Lending to Biotech Firms
Cochran, Robert Bruce, Vertin, Thomas, Journal of Commercial Lending
In the history of the banking industry, its heroes have been those who found opportunity in unchartered financial waters. For example, A.P. Giannini, founder of Bank of America, found a way to extend installment loans to car buyers in the 1930s. And in 1959, Bank of America and Citicorp led a small group of banks in offering credit cards.
However, bankers have been somewhat slow to respond to new market opportunities. In fact, two prevailing attributes seem to dominate the natural inclinations of bankers: the herd instinct and cautious conservatism. Neither fosters heroism.
Consider that bankers were reluctant to serve emerging electronic companies until the 1970s. Owing to problems elsewhere in their portfolios, they abandoned that market a few years later.
But, where other bankers saw only risk that was seemingly unable to be mitigated, Roger Smith of Silicon Valley Bank recognized the opportunity and found a way to build his bank around the emerging technology marketplace. A few others have also learned to serve this market. However, according to a 1992 American Electronics Association survey, there are still only a handful of banks that do.
The biotech industry offers special challenges to bankers. Biotech companies tend to have more areas of risk, greater diversity of financing strategies, and longer gestation periods than, say, the electronics industry.
The purpose of this article is to identify the aspects of the biotech industry that present opportunities to bankers and to suggest ways that bankers can begin to address the needs of the industry.
The birth of modern biotechnology is generally credited to the discovery of DNA by Crick and Watson in 1953. In the early 1970s, molecular biologists began to imagine the potential for their new process called gene splicing or recombinant-DNA technology.
The applications of biotechnology today include:
1. Agriculture, including the development of disease- and pest-resistant crops, food safety tests, and methods to produce low-fat beef.
2. The medical field. Biotechnologists are developing treatments by which the body's own immune system wards off diseases more effectively. They are also continuing to fight blood clots, diabetes, hemophilia, herpes, hepatitis, human growth deficiencies, AIDS, Alzheimer's disease, and cancer.
3. Energy and bioremediation fields.(1)
The industry consists of five market segments:
* Human health care--diagnostic.
* Human health care--therapeutic.
* Ag-bio (microbial crop protectants, plant genetics, food processing, and animal health).
* Suppliers to the industry (instruments, lab supplies, reagents, and other supplies).
* Chemical, environmental, and services (fine chemicals, bioremediation).
Today the industry is evolving from an incubation period to a period of commercialization. There are approximately 1,230 firms in the industry today, only 225 of which are publicly owned.
TABULAR DATA OMITTED
Industry revenues in 1992 were $8.1 billion. Product sales accounted for approximately $5.9 billion, and the remaining revenues came from royalties, licensing, and alliance funding.
The industry as a whole, however, continues to lose money. The net loss for the industry in 1992 was approximately $3.4 billion. The balance sheet for public companies in the industry shows approximately $11.3 billion in total assets, with current assets of approximately $7.6 billion. Of the $3.2 billion in debt, approximately $1.4 billion is long term. Table 1 provides more information on the financial performance of this industry in the past year. Table 2 contains specific balance sheet data.
The largest geographic concentrations of firms are in the San Francisco Bay area, the New York tristate area, Boston, San Diego, the District of Columbia, and Los Angeles. …