Zombie stock is a term used to describe insolvent companies that keep operating. They can repay interest on their debt but not the debt itself, and the only thing saving them from bankruptcy is financial support from the government or a venture investor.
Biotech zombies are heavily indebted biotechnology companies. They exist on paper but have no available cash to be engaging in substantial R&D activities.
Who are the Frankensteins that create such monsters? Often, they are local governments, a foundation or a wealthy venture investor. In the beginning, a biotech company shows no signs of being a zombie. The future walking dead seems quite alive and even claims to be inventing a revolutionary treatment.
As a rule, biotech companies usually focus on common diseases that affect a large proportion of the population. Testing requires huge capital, thus for a startup to survive, the research should cover a wide-spread illness. Examples include cancer, AIDS, Alzheimer's, etc.
A zombie's life expectancy is hard to predict, thus investments in such companies are very risky. An investor backing a biotech startup may be able to expect returns in 5-12 years, if a company is successful. On the other hand, if it fails to develop and market a breakthrough drug, the startup may turn bankrupt in no time at all.
Let’s follow a typical zombie behavioural pattern.
Frequently, biotech zombies appear in response to disease outbreaks and claim to discover the wonder cure. Now, that the company has been born, it has to keep afloat while doing its research. The zombie’s business activity results in no sustainable revenues, even though they may be reflected on the balance sheet (interest and grant payments, financial support from partners).
At some point, the promising biotech company realises that its ambitious lab tests will bear no fruit. Moreover, half of the cash raised with the IPO or from its partners is gone. The time has come to admit failure. And the monster loses its key financial supporters. It considers what to do next.
The biotech zombie is very likely to slow down. It phases out its operations, curtails spending and downsizes personnel. Usually, its net cash doesn’t exceed $150 million. The zombie company is about to go into a coma, nevertheless it may continue to chase after its goals.
In conclusion, though the future looks grim, zombies may come back to life, it’s true! To spot the signs of any possible resurrection, a good idea is to follow press-releases from the biotech company. Positive signals include hiring a successful team of experts or even a single prominent scientist, and having enough cash to sustain the business for a year or two. Zombies are always undervalued on a stock market, but things can turn around when the living dead comes back to life.