Originally created 11/28/98

Biotech's newest task: Engineering a source of cash



BALTIMORE -- These are heady days for scientists at biotechnology companies as they take part in what many see as a remarkable revolution in our understanding of disease and efforts to develop treatments for scourges like cancer and spinal cord injuries.

But for the executives charged with running many of these ventures, these are days of fret and worry: As their companies burn up cash, traditional sources of financing such as venture capital and the stock market have gone bone dry.

"It's really dismal," said Robert Curtis, chief executive officer of Baltimore-based Lion Pharmaceuticals Inc. The company was born two years ago as the nation's first biotech venture focused on commercializing discoveries at a major university, in this case the Johns Hopkins University's School of Medicine.

The money situation for the industry might be the worst in a decade, say company executives and industry experts. The resulting fallout seems destined to substantially alter the industry landscape. Some experts fear bankruptcy and wholesale consolidation; others see only a much tougher sell.

Still, alarm bells are ringing in struggling biotechnology companies from Maryland to California, experts say.

Burrill & Co., a San Francisco-based merchant bank active in the life sciences industry, says investments in biotechnology have slumped severely this year, particularly in the third quarter -- down 88 percent from the same period last year.

Curtis and Lion, for example, spent the better part of the year fruitlessly shopping for up to $15 million in a second round of financing after landing $2.3 million in start-up money from the city, state and Anthem Capital LLP, a Baltimore venture capital group, in 1996.

As a result, Curtis has focused on restructuring Lion to make it more attractive. But instead of again targeting Wall Street deal-makers and venture capitalists, he expects to raise money in the "angel" market of well-heeled individual investors -- or possibly big pension funds and other money managers looking for an investment with a big payoff potential.

For the most recent quarter, the nation's public companies raised $242 million compared with $2.2 billion in the same quarter last year, according to G. Steven Burrill, founder and chief executive officer of Burrill & Co.

"The equity financing window for biotechnology is essentially shut down," Burrill said.

"It's a pretty barren landscape out there for now. There's very little money available, and that is having a dramatic effect on the industry."

The downturn comes as venture capital funds are flush with cash to invest. In the third quarter of this year venture capital funds invested a record $3.77 billion in emerging companies, up 29 percent from the same period a year ago, according to PriceWaterhouseCoopers' quarterly Money Tree report.

Software development and information companies got the lion's share of the funding, the consulting outfit found.

One key reason for the shift is that venture outfits are finding they can fund a start-up Internet or info-tech company and take it public or otherwise sell their stakes quickly, in some cases for staggering returns.

Aside from the increasingly competitive market for technology financing from the Internet and other high-tech ventures, Burrill lists other reasons for the downturn. They include recognition by investors that biotechnology companies' partnerships with big pharmaceutical houses have led in some cases to biotechs being stripped of their best technology and value; and the high risk of product failures and marketing delays.

Also, said Burrill, "Some companies that looked very promising just haven't done well."

As a result, he said, "Wall Street has lost the passion it once had for this industry, and that has affected private investors."

The difficult market forced two promising Maryland biotechnology companies to shelve plans to go public. Rockville-based GenVec Inc., which is developing gene therapy treatments for heart disease, canceled plans for a 2.5-million share offering to raise $27 million in August.

And Baltimore-based Osiris Therapeutics Inc., which is developing treatments to regenerate damaged bone and cartilage, canceled a $30 million offering.

The financing market has been particularly tough on already public companies that are starved for cash.

For the first nine months of this year, secondary public offerings are down more than 65 percent, according to the Burrill report, to $449 million from $1.3 billion in the same period last year.

As a result, some of the companies unable to tap the stock market for more funds have sought mergers with other biotechnology outfits looking to expand their technology base.

For example, Texas-based Gene Medicine Inc., a gene therapy developer, recently agreed to be bought by competitor Megabios Inc. of California for $39 million.

(Begin optional trim)

Burrill doesn't subscribe to the theory that the tight financing market will lead to wholesale bankruptcies and fire sales.

But he sees signs that huge mergers involving multiple companies increasingly will become a survival strategy, particularly among small and midsize firms.

"Instead of two companies merging, and in the end you still have just one, I think we'll see a number of companies getting together so that you'll really have something," Burrill said.

Curtis, at Lion, sees the changed financing atmosphere resulting in rapid consolidation and start-up ventures being based on new models that address investor concerns about risk, efficiency and the time required before there are significant investment returns.

The most likely models for new businesses, Curtis believes, are university affiliations like Lion and companies that buy rights to dormant, but almost fully developed drug candidates.

Also, he notes, the pharmaceutical industry's drive to generate new products should bring more alliances with cash-rich drug makers.

"There is still a lot of interest, I think, in technologies and discoveries that can be nurtured," Curtis said. "The question everybody's asking is, how best to pay for it."