Finding financing is tough for fledgling biotechnology firms

October 06, 1991|By Timothy J. Mullaney

Cellco Inc. and Pharmavene Inc. have a lot in common. They're young biotechnology companies, small and well-regarded, and based in Montgomery County. But one big difference between them tells a lot about Maryland's economic future.

Since it was founded in late 1989, Pharmavene has had a fairly easy time obtaining money to fund development of drugs to suppress craving for cocaine and nicotine and an enzyme to treat cocaine overdoses. On the other hand, Cellco had to go to Japan to finance its 1988 start-up and has been trying for months to raise $2 million in fresh capital.

The reason: Gaithersburg-based Pharmavene is closer to having more products on the market and will need less money to develop them. In today's financing climate for small biotech firms, that makes all the difference.

"They [Cellco] are a longer-stage company," said Stuart Gallant, chief executive of Stuart Medical Inc. in Owings Mills, a supplier to Cellco. "It's going to take longer for them to see the fruits of their labor."

Finding money for research-based companies is hard work. For some people, it's even harder than the cutting-edge science that is producing path-breaking therapies and, biotech enthusiasts say, will yield more in the next decade. The financing markets, mainly private venture capital and public stock markets, blow hot and cold.

Right now, the financing market is lukewarm. Biotech company stocks had a roaring spring, allowing many companies to make initial public offerings of stock. The IPO market slowed over the summer, amid criticism that stock prices of young companies were too high. But the market is expected to perk up in the fourth quarter.

Meanwhile, biotech companies that are not ready to go public face a venture capital industry with structural problems. The industry has far less money to invest in small companies than it did in 1987, its peak year. And venture capitalists have become much less risk-oriented, investing little money in early-stage companies.

Such trends have sparked concern in Maryland, where the biotech industry is made up of about 125 companies, most smaller than the industry average.

"Especially in this economic environment, when you realize how vulnerable we are in so many areas, it's critical that our fledgling companies have access to capital," said Thomas J. Chmura, deputy director of the Greater Baltimore Committee. The GBC ** has proposed that the region focus economic development on biotechnology and health sciences.

The venture capital industry raised $4.2 billion in 1987, its best year ever, said Adam Kopp, a spokesman for Venture Economics Publishing Co. of Needham, Mass. That figure fell to only $1.8 billion last year and $534.9 million in the first half of this year.

And, according to the latest data available, just $6 million in venture capital was invested in biotechnology firms nationwide during the first quarter of 1991. That's down from $48 million in the first quarter last year.

Germantown-based Cellco is among the companies feeling the financing pinch. The company, which is developing systems to treat cancer, acquired immune deficiency syndrome and other diseases by helping doctors grow cells outside the body, has been trying to raise capital since May.

Although it already has been backed by Baltimore-based New Enterprise Associates, Maryland's largest venture firm, it is looking for new investors. Cellco wants to raise $2 million this year, with $1 million coming from New Enterprise and an affiliated firm, Catalyst Ventures.

"We sure haven't experienced people beating our door down," even though New Enterprise's reputation helps establish Cellco's credibility, Richard Knazek, senior vice president of Cellco, said. "Something has clearly changed in a year and a half. Some of it has to do with the entire venture capital environment."

"It's a well-known fact that the amount of money available to any investor is down substantially this year," said R. William Lynn, Cellco's president. "If it's a concept company, it's hard to get money. If you've got a product and got sales, it's easier."

Only 7 percent of the money the venture capital industry raised last year went to early-stage companies, according to an article in the September issue of Venture Capital Journal, a trade publication.

"It makes one concerned about the ability to raise capital, but I'm optimistic for two reasons," Pharmavene President James D. Isbister said.

One is that the company was started by venture capitalists, assuring it of some backing. "The other difference is that we have the opportunity for early revenues," he said, especially from some products that may not need time-consuming Food and Drug Administration approval.

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