AFTER A NEARLY four-year slowdown, money is once again beginning to flow into the biotechnology sector. But it's more a trickle than a torrent.
During the first six months of this year, initial public offerings raised more than twice what they did all of last year and the most since the technology market peaked in 2000. Biotech companies that are public have been going back into the market with secondary offerings, and promising young start-ups are winning venture capitalists' attention.
At the same time, wary investors, singed in the collapse of the technology bubble, are being highly selective and driving harder deals, seeking more than usual in return for their much-needed money, industry executives and experts say. The upshot is that capital-hungry biotechs - which typically rack up years of losses as they struggle to bring a product to market - are pursuing every strategy they can to secure the funds they need to stay alive and grow.
"It is a [somewhat] difficult time, and companies are being forced to be very creative," said Tom Salemi, editor of The Venture Capital Analyst/Health- care trade journal in Wellesley, Mass.
Maryland companies are among those pursuing funding in a variety of ways:
Ruxton Pharmaceuticals Inc., a Baltimore start-up that's working with the Johns Hopkins University on a treatment for Lou Gehrig's disease, just secured $5.4 million in first-round venture financing.
Biodefense researcher PharmAthene Inc., a new Annapolis company working on a treatment for anthrax, is trying to secure more than $25 million in second-round venture funding and is confident it will succeed.
Guilford Pharmaceuticals Inc., a 10-year-old Baltimore publicly held biotech, is taking a two-pronged approach to bolster its financial position. It raised more than $40 million in a recent secondary stock offering and has also licensed out its promising nerve-regeneration technology, a move that will save it as much as $40 million in development expenses over the next three years.
Panacos Inc. of Gaithersburg - in need of money to continue development of a new type of HIV drug - is selling out to a larger company.
Winning financing for biotechnology ventures has always been arduous. It takes years and millions - estimates range as high as $800 million to $1 billion - to develop a new drug. And the risk is high, with many hurdles, including human trials.
Even if a drug is successful in winning Food and Drug Administration approval and getting to market, it typically has used up years of its patent life, giving it a shorter time to earn back the huge investment and generate a profit for its developer. And there's always a chance the drug can be trumped by another offering that becomes the winner in the marketplace.
Still, companies are finding opportunities, and IPOs - an indicator of venture capital financing for the sector - have surged significantly this year.
After vaulting from $374 million in 1999 to $3.5 billion in 2000, IPOs of venture-backed biopharmaceutical companies slumped to $187.5 million in 2001 and $205 million in 2002, according to Alternative Investor, publisher of The Venture Capital Analyst trade journal. After an uptick to $437.8 million last year, IPO activity soared to $1.15 billion in the first two quarters of this year, the most recent figures available.
The surge is important not only because it means more money for companies, but also because the IPOs offer the "exit strategy" for the venture capital investors who cash out, said M. James Barrett, general partner with the Baltimore office of New Enterprise Associates, a major venture capital firm.
That cashing out frees up money that the venture capitalist can use to invest in another biotech start-up, Barrett said.
That's what happened in 2000. As IPOs surged in value, so did venture investments in biopharmaceutical companies - from $568.4 million in 1999 to $4.19 billion in 2000, according to statistics from Alternative Investor.
Active IPO market
It's no coincidence that the active IPO market at the start of this year also translated into a bustle of venture-financing activity. This year's first quarter was the most active for venture funding in at least six years.
During the first three months of this year - the most recent figures available - biopharmaceutical companies received 57 investments with an aggregate value of $1.47 billion, or about $25.75 million per deal.
But this time investors, aware of the long gestation for biopharmaceuticals, "are being very precise" in valuing bioscience firms, Barrett said.
Investors are looking most favorably on established companies, he said, and those with proven technologies or products or alliances - factors easier to value than a start-up company with only an idea for a product.