Venture Capital: Seattle biotech shakeout under way, some fear
Friday, August 30, 2002
By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER
Is Seattle's biotechnology bubble bursting?
Some evidence exists that it may be. Over the past four months, eight local biotechnology companies have cut more than 300 employees -- a sudden reversal from last year, when new job postings were plentiful and biotechs were swimming in cash.
Amgen's recent purchase of Immunex means even more biotech workers will be joining the unemployment lines in coming months, although Amgen did not return calls yesterday about cutbacks here.
While the biotech layoffs probably will have little impact on the local economy, some longtime watchers of the biotechnology industry believe a shakeout is well under way. A few even draw comparisons to the dot-com bust that led to more than 24,000 layoffs in the state in the past two years.
Alan Frazier, who has watched the rise and fall of life sciences many times -- first as chief financial officer of Immunex and now as a venture capitalist with Frazier & Co. -- believes the wave of layoffs may have just begun.
"This is a Darwinian time, and over the next year or so, you are going to see firms shut down," said Frazier, who raised a $400 million health care fund last year. "But I think it is Darwin at work. It is not necessarily bad. It is reality."
This comes as a bit of a surprise because only 18 months ago, the life sciences sector was a bright spot in an otherwise dismal economy.
Back then and continuing into recent months, everyone wanted a piece of the biotech action.
Optimistic venture capitalists, licking their wounds from Internet flops and hoping to find the next "hot" sector, started tossing piles of money into biotechnology, medical device and drug development companies.
Laid-off software and Internet workers rewrote their resumes for positions in biotechnology start-ups.
And real estate developers, saddled with acres of unused office space from dried-up dot-coms, began dreaming up new biotech campuses.
If this pattern of behavior sounds familiar, one need only look at the sorry state of Seattle's Internet start-ups -- many of which are no longer here. They, too, attracted unbelievable sums of money and captivated the real estate community with lofty plans of renovated warehouses and amusement park-style office buildings.
But like the Internet start-ups of the late 1990s, biotechnology companies depend on cash -- lots of cash. In fact, biotechs can burn through capital faster than a dozen dot-coms and still not have a product at the end of the day.
Nader Naini, a venture capitalist at Frazier, said that's a big reason that investing in life sciences is neither for the faint of heart nor the inexperienced interloper. Unfortunately, both entered the realm of biotech investing recently thinking it was a "safe haven." Naini also sees similarities between the demise of Internet companies and the current state of affairs in the biotechnology community.
"The concerns of what happened in the IT market -- the dynamics are very analogous in some ways," Naini said. "It is not exactly the same, but I think we are going to have to be very cautious over the next 18 to 24 months."
The frenzy may have hit a peak last quarter when investments in the sector increased by 42 percent and more than a third of venture dollars flowed into health care start-ups. Locally, investment levels also soared as six medical device companies raised $81 million.
That level of activity may be short-lived. There are still new companies and products being developed, but every entrepreneur in the life sciences field has gotten the message that times have changed.
That's certainly the case at Bio-Origyn, a tiny Spokane company that is planning to release a new infertility lubricant in December. The company scaled back several research projects and cut four staff members earlier this year as it concentrated on the vaginal lubricant product.
It also delayed the search for first round financing, a move that Bio-Origyn Chief Executive Officer Joanna Ellington said was difficult but necessary.
"We have to do more of a bootstrap model, where we get one product to market and then we can move on to the others," said Ellington, reflecting the mind-set of many biotech executives these days. "I don't think that's unhealthy. But it is frustrating as entrepreneurs because we just want to make products but we need money to do that."
Other biotechnology companies are looking at ways to cut costs. Dendreon Corp., a publicly traded Seattle biotech, announced plans to outsource some of its cell processing activities this week at a cost savings of $10 million over the next four years. Seattle's NeoRx Corp. is trying to sell intellectual property to raise money while Bothell-based Northwest Biotherapeutics is looking for a buyer.
Frazier, whose firm is actively searching out biotechnology and medical device start-ups, said there are still plenty of opportunities for the best-of-breed companies. Many of his firm's early-stage companies, some of which have not yet been announced, are "fighting off" investors, Frazier said. Still, he thinks the overall market needs to readjust because too much money was raised last year.
"Twelve months ago everybody raised so much money that it disguised issues," he said. "There was that period where everyone could just raise a ton of money. Now it is a very difficult time."
Not everyone believes a shakeout is near.
Scott Wolf, a partner with Scout Medical Technologies, a medical device incubator in Kirkland, said the problems are really isolated to certain areas of the industry. Those companies that have experienced problems -- such as genomics, proteomics and gene therapy firms -- have found it difficult to survive because of their long development cycles, he said.
Wolf said Seattle's biotech bubble is not bursting, though he does admit the real estate market for biotech space could be soft for a while. Still, he is hopeful that biotech companies in Seattle can avoid the fate of the dot-coms.
"There is not going to be the domino effect we saw in Internet and communications companies," he said. "Biotechnology companies developing specific therapeutic compounds and therapeutic medical device developers are currently in favor because there is a clear path to marketing of the product and revenues for the companies."
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