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For Biotech, a Loss of Patience and Funding

Medicine: Many small companies that may be years away from having marketable products are confronting a capital drought and withered stock values.


This should be the best of times for the biotechnology industry.

Dozens of new products that attack cancer cells, block viruses or slow arthritis have finally arrived on the market; scores of other promising treatments are being tested in patients and readied for regulatory approval; and the biggest firms are rewarding longtime investors with soaring stock prices.

But these are difficult days for smaller, emerging biotech companies--those that are cash-strapped and several years away from completing tests on their first marketable products. A shortage of capital poses a serious threat to the survival of many unproven firms, say investment analysts, industry consultants and corporate executives.

Private companies have been unable to go public, public companies have been blocked from selling stock to raise additional financing, and some investors are just losing patience with this high-risk industry in which many companies have failed to deliver.

And although the industry has seen cash dry up before, many observers believe this time is different--that biotech will never see the same level of investor support that sustained it in the past.

The problem is that only a few of the nation's estimated 1,300 biotech companies are profitable. Most survive from one financing to the next based on investor hopes that one day they'll hit it big.

Now a significant number are close to using up their cash reserves at a time when they are hard-pressed to find new money.

"Eighty-four of 345 public [biotech] companies have less than a year and a half of cash on hand; 54, less than a year," said D. Theodore Berghorst, chairman and chief executive of Vector Securities, a Chicago-area investment bank that specializes in biotech and other health-related businesses. "Our worry is that a lot of these biotech companies will not get funded."

Berghorst, along with many others, believes that the market has changed fundamentally. He says that cash-hungry companies will have little choice but to merge with better-financed biotech firms, form partnerships with major pharmaceutical companies or file for bankruptcy protection.

The industry is suffering also because of a consolidation of institutional investors and investment bankers, according to Berghorst and others. The result is fewer knowledgeable analysts who can gauge the eventual worth of an unproven technology and a lack of interest in investing in companies that are valued at less than $1 billion.

But to other observers, the current dry spell looks like others that have come before. They believe the window for biotech financing will eventually reopen as investors perceive the technology being developed by many smaller companies as undervalued.

"I probably have been through four up and down cycles in the business, and this is not the worst I've ever seen," said James Blair, general partner at Domain Associates, a venture capital management firm with offices in Costa Mesa and Princeton, N.J., that focuses on biotech and health care. "The situation may not be nearly as profound as people make it out to be."

Biotech executives also seem to be divided over which view is correct. "There are two reigning schools of thought among CEOs," said G. Steven Burrill, who heads Burrill & Co., a San Francisco merchant bank. "One is the hunker-down theory that we in the biotech industry have been through these periods before. The second is the sea-change school of thought, that things are different."

Waiting, and Spending

The factors behind the current squeeze don't matter much to companies that need millions now to support their research and clinical trials.

DepoTech Corp. of San Diego, for example, has a promising method of encasing injectable drugs in microscopic capsules for slow release, a technology that has a variety of applications. As with all but a handful of biotech companies, it has yet to make a dime of profit. But it's been burning through its cash reserves at the rate of $20 million a year.

The company had what it thought was a winner. After five years of development, it completed clinical trials of DepoCyt, a slow-release version of the anti-cancer drug cytarabine that was to be marketed in the United States by biotech giant Chiron.

Although the drug was aimed at just 20,000 patients with cancer that has spread to the brain, Food and Drug Administration approval would have assured profitability for the company. Further, it would have improved the outlook for DepoTech's time-release version of morphine, DepoMorph, which is being tested on patients following hip-replacement surgery--a much larger potential market.

In December, however, an FDA scientific panel refused to endorse DepoCyt after objecting to the design of the study, even though agency officials had approved the design in advance.

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