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Biotech Blues : Firms Go Begging for Money to Test New Drugs


TUSTIN — The road to riches in biotechnology has never been easy. But now Southern California companies with experimental drugs are finding it especially difficult.

Consider ImmunoTherapy Corp., a tiny Tustin company with a vaccine intended to combat cancer.

Jeff Lillard, the company's chairman, wants to raise $3.5 million to fund tests in cancer patients. He's talked with more than 100 venture capital firms, investment bankers and big drug firms, but Lillard has nothing to show for it.

His odds of landing capital from traditional sources? About as good, Lillard says, as those of Reggie Jackson coming out of retirement to hit "four home runs in one World Series game."

While the number of companies like ImmunoTherapy seeking money to test their drugs in the doctor's office is growing, capital appears increasingly scarce, observers say.

The high failure rate of drugs in clinical trials has always made it hard to raise money from venture firms and public investors. Now there is the added concern that even successful new drugs won't sell in today's cost-conscious health care industry.

Industry sources estimate that the total investment in biotech firms nationally dropped to $1.8 billion last year from almost $2.7 billion the previous year.

The companies have been forced to get smarter about drug development.

"They've had to get pretty creative about keeping themselves going," said Cynthia Robbins-Roth, editor in chief of BioVenture View, a newsletter that tracks the industry.

Among other strategies, biotech firms are striking alliances with large drug companies, testing inventive stock offerings, raising capital overseas and even concentrating on drugs that cost less to develop.

It generally takes six to nine years and an investment of $50 million to $120 million for an experimental drug to clear human tests and gain regulatory approval for marketing. Three out of four drugs don't make it, so small, struggling biotech firms must fight to stay on track.

"Many of these biotech companies are primarily funded by existing investors, and it's extremely difficult for them to get new investors to jump on," said Howard Wachtler, managing director of Medical Venture Holdings Inc., which manages two health care investment funds.

Gyrating stock values have done little to ease investors' concerns. Shares of Cephalon Inc., for instance, soared in the week after the West Chester, Pa., firm announced its drug Myotrophin slowed the advance of Lou Gehrig's disease in clinical tests.

But shares of Cor Therapeutics, in South San Francisco, tumbled on news that its anti-clotting drug Integrin didn't do much better than a placebo in preventing death or other adverse outcomes in angioplasty patients.

Such clinical disappointments have forced companies to slash their research-and-development budgets. Earlier this year, San Diego-based Gensia Inc., faced with disappointing results for a cardiovascular drug, cut 35 headquarters jobs--laying off four corporate officers, among others.

Yet with a record number of drugs in the human testing phase, the pressure on such companies to prove themselves in clinical tests is only intensifying, analysts say.

Frederick Dorey, president of the Bay Area Bioscience Center, a regional clearinghouse for companies and researchers, predicts that the number of experimental drugs failing in late-stage tests will increase as the huge number of companies started in the 1980s get ready to test their ideas on human subjects.

"The odds are daunting," said Mark Edwards, managing director of Recombinant Capital, a San Francisco consulting firm. "They will fail more often than they will succeed."

Facing such odds, some companies are taking pains to make themselves more attractive to public investors.

Ligand Pharmaceuticals Inc. in San Diego and its larger partner, Irvine-based Allergan Inc., launched a company to develop drugs using their combined technology for naturally occurring hormones called retinoids. The new company, dubbed ALRT, or Allergan Ligand Retinoid Therapeutics, went public June 3 with an initial offering of 3.25 million rights priced at $10 each. The rights, which include a share of ALRT stock and two warrants to purchase Ligand stock in five years, closed Friday at $15.75.

The deal gives Ligand the right to buy the new company's stock back for $120.7 million, or $37.13 a share, in five years--a prospect that gives investors the chance to earn a substantial return on their money. The offering, which sought to raise $32.5 million, was so popular that it attracted $90 million from the public, said Jeff D'Eliscu, an Allergan spokesman.

"We had to give $60 million back," he said.

Other companies are scouring foreign markets for investors.

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