From today's Boston Globe:
Biotech firms face funding crisis
By Naomi Aoki, Globe Staff, 10/30/2002
boston.com
The situation was already desperate by the time Donald Hawthorne was brought in to turn around BioTransplant. The Charlestown biotech company had only six months of cash left. Its stock was hovering just above $2 a share - the lowest it had been in years.
At those prices, the company couldn't afford to raise money without selling so many shares that it would hurt current stockholders. Hawthorne would have to make the cash last at least a year, buying time to hit a few key milestones that could fuel investor interest. On July 29, a month after his arrival, he laid off 20 people and outlined the new goals.
The results from a study of a psoriasis drug the company had licensed to a larger biotech firm were expected to be made public in coming months. It was just the kind of news BioTransplant would need to raise money. Last week, however, that hope was dashed. The drug's development was delayed because of potential safety concerns, sending the company's stock below 50 cents and jeopardizing its listing on the Nasdaq Stock Market.
''Cycles come and cycles go,'' Hawthorne said. ''Our job as executives is to make sure we live to see the upturn. We have contingency plans in place. We weren't betting on one plan and holding our breath. This is a turnaround. It was before, and it is today. We're just dealing with a slightly different set of facts.''
BioTransplant is part of a growing contingent of biotech concerns running dangerously low on cash. Relatively few biotech companies are profitable. Most of the nation's roughly 1,500 firms depend on their ability to raise money to survive. With the public markets closed, access to cash has deteriorated dramatically in the past two years. And industry insiders say at least a third of publicly traded biotech firms has seen their cash reserves dwindle to a year's worth or less.
With no economic recovery in sight and another third of companies down to less than two years of cash, industry insiders say the problem is likely to get worse before it gets better. Already, one Massachusetts biotech, Organogenesis, has been forced into bankruptcy. Trading of another, Select Therapeutics, was suspended two weeks ago after it failed to file regulatory documents, citing a lack of resources. Others have shed staff or early-stage research programs to ensure their survival through what is expected to be among the toughest financial droughts in the 20-year history of the industry.
Biotech has long been prone to booms and busts. But some believe that the sheer giddiness of the last boom set the industry up for an equally punishing bust. The earliest anyone expects the market to return is in spring 2003, and most believe that is an optimistic forecast. Although some of the firms that are struggling today will bootstrap themselves along until the next boom, industry veterans say, many others won't.
''A lot of companies aren't going to make it,'' said Henry Blair, chief executive of Dyax and a cofounder of Genzyme. ''One of big differences between this downturn and past downturns is that there are more companies and more companies that will not make it.''
Some will be forced to shut their doors. Others will be sold to pharmaceutical companies or large biotech firms. And still others will merge with like companies in an effort to pool resources and gain critical mass. For years, industry observers have predicted that such a wave of consolidation would ripple through the biotech industry. And for years, the predictions have failed to come true.
''It's been 10 or 15 years that people have been saying consolidation is going to happen,'' said Dan Omstead, chief executive of Hambrecht & Quist Capital Management LLC, which manages two health-care mutual funds worth more than $3 billion. ''But I tell you, I'm a believer now.''
With so many companies pursuing similar scientific endeavors and competing for finite resources, industry observers say, consolidation is inevitable. The capital simply isn't available to support 1,500 firms in the United States, said James Garvey, who as chief executive of SV International Life Sciences oversees $700 million in venture funds. After losing $300 billion in the last bust, he said, investors aren't likely to rush into biotech any time soon. All of which means a funding crisis is looming.
Ultimately, however, Garvey and others believe the crisis will give rise to a more efficient and productive industry. The process will be painful. Some promising technologies will inevitably be delayed or abandoned. But for the most part, the products and companies that survive the maelstrom will be the stronger for it. As companies merge, they will advance only the most promising of the products in their pipeline. Investors will only support firms with strong management, a realistic business model, and real treatments for real diseases.
''Those that emerge will have the ability to take the best of the science forward in a more efficient fashion,'' Garvey said. ''And they will bring to the market more products in the coming decade than the industry has produced cumulatively in the past two decades.''
Thomas Moore, who took over as chief executive of Cambridge-based Biopure in July, said too many firms make the mistake of not raising enough money when they can and relying too heavily on the public markets for cash. With around six months of cash left, Moore has set the goal of raising $45 million by the end of April - one month before the company expects to hear from the Food and Drug Administration on its application to market its human-blood substitute, Hemopure. If approved, the company needs an infusion of cash to fund the product's launch. But it also needs the money in case regulators ask for more studies.
Moore has spent much of the past few months meeting with investors and working to win their confidence. But he is also pursuing other deals, leveraging Hemopure as an asset to bring in cash from licensing agreements with other companies. And he believes the company is on the verge of turning a crucial corner. He is final stages of negotiating a deal that would give another firm the rights to develop and market Hemopure in Asia. If completed, the deal would bring in $30 million in cash between now and September 2003.
''It's an attractive alternative to raising money on the capital markets, but it also tells investors that we're a real business,'' Moore said. ''In today's market, the old rules don't apply. Good news doesn't have the same impact it used to have. There's more skepticism, and relying on a milestone to drive investment is a risky strategy.''
Naomi Aoki can be reached at naoki@globe.com.
This story ran on page C1 of the Boston Globe on 10/30/2002.
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