Biotech Industry Flexes New Muscle
August 24, 2000
Investors Pump Cash Into Research
By ANDREW POLLACK
As a young biotechnology company in 1986, OSI Pharmaceuticals agreed to use its expertise in genes and molecular biology to help Pfizer Inc. discover new drugs for cancer. As in many such deals, OSI agreed to receive a royalty of about 5 percent on the sales of any drugs that made it to market.
Now OSI has a chance to rewrite history. To win antitrust clearance for its acquisition of Warner-Lambert, Pfizer recently gave back to OSI full rights to one of the drugs from their collaboration.
Big drug companies are courting OSI, hoping to take Pfizer's place. But this time around, OSI has more than $80 million in cash, having recently completed a $56.5 million financing. The Uniondale, N.Y., company can carry the drug through clinical trials itself, executives say. And even if it takes on a partner, OSI will get a much bigger share of the profits.
"The fact that we are not in a defensive position because of our financial situation is very important," said Colin Goddard, OSI's president and chief executive. "The economics are transformed, as it were."
Money has poured down upon the biotechnology industry in the last year, changing the dynamics of an industry that has long lived from hand to mouth and relied on the deep pockets of the big pharmaceutical companies to bring its technology and drugs to market.
Today, the biotech companies simply do not need the drug companies' money as badly as they once did -- but the drug companies still want to license biotech drugs. So as the balance of power shifts from the pharmaceutical giants to biotech companies like OSI, the smaller companies are able to arrange licensing deals that leave them with larger shares of the profits, and in some cases, direct roles in selling the drugs they develop.
Only two years ago, many biotech companies were in financial trouble because investors had soured on their industry.
Unable to raise money from wary investors, some companies had to close their doors or enter into shotgun mergers.
But as fast as you can say "genomics," that has all changed. The excitement at the prospect of unraveling the human genetic code, announced in June, has transformed investors' view of the biotech industry over the past year.
Biotechnology stocks roared from last fall until March, when they plunged after President Clinton and British Prime Minister Tony Blair seemed to suggest opposition to patents on genes. But the stocks have been climbing back since then, and most are well above where they started the year. The Nasdaq Biotechnology Index is up 39.3 percent so far this year, while Nasdaq stocks as a whole are down 1.4 percent this year and the Dow Jones industrial average is down 3.1 percent.
In the face of heightened investor interest, companies have raced to raise money. In the first half of this year alone, biotechnology companies raised $22.1 billion from public and private financings, well above the $12 billion raised in all of 1999 and nearly triple the $8.1 billion raised in 1998, according to Recombinant Capital, a financial consulting firm in San Francisco.
Some of the deals this year have been breathtaking. While the typical initial public stock offering for a biotech company in years past might have raised about $30 million, according to investment bankers, many of the biotech offerings now are for $100 million.
Companies like Abgenix, Medarex and Millennium Pharmaceuticals each raised more than $400 million in single transactions earlier this year. And Celera Genomics issued stock worth nearly $1 billion in a secondary stock offering in March, more than the total raised in secondary offerings by all biotechnology companies combined in 1998.
"Even if you stop today, we've broken all records," said Stelios Papadopoulos, the head of biotechnology investment banking at SG Cowen Securities.
But the rush is not stopping. While biotech companies stayed away from the market after their stocks fell in March, they have since returned. Since the beginning of July, 30 biotech companies have gone public, according to Recombinant Capital, raising about $2.5 billion. That follows 23 initial public offerings in the previous six months. Another 16 biotech companies are waiting to go public.
"We're just trying to get our arms around it," said Jeffrey Casdin, chief executive of Cooper Hill Partners, a New York biotech investment partnership. "Who's who? Who does what? Who are the good ones? Who are the bad ones? It's all coming in a rush."
The boom has helped create a class of biotechnology companies big enough to compete with big pharmaceutical companies to license technology or buy smaller companies. Millennium Pharmaceuticals, for instance, recently paid $55 million in cash for Cambridge Discovery Chemistry, a company with technology for developing drugs.
Biotechnology companies are also in a better position to develop more than one drug at a time and diversify their risks.
And thanks to their solid financing, companies making tools for genomic analysis can afford to develop their technology themselves and sell to all comers, rather than give exclusive rights to a single big drug company in exchange for an injection of capital.
The newly emboldened biotech companies are also beginning to demand -- and get -- better bargains in their deals with pharmaceutical companies. "A lot of deals that may have been done in the past are not being done," said Lee Babiss, vice president for preclinical research and development at Hoffmann-La Roche Inc.
Some biotech companies are demanding a 50-50 split of profits from their drugs and a role in the marketing that will help them become full-fledged drug companies. Abgenix recently struck a deal with Immunex, a larger biotechnology company, that will give Abgenix 50 percent of the profits from a cancer drug it is developing. Millennium Pharmaceuticals recently announced a deal in which it would be virtually an equal partner with Aventis, a big European drug company, in a variety of endeavors.
Allos Therapeutics of Denver, which raised $90 million in an I.P.O. this year, plans to take its drugs to market by itself. "There's now no need, at least for financial reasons, to seek a corporate partner in North America," said Stephen J. Hoffman, president and chief executive. The money, he said, "has really given us control of our own destiny."
While biotech companies are more independent now than ever before, they and the pharmaceutical giants have long had a symbiotic relationship. In the years when biotech companies' stocks were depressed and they had a hard time raising money, deals with big drug companies kept many smaller biotech concerns afloat. The pharmaceutical companies, meanwhile, have come to rely on the biotech companies to help fill their pipelines with new drugs or to provide the latest technological tools. Many big drug companies now spend 20 to 30 percent of their research and development budgets on outside collaborations.
In the past, big pharmaceutical companies would often pay for clinical trials and give a biotechnology company some money up front, various payments at milestones along the way, and a royalty on product sales. But "most of the deals that biotech has done have rewarded the pharma investor, not the biotech investor," said Louis G. Lange, chairman and chief executive of CV Therapeutics, a biotech company in Palo Alto, Calif.
Now, however, biotechnology companies can afford to conduct more clinical trials themselves, and license drugs at a later stage when the risk of failure has been reduced. That allows them to get a bigger share of the profit.
"The notion that 'We're Big Pharma and will give you a 2 percent royalty and a million bucks' -- those days are over," said Mark Simon, the head of life science investment banking at Robertson Stephens.
Analysts caution that biotechnology companies should not get too cocky. The entire market capitalization of public biotechnology companies -- about $400 billion, according to Burrill & Company, a biotech investment and research company -- is only as much as Pfizer and Merck combined.
Partnerships with big companies can provide smaller biotech operations with more than money. They validate a small company's technology in the mind of investors. And the big company can offer expertise in bringing a drug through clinical trials and in sales and marketing.
Nor is every company rich. Recombinant Capital said 61 of 247 public companies it surveyed in the first quarter had less than a year's worth of cash. And even the better financed companies can find they need more than they have.
"Genomics is a game of scale and post genomics is even more so," said Kevin Starr, chief financial officer of Millennium Pharmaceuticals. "It takes billions, not $100 million, to make this happen."
Moreover, biotechnology has had waves of investor enthusiasm before, most notably in 1991 and in 1996. Those boomlets were followed by prolonged downturns as investors realized that it would take several years and hundreds of millions of dollars more for the companies to become profitable.
The companies raising money now, for the most part, are also years away from profitability, so analysts say it would not be surprising for stocks to go down.
"I think it's difficult to understand the business models of many of the more recent I.P.O.'s," said Matthew N. Murray, portfolio manager of the Alliance Select Biotechnology Fund.
Already investors are suffering some indigestion from the run of I.P.O.'s and are getting pickier. One company, Advanced Medicine, which is backed in part by William H. Gates, dropped plans for a public offering in late July, citing unfavorable market conditions. The Pharsight Corporation, Telik Inc., and Ista Pharmaceuticals all had initial stock offerings at lower prices than expected. "We've gone from a seller's market to a buyer's market," said Fred Frank, vice chairman of Lehman Brothers.
Still, many companies have already filled their coffers enough to last through many lean years. "In 1991 you got two years of money and thought you did pretty well," said Vivek Jain, an investment banker at Chase H&Q. "This time companies are going out and getting five to six years of financing." |
