Professor Mike Lord Comments on Tengion’s Financial Struggles

2.21.2011 Article, Business Analytics, Faculty News

Experts optimistic about Tengion
Reposted from Winston-Salem Journal | by Richard Craver

Tengion Inc. is in a race for its survival, but analysts and industry officials think the biotechnology company will secure enough cash to make it.

The company, with its largest operations and 45 employees in Winston-Salem, acknowledged Wednesday that its short-term fate depends on attracting a buyer or new investment by May before it runs out of money.

The company said that if it cannot find a buyer or new funding through partnerships or investment groups, it might "need to take steps to wind down its operations so as to preserve the value of its assets for the benefit of its creditors and stockholders."

Company officials declined to comment beyond its statement.

Analysts and industry officials say they are optimistic about the company's chances. The main reason: Three top shareholders reported in regulatory filings in the past 10 days that they had significantly expanded their stake in Tengion. Analysts expect those shareholders will choose to provide more money rather than risk losing their investment in a company with promising regenerative-medicine research.

However, they caution that Tengion and its investors face a challenge more akin to the Boston Marathon or the 24 Hours of Daytona than a sprint.

"Many biotechnology companies constantly run on the edge of being empty financially," said Don deBethizy, the chief executive and president of Targacept Inc., an anchor tenant in Piedmont Triad Research Park where Tengion also operates.

"Just like a marathoner or a NASCAR driver, a biotech company can't make it to the finish line on one tankful. They are in constant need of strategic refueling."

Biotech short on cash

That Tengion is nearly out of funding — after spending more than $102 million on research and development since its founding in 2003 — is not surprising.

DeBethizy said that 70 percent of biotech companies have less than a year's worth of cash on hand.

By comparison, Targacept has enough cash to pay for its operations through the end of 2013. It reported on Feb. 10 its first fiscal profit of $10.9 million, with its revenues coming largely from payments from AstraZeneca PLC and GlaxoSmithKline, with whom Targacept is collaborating.

Tengion said talks with a potential unidentified buyer ended because of the sharp rise in Tengion's share price in the past week.

The share price had more than doubled to $6.24 by Tuesday. But after Tengion's announcement, it fell 6 cents Friday to close at $2.91 a share.

The announcement also was Tengion's first public acknowledgment it is for sale.

Analysts said the sharp drop in the share price could restart negotiations because the buyer was an unidentified publicly traded company wanting to do a stock-for-stock deal.

"These guys aren't going bankrupt for lack of cash since there are plenty of institutional people surrounding the company with significant recent financial interests," said Tony Plath, a finance professor at UNC Charlotte. "This is a play to drive down the stock price to make the stock-for-stock exchange more reasonable for the acquirer."

Having Tengion gain a buyer could represent a win-win for its top stakeholders because they likely would get a premium for their shares and would benefit from an owner with deeper pockets.
But Kimberly Lee, a senior health-care analyst at Global Hunter Securities LLC, cautioned that "if an acquisition doesn't happen, they could sell off their assets."

Many biotechnology companies report major losses when they first go public because their research and development costs are much greater than their revenue sources. As a result, most analysts put their focus on research updates rather than quarterly earnings.

"What investors want to see is a biotech company's management team deliver on what it promises — doing the right research, the right clinical trials and meeting realistic deadlines," deBethizy said. "Tengion has demonstrated an ability to do all three."

The company is developing a neo-urinary conduit to help patients with a bladder disorder divert urine through the use of their own cells to an external bag rather than through bowel tissue.

On Jan. 10, the company said it had made enough progress with the patient implants of its most promising regenerative-medicine development to consider expanding its clinical trial.

It plans in the second half of 2011 to pursue an initial regulatory interaction with the Food and Drug Administration for another program focused on its neo-kidney augment "to clarify the path to clinical trials."

"Still, some investors give a biotech company a very short funding leash," deBethizy said.

'New and path-breaking'

Michael Lord, an associate professor of management at Wake Forest University, said that Tengion faces a particularly difficult challenge with investors because there are few regenerative-medicine companies that are publicly traded.

For example, a biotech company focused on pharmaceutical discoveries typically has five to seven years to show success, analysts say, but Tengion is more likely to need 10 to 12 years before its research could reach fruition.

The expectations and the pressure are even higher for biotech companies trying to be "first in class" with their research rather than piggybacking on existing research.

"What Tengion is trying to do is really new and path-breaking, so it's even more of an effort," Lord said.

"They have some great science. But in many ways, it's a lot more complicated and resource-intensive than a drug company. They're working with living tissues and three-dimensional structures, not just mixing and testing chemical compounds."

DeBethizy and Lord said it is unlikely Tengion's research would wither even if it had to shut down operations.

"You could see some of the officials take the research into a newly formed company, or it could be sold, perhaps cheaply, to bidders if it were to go into bankruptcy," deBethizy said. "Then again, I don't think its investors will let that happen."
Lord said that private and public funding is getting harder to attract.

"Biotech and biopharma in general are very stressed right now," Lord said. "There are a number of pressures coming from many directions, whether funding challenges, health-care cost concerns, or a more demanding FDA.

"Investors have become less patient and more risk-averse. Many would rather invest in yet another glib social-media venture than in potentially life-saving life-science businesses."

Lord said that the "best, and fortunately most likely, case" is that Tengion's research and development continues to move forward.
"It's just a matter of how much, how fast and who funds it," Lord said. "It's important and valuable work.

"It'll be interesting to see exactly who might step in to that end. There could be some unexpected wild-card possibilities."