December 30, 2024

What Did U.S. Biotechs Learn from Silicon Valley Bank’s Collapse in 2023?

On Friday, March 10, 2023 – less than two years ago at the time of writing – Silicon Valley Bank (SVB) failed after a run on its deposit base. At the time it was the second largest bank failure in U.S history with approximately $209 billion of assets when it went under. It would become only the third largest failure when First Republic Bank failed a few months later.

Two smaller banks had already failed that March, namely Silvergate and Signature Bank, but SVB was thought to be in a different league, being the 16th largest bank in the U.S. at that time.

Nevertheless, on the morning of March 10, the California Department of Financial Protection and Innovation (DFPI) seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC).

That weekend I was in continuous contact with (a lot) more than one of my biotech clients as together we prepared potential SEC filings and press releases announcing huge possible hits to our balance sheets through the potential loss of highly concentrated deposits held with SVB.

How did so many biotechs get caught up like this?

The answer lies in the January 2019 takeover by SVB of Leerink Partners, the boutique healthcare investment bank. At the time the move was meant to diversify SVB away from its Silicon Valley, tech-heavy client base, by expanding into the adjacent vertical of healthcare, including biotechnology and medical technology.

In the years leading up to SVB’s collapse, SVB Leerink (as it was renamed after being acquired) was one of the leading bookrunners for biotechnology IPOs, follow-ons and other healthcare financings, just as it had been when it was independently owned. Upon acquiring Leerink however, SVB began to market its traditional banking services to the biotech community (including recent IPOs) which included its deposit products. And by all accounts it was remarkably successful, perhaps because it was able to leverage the Leerink connection. Deposits ballooned. SVB however made the mistake of investing these short-term deposits in long-term securities (accounted for as being “held to maturity), the market value of which subsequently declined rapidly when the Federal Reserve began raising interest rates at the fastest pace on record.

Long story short, when rumors of the asset/liability imbalance at SVB began to swirl, depositors wanted their money back. Returning their money meant SVB incurring losses on its matching bond portfolio, which then fueled more rumors, and leading to more depositor withdrawals in a vicious downward spiral.

As someone who was in banking during the 2008 financial crisis, and who as a publishing analyst at one time in my career covered financial institutions, I knew the situation was bleak, but by then it was too late. My clients, who had tens of millions to hundreds of millions of dollars with SVB had deposits well in excess of that guaranteed by the FDIC, which at the time only insured the first $250,000 of cash. At SVBs encouragement, they had parked huge amounts of cash (and in some cases all of their cash bar what was needed for payroll and day-to-day expenses) with the bank. This meant the vast majority of their financial resources were at risk of being lost almost entirely (at worst), or at risk of becoming part of a drawn-out bankruptcy process (at best).

According to regulatory reports, uninsured deposits were estimated to represent 89 percent of SVB’s deposits as of December 31, 2022, around two months before the bank’s collapse.

The press releases we wrote that weekend – which thankfully never saw the light of day – warned not just of going concern status at my clients, but of the withdrawal of cash and milestone guidance, and the possible immediate cessation of activities, including the firing of nearly every employee.

Had the U.S. government not stepped in late on Sunday to guarantee the bank’s deposits, there would have been carnage in the biotech sector and doubtless many other tech sectors the next day. As it was, on March 12, the FDIC received exceptional authority from the U.S. Treasury to announce that all depositors would have full access to their funds on Monday morning.

So, what did biotechs learn from this “near-death” experience?

1) Diversify your banking product providers.

The obvious takeaway is don’t put all your eggs (or deposits) in one basket (bank account). But this rule applies not just to deposits, but to all the services banks provide to you.

A bank will happily take you IPO business, you M&A business, your follow-on business, manage your ATM, and keep all of your deposits. They are not going to decline any of your business, and indeed will actively encourage you to do all of your business with them.

But that is not in your interests, as this story attests.

Therefore, do not acquiesce to the pressure the bankers put on you. Diversify your business out across as many financial institutions as you can, because that way you ensure your own survival and continuation of business even if one of your counterparties fails or runs into trouble.

More than that however, by having more relationships you should find you are covered by more analysts, get invited to more healthcare conferences, and generally have more favors to call in from your banking counterparties.

2) The FDIC only covers the first $250,000 of your deposits.

You’d be surprised how few people knew just how much of their savings/deposits were guaranteed by the FDIC in the event of a member’s (bank’s) collapse. By the end of the SVB crises however, every biotech CEO and CFO knew.

Now, no one is suggesting that a biotech should take the $70-100 million it has just raised at IPO (or from a follow-on) and split that across 280-400 accounts with separate banks so that their entire cash pile is protected. But equally no Board should be happy with a management team who needless concentrates its cash holdings with just one or two financial institutions.

Most of my clients now split their cash across 3-5 banks, with them favoring members of the Big Five to be the preferred holders of their deposits.

3) The systemic importance of your banking counterparty matters

When the panic died down surrounding SVBs demise and subsequent rescue, most biotechs quietly moved their deposits from the likes of SVB and First Republic Bank (which as I said went under around two months later) to the Big Five – the five largest banks in the U.S.

Starting with the largest, at the time of writing, the Big Five are: 1) J.P. Morgan Chase 2) Bank of America 3) Well Fargo 4) Citibank and 5) U.S. Bank.

SVB’s rescue was a surprise given it was not previously seen as being systemically important. No one would argue however that the top ten U.S. banks, let alone the top five, are not systemically important, which means that in the event of extreme need the U.S. government would undoubtedly step in to avoid the entire system collapsing should one (or more) of them go under.

It could therefore be argued that deposits with these banks are therefore as safe as U.S Treasury bills, only with the advantage of immediate access/greater liquidity.

Recalling SVB’s collapse reminds me how proud I felt that long weekend, advising my clients. I calmed them and forecast that the U.S. government would likely step in… and I was right. Nevertheless, we prepared for the worst. Thankfully though, those filings and news releases never had to be issued, and the biotech industry went back about its business on Monday morning. As if developing new drugs wasn’t already risky enough.