The SVB failure appears to have been caused by an underwritten public offering to raise $2.25 billion to cover security losses announced during SVB’s Q1 2023 mid-quarter update.
Pictured: SVB Headquarters Sign/Courtesy of Getty images
On Friday, Silicon Valley Bank (SVB) failed without warning.
Monday, Pres. Biden vowed to investigate the matter further. For now, the bank failure appears to have been caused by an underwritten public offering to raise $2.25 billion to cover security losses announced during SVB’s Q1 2023 mid-quarter update.
While SVB was the 16th largest bank in the U.S., there is ample reason to worry about this recent development, especially for small-to-mid-capital biotech companies.
These companies have many factors that could influence their trajectory over the short and long term.
Compared to large-capital biotech companies, small-to-mid-caps tend to have smaller pipelines, lower market caps and may not have an FDA-approved product.
While these distinctions allow for potentially higher growth, even in normal circumstances, there is always a risk of small-to-mid-cap biotech companies shutting down for various reasons, such as clinical trial failures, lack of patient enrollment or lack of funding.
As a sole source of mostly uninsured cash reserves for many biotech companies, SVB had loans for small-to-mid-cap biotech companies that may now be in jeopardy.
According to SVB’s 2022 full-year financial report, 44% of the venture-backed technology and healthcare IPOs in 2022 were backed by SVB, and $70 billion in average loans were handed out in 2022.
Although the FDIC insures deposits up to $250,000, it does not cover amounts exceeding that figure, which is the norm for small-to-mid-cap biotech companies that require millions of dollars to fund clinical trials.
While long-term effects have yet to emerge, small-to-mid-sized biotech companies will try to adjust tactics to account for the market conditions.
Some options include:
- Cost-cutting via targeted layoffs and slimming down pipelines,
- Seeking buyouts from larger pharma companies with more cash reserves
- Possible reverse splits in stock prices to avoid NASDAQ delisting.
Small-to-mid-caps may shut down and file for bankruptcy if all else fails.
In the meantime, large-cap biotech companies in competition with small-to-mid-caps may find the market conditions opportunistic.
While large caps have more cash reserves and are more likely to have insured deposits and FDA-approved product revenues to fall back upon, companies that seek to partner with smaller biotech companies will need to be more strategic with financial allocation.
