Down market puts squeeze on biotech firms

Companies weigh options in face of possible cash crunch

'Not in the panic mode'

April 21, 2000|By Julie Bell | Julie Bell,SUN STAFF

John Coker isn't panicking as he goes about his business as the chief financial officer of a money-losing drug-development company.

But should the stock market continue its volatile performance -- one that saw the Nasdaq biotech index jump 81 percent for the year and then lose nearly all the gain in the past six weeks -- history shows companies developing everything from anti-tumor drugs to vaccines may have to grant big pharmaceutical companies the rights to some of their future drug sales in exchange for cash.

Or sell themselves to other firms. Or simply fail. All of those steps are alternatives to issuing public shares to raise money, something considered foolish if not undoable in a down market.

Relatively soon, Baltimore-based Osiris Therapeutics will be facing a decision about whether to take the leap and issue public shares -- or find another way to raise the mountains of cash it churns through as it tests the drugs it wants to sell to help cancer patients.

"We have been supported by current shareholders, so we're not in the panic mode," Coker said yesterday, referring to the more than 100 individuals and institutions that hold its private shares.

For now, biotech experts say, few other biotechnology companies are panicking, either. Some are even flush with cash after riding the market's short-lived wave in February with well-timed sales of public stock. Others attracted millions in venture capital as private investors, excited about the stock market's spike, rushed to pour money into biotech companies that had yet to go public.

Still, in the past few weeks, some early symptoms of a potential cash crunch have begun to appear. EntreMed Inc., the Rockville-based developer of a product designed to stunt the growth of tumor-feeding blood vessels, canceled plans to issue additional public shares. Biotech firms Adolor Corp., Drug-Abuse Sciences, Rigel Pharmaceuticals, Onyx Pharmaceuticals, Paradigm Genetics and Genomic Solutions also withdrew or postponed planned offerings.

The volatility has been especially hard on companies that already had problems. Columbia-based North American Vaccine was forced to reduce its sale price to Baxter International this week after its shares suffered as a result of the market downturn and its own failure to hit targets for getting a meningitis vaccine approved for sale. Now there is no assurance the acquisition will go through, a possibility that would leave North American in immediate need of at least $20 million to pay off debts.

Because most biotech companies lose money for eight years or so and spend about $250 million getting each successful drug to market, Morningstar analyst Emily Hall said it's key to raise cash to stay alive until a moneymaking product can be launched. Companies already short of money can be further hurt by having to withdraw a public stock offering.

"There's a real cost to pulling an IPO" out of registration, said Mark Edwards of Recombinant Capital in San Francisco. He estimates preparing and selling an initial public offering can cost up to $400,000. "Then there are all the psychic costs: Companies may be doing the right things but still, there is this sense that something is wrong."

EntreMed finds itself in this situation. The company reported a $36.9 million loss for 1999 but said it had more than $26 million in cash on hand at year's end. By early March, it had $15.4 million more in cash. Still, EntreMed burned up about $13.8 million on research and development in the last quarter of last year, meaning it is fast eating up what it has raised.

In general, biotech startups should have a two-year cash supply to ensure their survival, said Jim McCamant, editor of Medical Technology Stock Letter in Berkeley, Calif. EntreMed has enough for this year, said Wall Street analyst Alan Auerbach of First Security Van Kasper.

EntreMed investor relations director Mary Sundeen is hardly panicking. The company earlier licensed one of its drugs to a pharmaceutical company to bring in cash while it gets its other products up and going. Now, it gets royalties on every tablet sold.

"What a lot of people think is that when you're running out of money that you go out and raise money, and if you can't, will the company fail?" Sundeen said. "Well, only if it's run by an idiot."

EntreMed, she said, prefers to raise money when the tank is half-full. "We don't wait until it's on `E.'"

Dry spell in '98

Biotechnology companies are no strangers to rough times. A dry spell in investing in biotechnology became apparent in 1998 as investors saw heady gains in Internet-related technology stocks and headed into those instead, said Tom Salemi, editor of Venture Capital & Health Care newsletter in Wellesley, Mass. So severe was the disdain for biotech, Salemi said, that several venture firms that had long invested in health care, including Accel Partners in Palo Alto, Calif., essentially quit investing in the field altogether.

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