Biotech Cashburn Barometer

BioShares, a weekly stock report, has tabulated the cash positions of 84 listed life science companies required to submit quarterly cash flow statements to the ASX (see attached).

This reporting regime is invaluable as it enables investors to evaluate the fundamental financial position of a firm and especially determine if a company is likely to be raising funds in the near term.

A measure commonly used to crudely evaluate a company’s position is the “Survival Index” or SI. For this period of analysis, the SI is calculated by dividing the annualised net operational cash flows for the half-year into the cash held by the firm at December 31. The SI is a rough approach to working out how long a company’s cash resources will last, based on its current spending patterns. For example, an SI of 3 means a company can fund three years of operations based on current spending trends.

However, the SI is not entirely satisfactory because companies can slow down their rate of spending to conserve funds, and a high SI can also be illusory if a company has plans to commit significant funds to forthcoming activities. The index is also unhelpful in the case of companies that have programs off balance sheet, such as Starpharma’s Vivagel program, which will receive $US20 million in funding from the US National Institutes of Health (NIH).

The company with highest SI was Pharmaxis, at 9.5, a figure made possible by the largest global capital raising ever conducted from Australia by an Australian biotech. Pharmaxis boosted its cash position by $73 million in the half-year to December 31, 2005, to $106.4 million. Next in line was BioMD (5.9), a company transitioning from the safety needle business into tissue engineering. Narhex Life Sciences’ SI of 5.5 is likely to reduce over the course of 2006, as it ramps up its clinical trials program.

Several companies do not have SIs calculated because they incurred positive operational cash flows. These companies were Sirtex, PanBio and Eastland Medical. Several other companies, Biodiem and NeuroDiscovery, also had positive operational cash flows, but the development nature of their operations could easily swing back into negative operational cash flows in future quarters. Another company, Medec, also posted strong half-yearly receipts from customers and may be a stock to watch.

Thirty-five companies scored SIs of less that 1. This score may be less of a concern for companies Cogstate, Bresagen, IM Medical and Pharmaust, which are likely to benefit from cash-generating operations under their management. For a number of other companies, such as Living Cell Technologies, Eqitx, Probiomics, RiTract and Select Vaccines, their cash positions and SI scores have been eased by recent placements, or funding activities under way.

One stock that appears to have a significant funding challenge is Solbec Pharmaceuticals, which aims to embark on a Phase II study without the funds at hand to pay for it. It held $300,000 in cash at the end of the year.

Two stocks that have spent substantial funds in the last half of 2005 in preparation for Phase II programs in 2006 are Avexa and Prana Biotechnology. However, Prana has previously disappointed the market and has a share price that reflects that disappointment. It should be looking to raise funds before its cash position weakens to the point that its stock price is depressed even further.

Prana is considering other options, including M&A, as a way forward. And one other company that has clearly signified an M&A direction is Ambri, which is now essentially a cash-box, with $8.2 million in the bank.

Reproduced with permission Bioshares edition 153, February 3, 2006. Website: www.bioshares.com.au