Sunday, July 5, 2009 | The unexpected call for an all-hands meeting came over the Metabasis Therapeutics PA system at 9 a.m. on May 27, just as employees were settling back into work after the long Memorial Day weekend.
Scientists and other staff knew the news wouldn’t be good as they filed into the second-floor conference room at the company’s headquarters across from the Torrey Pines Golf Course. Good news had been hard to come by at the small biotech in recent years.
They didn’t, however, expect CEO Mark Erion to walk into the room and announce that the company was all but broke, and nearly everyone — 45 out of the company’s 52 employees — was being laid off. Nor did they expect Erion to tell them that they weren’t getting any severance pay, or even their unused vacation pay, and that if they didn’t hurry to the bank to cash their final paycheck, it would probably bounce.
The events over the next hours and days at Metabasis, as recounted by former employees, were bizarre, even for the world of biotech, where companies big and small can be one failed drug away from oblivion. In the conference room that Tuesday morning, human resources people hurriedly handed out folders with last paychecks to employees who immediately headed to nearby Bank of America branches, the only bank that Erion told them would take the checks.
“We were thrown out into a bank run,” said one manager who was laid off. “It was a crazy scene, like the 1929 stock market crash. It was an amazing debacle.”
It turned out that the best thing for an employee to do that day was to cash the check on the spot — some employees left the bank with thousands of dollars in their pockets. Some who tried to have their checks wired from Bank of America to other accounts saw them returned for insufficient funds, former employees said. And some checks deposited into Bank of America accounts bounced.
Meanwhile, operations at Metabasis, which focuses mainly on diabetes therapies, ground to a halt. Employees, some of whom had been with the company since it was established in 1999, hastily packed up their desks. A few worked to find homes for several dogs that had been used in drug research. Dozens of rodents had to be euthanized immediately.
All the dogs ended up being placed in homes, and the laid-off employees eventually got their final paychecks paid in full, as well as their accrued paid time off. But they never got any severance or transition assistance, two benefits that a vast majority of laid-off workers get. And even employees who have spent decades in the rough-and-tumble world of biotech described the last week in May 2009 as the most traumatizing of their careers.
“Leaving that day we were all left high and dry,” said another of the former employees. “We were all in shock, and in some ways still are.”
Nearly a dozen former Metabasis employees were interviewed for this story, including several who were in the conference room on May 27. All corroborated the events of that week, although none wanted their names published for fear that it would hamper their ability to find another job.
Erion and other Metabasis officials did not return repeated calls for comment. Calls to several Metabasis board members also went unreturned. The company’s most recent press release details a termination of a collaboration with pharma giant Merck & Co., which netted the company $6 million. But even with that cash infusion the company stated that unless it can find more funding, and quickly, it “may be forced to cease its operations entirely.”
Some former employees and industry watchers have called what happened at Metabasis the result of bad luck; others say it was bad management.
Regardless, it is a window into the new reality for the biotech industry, a reality where funding can dry up overnight, and the 11th-hour bailouts from venture capitalists or hedge funds that biotech CEOs came to depend on during the boom years are no longer forthcoming.
The past year has been a bloodbath for San Diego’s biotech cluster, which, depending on the day, includes about 700 companies. Since last June, local life sciences companies have laid off more than 3,000 people, according to the website Xconomy.
Bud Leedom, a local stock analyst who focuses on California companies, said that while the events described by the former Metabasis employees are shocking, abrupt layoffs and company closures will become more commonplace given the barren funding environment that is likely to last for years.
“Management has been somewhat jaded over the last 20 years, confident that when push comes to shove something will happen,” Leedom said. “That thought process is colliding with an unprecedented situation in the market — it’s not hard to raise money, its virtually impossible for some companies.”
Other industry watchers agree with Leedom that this is one of the most difficult periods in the history of biotech. But they offer a harsher assessment of the actions of Erion and other top Metabasis officials.
“This is a sign of poor management to allow it to get to that point. You need to make better decisions than spend all your money, close the doors and kill your animals,” said John McCamant, editor of the Bay Area-based Medical Technology Stock Letter.
Although Metabasis officials have not made themselves available for comment since the mass layoff, filings with the Securities and Exchange Commission show that the company has lost $200 million since it went public in 2004, and, with no drugs on the market, leadership has been scrambling for the better part of two years to keep the company afloat.
Things began to go south for Metabasis in July 2007, when one of its diabetes drugs failed to impress in clinical trials, and big pharma company Schering-Plough backed out of a partnership on a hepatitis B therapy. Those two pieces of bad news precipitated a long slide in the company’s stock price from more than $6 per share in early 2007 to its closing price Wednesday of 48 cents. The stock is currently under threat of delisting by the Nasdaq Stock Market.
It hasn’t helped that the company focuses on therapies related to diabetes. It is a crowded market, with several pharmaceutical companies, including San Diego-based Amylin Pharmaceuticals and Merck, coming out with new diabetes drugs. And the Food and Drug Administration has in recent years raised the bar when it comes to safety and efficacy on drugs that treat chronic illnesses.
And traditional funding sources for biotechs, like venture capital and hedge funds have all but disappeared in this recession. “You basically see that entire funding group out of the market,” Leedom said.
A clear sign of the company’s dire financial situation came in March 2008, when it borrowed $5 million from Virginia-based Oxford Finance Corporation to cover operating costs. Metabasis agreed to a collateralized loan with a 9.83 percent interest rate, and it was required to notify Oxford of significant changes in its finances, according to an SEC filing.
The news got worse with each new SEC filing this year. In a March filing based on 2008 results, the company stated: “We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our research and development programs and affect our ability to continue as a going concern.”
However, in a May 15 filing — 12 days before the layoff — the company reported that its current financial resources “will support its on-going planned operating expenses into July 2009.” Former employees said that while Erion and other top executives would readily acknowledge that the company was in difficult financial straits, the executives seemed confident in their ability to raise enough money to keep going.
“Everyone expected that someone would put the money in,” said a former employee.
That employee and others speculate that the company’s leadership had to take such a drastic measure because its financial situation deteriorated to the point where Oxford Finance had the ability to call in its loan, and it did. An Oxford Finance spokeswoman confirmed that “at one point in time we had a relationship with Metabasis,” but would not comment further because of a nondisclosure agreement.
Former employees said executives were working feverishly to secure financing from Panorama Capital, a Bay Area-based venture capital firm, but the deal fell through at the last minute. “We were certainly looking at them very closely, but in the end decided not to invest,” said Girish Putcha, a Panorama executive. Panorama would not comment further.
That rejection, say former employees, was the final straw.
“The one word I would use is disappointing,” said a former employee who was in the room that May morning. “You see downsizings, but you don’t often see a company just pretty much come to an end.”
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