If you’ve been following the news any time in the past year, you probably have noticed that there have been several drug manufacturers who’ve filed for bankruptcy. Why are they doing this? Don’t they make tons of money selling their products? What impact will this have on your daily medications? What are other potential consequences?

The World Health Organization (WHO) calls antibiotic resistance “one of the biggest threats to global health” and is a crisis that should alarm everyone. According to the Centers for Disease Control (CDC), there are more than 2.8 million antibiotic-resistant infections every year in the United States, with over 35,000 people dying from these infections. Per Cancer.org, this number of deaths is more than that of those suffering from skin cancer and leukemia combined.

Antibiotic resistance means a bacterium is no longer responsive to a drug that was once effective at treating it. This makes an infection that we consider “harmless” into a deadly disease. Antibiotics become less effective over time because bacteria can randomly mutate, sometimes at a rapid rate. Once bacteria are exposed to antibiotics, they can mutate so that it doesn’t get destroyed. The surviving bacteria pass this advantage to future generations or to other bacteria.

A couple of reasons are contributing to the development of so many of these bacteria as of late. The CDC notes that in the US, at least 30% of prescribed antibiotics are “unnecessary.” Antibiotics are designed to treat infections caused by bacteria, but many doctors have mistakenly prescribed them to people who are sick as the result of a viral infection. Viruses have a very different structure than bacteria, so they don’t respond to antibiotics the same way bacteria do. When this occurs, if there are any bacteria that are normally affected by the antibiotic present, they become exposed, and some start to mutate to combat being killed.

Another issue is that many individuals don’t take antibiotics as prescribed, even when antibiotics are correctly given for bacterial infections. People will often stop taking the antibiotic as soon as they start feeling better because they figure they’re fine, and they’ll save the rest of the medicine for another time. The problem with this concept is that they stop treatment before the bacteria has been completely removed from their body, meaning the remaining bacteria aren’t only the strong ones but also more likely to mutate so that they’ll be resistant to the antibiotic.

In addition, farmers in the US and parts of Asia where our food comes from routinely give healthy animals antibiotics to promote growth and prevent disease. This is so prevalent that it’s estimated that 80% of antibiotics sold in the US are used in animals. Some evidence suggests that this contributes to antibiotic-resistant bacteria, and we’re ingesting these bacteria when we eat the meat from these animals.

The United Nations estimates that without new medications to combat these mutated bacteria, the global death toll from bacterial infections could soar to 10 million by 2050. Without antibiotics that are effective, many common medical procedures could end up being life-threatening.

Many of the newest antibiotics are effective at tackling some of the most stubborn and deadly germs. However, these drugs are not cheap because coming up with new compounds is not easy. In the last 20 years, only two new classes of antibiotics have been created. Most of the new drugs are derived from existing ones. Developing a new antibiotic can cost around $2.6 billion, with the biggest part of that cost going to the failures along the way.

For example, a newly approved antibiotic, Xerava, targets multi-drug-resistant infections, like MRSA and CRE, which is a group of resistant bacteria that kills 13,000 people a year. The problem is that a single treatment course costs as much as $2,000. The biopharma company Tetraphase created it and has struggled to get hospitals to embrace it. Xerava took more than a decade to discover and bring to market. So, while the drug has proven effective, the price is limiting sales, and the company hasn’t been able to recover its costs. As a result, the company recently closed its labs, laid off some of its scientists, and canceled plans to move forward on three other promising antibiotics.

Tetraphase isn’t the only company having this issue. Numerous companies are spending billions to develop these life-saving drugs and are struggling to sell them. This has led to fewer and fewer companies doing research and development (R&D) on new antibiotics. Currently, there are only 3 major pharmaceutical companies committed to doing this. In the 1980s, there were 18.

Before this, there were record-setting levels of capital raising because biotech was vastly outperforming the broader stock market, so there was a steady inflow of capital, supporting more companies going public at rich valuations. This has caused the number of public small and mid-sized biotechs to double in the past decade. In 2018 and 2019, there were 100 initial public offerings, and 270 follow-on raises that brought in tens of billions in cash. Besides being more of the smaller firms, the companies are worth more and consume more capital on average. For example, from 2010 to the present, many of these companies have seen their typical market values double, R&D budgets triple, and cash burn rates quadruple. The annual burn rate for these biotechs has increased from $20 million to $80 million.

However, after a decade of booming growth, many of the newly public biotechs are struggling to withstand the current market’s financial, legal, and political pressures. Investor anxiety is rising since it’s an election year, with drug pricing as one of the top issues. Biotechs place value on ideas and hope rather than more tangible assets or resources, but investors are no longer supportive of companies going public with preclinical data. Big pharma companies, like Novartis and Allergan, have responded to the decrease in funds by closing their antibiotics-focused operations. However, with small pharma companies being responsible for more than 90% of the research, it’s not surprising that this is the area being hit the hardest by a lack of investors.

In 2019, there were 12 biotechs that filed for bankruptcy, including Novum Pharma, Avadel Specialty Pharmaceuticals, Aradigm, Immune Pharmaceuticals, Pernix Therapeutics, Mabvax Therapeutics, Achaogen, Aegerion Pharmaceuticals, Insys Therapeutics, Purdue Pharma, Sienna Biopharmaceuticals and Melinta Therapeutics. This is double the number of bankruptcies in 2018, which is concerning because several of these companies were developing antibiotics that are sorely needed.

For example, Melinta Therapeutics makes four antibiotics, including Baxdela, which recently gained the Food and Drug Administration’s (FDA) approval and is used to treat the kind of drug-resistant pneumonia that often kills hospitalized patients.

Another company, Achaogen, spent 15 years and $1 billion to get FDA approval for Zemdri, a drug for hard-to-treat urinary tract infections. In fact, Zemdri was so promising that it became the first antibiotic the FDA designated as a breakthrough therapy, and they expedited the approval process. The company received $124 million from the Biomedical Advanced Research and Development Authority (BARDA) to develop the new antibiotic. The drug brought in around $16 million in sales but cost $300m to develop. This past July, the WHO added Zemdri to its list of essential new medicines. However, it was too late to save Achaogen, which declared bankruptcy in April, less than a year after Zemdri went to market. By June, the company’s lab equipment and the rights to Zemdri were sold to generic drug maker Cipla USA for only $16 million. Thankfully, they’ve continued to manufacture the drug.

According to experts, the financial outlook for the few companies still committed to antibiotic research is grim. With investors hesitant to put forth funds, it’s threatening to put a stop to the development of new lifesaving drugs at a time when they are most needed.

The number of bankruptcies is surprising because biotechs are typically structured to avoid them. Companies that are pre-revenue usually carry little debt, so they have little to restructure through a bankruptcy court if their investors pull out. If a biotech is privately held, it can avoid bankruptcy by having its financial backers buy it out. Biotechs are like any other business in that they have several practical options to hold off bankruptcy. The two main focuses are restructuring and raising cash.

The point of restructuring is to shrink the business by laying off employees, selling assets, or stopping R&D projects. Raising capital can include licensing rights to experimental therapies, taking on debt, or tapping the public markets for secondary stock offerings. If these options have already been tried and are unsuccessful, then the next option is a merger and acquisition (M&A) with another biotech company. Notably, among the 333 biopharmas that have gone public since 2012, only 3% have filed for bankruptcy, 6% became reverse merger shells, and 10% exited via M&A.

The small, antibiotic-making biotechs aren’t the only ones facing an elevated bankruptcy risk. The weight of thousands of lawsuits related to opioid marketing, which played a key role in the opioid crisis, took down Purdue Pharma and Insys Therapeutics. Several others, like Teva Pharmaceutical, Mallinckrodt, and Amneal, are at a high risk of joining them. Thankfully, the number of companies affected by opioid liabilities is relatively small.

Opioids have been linked to more than 400,000 deaths in the US in the past two decades and are currently killing about 130 people each day, according to the National Institute on Drug Abuse. The drug companies are coming under fire because they used to have funds specifically for educating physicians about their products.

However, there’s a fine line between trying to educate a doctor and bribing a doctor. There are several studies that have found that doctors who receive payments from the medical industry prescribe drugs differently than their colleagues who do not. This is why there is such controversy over the marketing that took place surrounding opioids. In cases like these, bankruptcy filings are helpful for the companies who face litigation because a bankruptcy judge overseeing the case would typically tally a company’s assets, including proceeds from the sale of its assets, and divide the total among the various claimants, including the government, rather than allowing juries in areas hit hard by the opioid crisis decide how much to award in damages.

Also, dealing with all claims in one place is more efficient than having to pay multiple lawyers in multiple locations to defend the company. This has happened in previous mass litigation cases, such as those dealing with asbestos and tobacco. Some of those big manufacturers declared bankruptcy because they faced claims in the multiple billions of dollars. In those cases, the funds that were obtained from the bankruptcy were used to set up trust funds for the victims, which would probably be the best outcome for the opioid cases, too.

One of the companies following this strategy is Insys, which marketed an opioid pain medication, Subsys, which contains fentanyl. Insys makes 90% of its revenue from Subsys and generates tens of millions of dollars in annual sales. According to the bankruptcy filing, Insys states that its assets are worth $175 million, and its debts are $262 million, with $225 million of that supposed to be going to the federal government as part of a recent settlement Insys struck with them. Besides this settlement, Insys is also named in almost 1,000 lawsuits from counties, states, Native American tribes, and insurance companies.

Another company, Purdue Pharma, manufacturer of OxyContin, has also filed for bankruptcy. This too, was announced just days after the company reached a tentative settlement valued at $12 billion in a massive lawsuit over their role in fueling the opioid crisis. In addition, Purdue, similar to Insys, is being sued by 2,600 states, territories, counties, cities, and Native American tribes. The attorneys general of 24 states and territories have agreed to the current deal. However, the AGs of the 26 other states and other territories say that the value of the payout is unlikely actually to reach the $12 billion, so they’re planning on suing the Sackler family, who owns Purdue, directly in state courts across the country.

This is a legally questionable option for two reasons. It will be difficult for states to convince judges to rule that family members are personally liable. Even if this happens, plaintiffs are going to have problems collecting on the Sacklers’ assets, which, in 2016, Forbes magazine estimated at more than $13 billion, because most of it is in a system of trusts and companies or offshore.

While all of the drama surrounding the rulings in the opioid lawsuits is playing out, we still need to focus on creating new antibiotics to combat the drug-resistant bacteria. This means that the remaining biotech companies are going to have to find creative solutions. There are several considerations.

The first is that patients usually only take antibiotics for a week or two, which is unlike medications used to treat chronic conditions that are taken at least once a day. This makes it challenging for companies to recoup their investment in developing the drugs. Also, doctors are rightfully holding back on prescribing antibiotics unnecessarily, so this means that many of them are reluctant to prescribe the newest medications. In addition, many hospital pharmacies will use cheaper generics even when a newer drug is far superior. This is especially true in the US because insurers pay hospitals a set fee for treating an infection, not considering the cost of the drugs used.

One possible way to help combat these factors would be to extend the exclusivity a company has for new antibiotics to give them more time to earn back their investments. Another solution would be to create a program to buy and store critical antibiotics, similar to how the federal government stockpiles emergency medication for possible pandemics or bioterror threats. Also, putting in place a subscription plan, where companies are paid a set amount for access to their drugs, regardless of the quantity used.

In addition, giving a one-off payment to biotech companies so they can launch a new antibiotic could be helpful. The US government recognizes the importance of antibiotic development and has invested $1 billion in the field since 2010, which is helpful but not enough. Part of this investment included BARDA, which is a federal effort to counter chemical, nuclear, and other public health threats by investing in companies developing promising antimicrobial drugs and diagnostics that can help combat antibiotic resistance.

Recently, despite bipartisan support, legislation aimed at tackling the lack of companies pursuing a solution for antibiotic resistance has languished in Congress. One of these measures, the DISARM Act, would have Medicare reimburse hospitals for new and critically important antibiotics. Some of the reluctance to push it forward stemmed from the political sensitivity over soaring prescription drug prices. So, rather than doing what is best for the American people, politicians are looking out for themselves and their ability to be elected.

The companies who developed these important new antibiotics didn’t count on the fact that their products wouldn’t be used as much as they predicted because doctors were hesitant to prescribe antibiotics, and hospitals sticking with existing generic products. Unfortunately, until the situation changes, many investors aren’t planning on supplying the funding the biotech companies need. The entire situation has left many doubting whether there will be any new antibiotics around in the near future.

One thing is for sure the longer we wait to correct the issue, the more firms will disappear, and this will delay the development of antibiotics that are not only needed but are life-saving.