Biotech Values

[DewDiligence]

Get Ready for More Biotech Bankruptcies

http://online.wsj.com/article/SB123715982654235371.html

›Cash Dries Up for Biotech Drug Firms

MARCH 15, 2009, 8:52 P.M. ET
By KEITH J. WINSTEIN

Big pharmaceutical companies have spent billions of dollars to buy other drug giants lately, leaving behind small biotech companies that can no longer find investors.

The biotech industry had thrived as a new-drug incubator for big pharma companies, which poured money into acquisitions and partnerships to build up their biotech-drug product line. Some of that is still happening, but most sources of investment funding have dried up in recent months.

Since November, 10 biotechs have declared bankruptcy [#msg-34742265], says Ellen Dadisman, a spokeswoman for the Biotechnology Industry Organization. Meanwhile, 120 of the 360 publicly traded biotechs have less than six months of cash left, compared with just 12 companies in that position a year ago, according to Burrill & Co., a venture-capital concern in San Francisco that follows the industry.

Last week, Altus Pharmaceuticals Inc., based outside Boston, said its auditors doubt it can make it through the year without additional cash. To save money, the company has canceled development work on a potential drug for cystic fibrosis.

Isolagen Inc. has positive data on its experimental skin treatment and has filed for U.S. Food and Drug Administration approval. But the Exton, Pa., company says it has only three weeks of cash left before it will need to cease operations or file for bankruptcy protection.

G. Steven Burrill, who heads Burrill & Co., says, "We'll lose 100" of the publicly traded biotechs this year as companies fail or get taken over.

"Companies have always had four, six, eight months of cash. That's not unusual," Mr. Burrill adds. But "we are clearly in unprecedented times. This isn't a 'This too will pass,' " he says. "The implicit assumptions that we've built the industry off of for 30 to 40 years have changed."

The Biotechnology Industry Organization is asking Congress to provide government matches for private investment in small biotech startups. Under the proposal, the National Institutes of Health would match investments by disease-focused charities such as the Cystic Fibrosis Foundation, which has invested more than $300 million in biotech startups.

The industry has long had a close relationship with failure. Last year was the first ever in which the biotech industry as a whole earned a profit, though its giants -- including Genentech Inc., Amgen Inc. and Gilead Sciences Inc. -- continue to produce solid profits even now.

The smaller biotech companies are typically in the development stage, meaning they don't yet have a product on the market, are losing money and are dependent on investors for their operating cash. Even in the best times, betting on such untried companies would be risky. But, with the global economic downturn hammering stocks and bonds, even their formerly risk-tolerant backers have become less willing to pony up -- and asking for more if they do.

"If you had to give up 50% of your company for 5 or 10 or $20 million a year ago, you probably have to give up 90% today to get the same amount of money," Mr. Burrill says.

Without fresh money, dreams are scaled back. Targanta Therapeutics Corp. of Cambridge, Mass., which is working on an antibiotic, laid off about 75% of its staff in December and sold itself to Medicines Co. in February after the Food and Drug Administration asked for another clinical trial to prove its drug.

Akesis Pharmaceuticals Inc. of La Jolla, Calif., also filed for bankruptcy liquidation in January after early trials found safety problems with the company's diabetes drug.

Not everyone is pessimistic. "This kind of crisis mentality is a matter of degree in the area we work in," says Noubar Afeyan, chief executive of Boston-based Flagship Ventures.

But he agrees that many biotechs are in trouble. One problem is that in biotech, even blue-ribbon scientific credentials are no guarantee of business success. Helicos BioSciences Corp., Cambridge, Mass., went public in 2007, backed by a slate of advisers including Steven Chu, the Nobel laureate who is the new U.S. energy secretary, and George Church, a prominent Harvard University geneticist.

But the $1 million DNA reader Helicos developed, which could enable researchers to produce custom-tailored cancer treatments, has faced tough competition from DNA readers made by Swiss drug giant Roche Holding AG and Illumina Inc., a San Diego company that makes biology tools.

Helicos has yet to book a sale, and it nearly ran out of cash last year, eventually raising money in a new round of investment from its venture capitalists that diluted the holdings of existing shareholders.

"It was a rotten time to try to go out and raise money," says Stephen Lombardi, Helicos's president. "We felt blessed that we were able to pull off what we did." But as its shares trade at 54 cents apiece, down from more than $18 last year, investors remain dubious.‹