Biotechs struggle as money all but dries up

Small Md. firms cut staff, delay plans, plead for cash

August 04, 2002|By Julie Bell | Julie Bell,SUN STAFF

ReceptorBase Inc., a tiny Baltimore developer of gene databases and software for drug discovery, is putting off plans to hire five people.

Publicly traded Guilford Pharmaceuticals Inc., scraping to save cash, laid off 60 last week after deciding to suspend human testing of three of the five new drugs it had in clinical trials.

Columbia-based Cylex Inc. is pinching pennies by having employees make some sales brochures for its just-approved immune-function test, rather than hiring an outside firm to do them.

The prolonged bear market is proving once again that tough times are particularly tough on biotechnology companies. Many have yet to put products on the market and face long development times - up to a decade for drugs - before they do. In the meantime, they're losing money, are chronically low on cash and are hard-pressed to raise more of it as the market falters.

Plummeting stock prices have made it virtually impossible to issue public shares. Failed drugs, the perception that ImClone Systems Inc. misled its investors and concern that the lack of a commissioner at the Food and Drug Administration is delaying product approvals have strengthened investors' perceptions of a biotech industry on the rocks.

The fortunes of private companies are tied indirectly to plummeting public stocks.

Venture capitalists assess the value of a private company in part by looking at the market value of similar, publicly traded ones.

With the market in the doldrums, they're now demanding far larger ownership stakes in struggling private biotech companies for the same amount of money invested.

M. James Barrett of the venture capital firm New Enterprise Associates says small biotechs are operating in a harsh environment. "The overwhelming thing is to stay alive," he says.

Unlike some other industries, biotechnology companies can't save money by putting off research. The promise of future products - and the results of expensive tests on them - is all that draws investors.

"Even when there's cash on the books in a biotech company, the burn rate is so astounding" that many are soon in need of cash again, said A. Gregory Kelly Jr., an accountant and senior manager at KPMG LLP who works with life sciences firms.

To be sure, some more-established biotechnology companies are still sitting on piles of cash after a record-setting $32 billion was raised by the industry in 2000, followed by $11 billion in 2001, according to San Francisco merchant bank Burrill & Co.

Human Genome Sciences Inc. in Rockville has about $1.6 billion in cash and short-term investments on hand, and neighboring drug discovery company Celera Genomics Group has about $900 million.

MedImmune Inc., Maryland's most profitable biopharmaceutical company, has about $1.4 billion in cash and marketable securities - so much that it has created a venture fund that aims to invest as much as $100 million in other biotech companies over the next three years.

There is even evidence that venture capitalists are loosening up the purse strings, investing $884 million in the industry in this year's second quarter compared with $711 million in the first quarter, according to Burrill.

One reason for the increase, however, may be that venture firms spy bargains - the opportunity to get higher ownership stakes in companies desperate for cash, said Tom Salemi, editor of Venture Capital Analyst-Health Care.

"VCs might be committing more money to the sector because they can get in at great prices" per share, he said. "Also, CEOs at companies that are being forced to take a lower valuation are saying, `Well, I better score as much cash as I can because I don't want to go through this again.' "

Maryland, however, has few active venture capital firms that focus on investing in young biotech companies, despite the nearly 300 biotechnology firms in the state. At least one study has shown proportionately little of the overall amounts raised is being invested here.

The study last year by Ernst & Young LLP for MdBio Inc., a nonprofit promoter of the state's biotechnology industry, found that Maryland ranked last among 12 states studied in venture capital investments relative to the number of biotech companies in each state.

The study concluded the gap between venture capital needed and invested in the state was $50 million to $100 million a year.

These days, even when companies do get venture funds, some executives are stunned by the small valuations the financiers place on their companies. (The less a company's value, the bigger the slice venture capitalists will end up owning for the same amount invested.)

Barrett, for example, remembers how despondent executives were at one company recently when his venture firm found its value was $10 million.

The executives had considered it worth $24 million.

"Valuations are just on the floor," said Judith A. Britz, chief executive officer of Cylex Inc., the privately held Columbia maker of the immune-function test. "Companies are turning to all sorts of survival strategies."

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