyzer, it also looks like a very attractive potential takeover target.

    Enterprise Value ($m) Market Cap. ($m) Net Debt & Cash - latest ($m)
1 Renovo (53) 126 179
2 Altus Pharmaceuticals (33) 56 89
3 Novacea (26) 63 89
4 CuraGen (19) 57 76
5 Adolor (17) 144 161
6 Spectrum Pharmaceuticals (3) 57 60

Attractive is not the word that comes to mind when talking about Novacea and Spectrum Pharmaceuticals, both companies are trading below cash thanks to set backs with their lead or late-stage candidates.

The failure of Ozarelix, a phase II treatment for enlarged prostate, due to major protocol violations at almost a third of test sites, and no data due for phase III product, EOquin, until April 2010 has effectively doomed Spectrum’s shares. The stock recently hit ten-year lows and is expected to trade flat for several months to come.

Novacea found itself high on cash and low on prospects after phase III trials of its prostate cancer treatment, Asentar, were halted in November following high death rates of patients. The news had come just months after licensing partner Schering-Plough had given the group a $60m milestone payment and taken a 5% equity stake.

The company, which is now down to 15 employees, has now effectively hung the ‘for sale’ sign above the door with the appointment of bankers Cowen to assess its strategic options. While the group has optimistically included in-licensing of a product, or starting development on Asentar again as one of its options, the most likely looking choice given its attractive cash pile is to find a willing buyer.

Chance of recovery

UK biotechnology company Renovo has also struggled on the clinical front. The group has seen its shares slide following a number of inconclusive phase II trials for its anti-scarring treatment Juvista, partnered with Shire.

But Renovo is in a better position than many of its companions as it has several other pipeline treatments to fall back on, including one phase III product, two other phase II candidates and over 10 pre-clinical drugs.

Filing Zesteem for European approval or moving Juvista into phase III trials, which are expected by the end of the year, could cause the shares to rise and drive Renovo's stock above cash. The company also has the flexibility to buy in assets if any of its own late-stage candidates fail.

If ongoing trials of Juvista are positive, however, the share price decline and its cash situation could present a good moment for Shire, which has taken a 6.7% equity stake in the company as part of a $825m deal, to make a move.

Altus Pharmaceuticals is also in the negative enterprise dog house for less-than-convincing data. Earlier this month its shares fell to historic lows after phase III results for its pancreatic enzyme replacement treatment Trizytek failed to show convincingly that it increased fat absorption in cystic fybrosis patients.

Design not accident

CuraGen by contrast got itself in to its current position by choice rather than accident. In April, the group agreed to sell its lead product belinostat to TopTarget for $38m. While this was positive for the balance sheet it leaves the group with only one mid-stage development candidate, CR011, a treatment for breast cancer and melanoma and little hope of recovery for the shares, which have been declining since January 2005 and regularly trade below $1.00.

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