Is there money in biotechnology

Biotechnology is a research-and-development intensive industry and R&D costs money. In addition to the time it takes to develop products, companies must also spend time and money testing in clinical trials and waiting for approvals from the Food and Drug Administration. The process of sending a potential new drug through testing and ultimately through FDA review can easily take three to five years. And only one of five drugs tested in human clinical trials makes it to the market. In short, the industry requires capital up front for investments that may not pay off for several years, if at all.

It today's economy, its hard to get capital on those terms. As a result, the biotech sector is facing one of its worst financial pinches ever. According to a recent survey by Merrill Lynch, about 35 percent of publicly traded biotech companies have less than a year's worth of cash left at their current operating levels. Many biotechnology stocks have plummeted in value. No biotechnology or medical technology companies have gone public in the last three quarters, according to the Daily Deal. Since late September, an average of one biotech company per week has postponed or withdrawn an IPO.

Venture capitalists and other private equity investors usually make their profits when a company either gets purchased by an industry buyer or goes public. With company valuations low and no viable IPO market, these investors see little potential opportunity for a profitable exit from investment in biotech companies.

Companies in the industry are responding to the financial squeeze in a number of ways. Biotech firms are selling off less-profitable product lines, laying off employees, and taking loans at exorbitant interest rates. Incara Pharmaceuticals sold off its liver stem cell business unit to concentrate on more traditional drugs. The Geron Corporation, which specializes in human embryonic stem cell research, laid off 30 percent of its workforce in June. Alliance Pharmaceutical Corporation, while striving to develop a chemical blood substitute, has had to pare down to 90 workers from a total of 180 at its peak. Alliance has also recently borrowed $3 million at an annual interest rate of 100 percent.

In some cases, even more extreme measures have been taken. Some companies, such as Organogenesis and Calypte Biomedical Corporation, are going the bankruptcy route. Others, such as Nexell Therapeutics, are liquidating. Variagenics and Hyseq Pharmaceuticals are merging into a new corporation in order to pool their cash resources. The new corporation is expected to be able to fund operations through 2004.

Even those who have money are tightening their belts. Many biotech firms raised huge sums of money in 2000, when investors were rushing to support the deciphering of the human genome. The industry as a whole raised $30 billion in that year. At the time, those firms spent freely. Now, even those companies in no immediate danger of running out of capital are making efforts to decrease their "bum rate," the speed in which they go through cash.

The financial crunch occurring in the biotech field will also have an impact on technological innovation. Controversial areas of study are not likely to attract investors in the current economic climate. "Stem cells has been a hot area with regard to the press, but it has not been a hot area in regard to investors," said Clayton Duncan, chief executive of Incara Pharmaceuticals. Newer areas of study, such as pharmacogenomics (the study of tailoring medicines to individual patients by testing their genes) and bioinformatics (the use of computers to analyze massive quantities of genetic data), are particularly impacted, since their potential payoffs are seen to be further down the line. In general, drug development companies are seen as better candidates for investment than companies pursuing genomics, cell therapies, or other exotic technologies.

Bio-pharming, a new field of study involving genetically modified food crops, is under fire from trade groups who are lobbying for federal regulators to restrict the industry. Bio-pharming focuses on making crops easier to grow and also exploiting the ability of plants to make medical proteins inexpensively. Of course, some biotech companies are better off than others.

Some still have money on hand from the investment boom in 2000. Other companies have successfully raised capital through secondary stock offerings, raising a combined $300 million. But those companies all have drugs close to reaching the market, which means that they are potentially close to profitability - a state that many biotech companies can't claim. BioTrove Inc. recently raised $5.25 million in a second round of venture capital financing. BioTrove's core platforms aim to improve the efficiency and productivity of drug discovery.

Unless there is some major change in the economy, the biotechnology industry will have to continue to struggle. Innovations and new developments will likely become a lower priority than revenue generating product lines. And many biotech firms that started up in the technology boom of the late 1990s will probably disappear off the map.

Sources: The Daily Deal, NewsEdge, New York Times, Seattle Times, Wall Street Journal