Dissecting Biotech Industry's Bleak Prospects
5,000 gathering to ponder their
woes at Seattle convention
TOM ABATE
Monday, May 17, 1999
Some 5,000 biotech leaders head to their annual trade
show this week in Seattle amid one of the toughest
times in the industry's history.
Despite record highs on Wall Street, most small and
midsized biotech stocks have tanked as money
managers shun long-term risks in biotech for instant
riches on the Internet.
''It takes seven to 10 years on average to approve a
new drug, and most institutional investors don't want
their capital tied up that long,'' said Curtis Hogue,
analyst with Volpe Brown Whelan in San Francisco.
And though the industry wants the Food and Drug
Administration to speed up its approval process, the
public is pressuring the agency not to let up its
scrutiny because some newly approved remedies
have turned out to have deadly side effects for a few
patients.
Even agricultural biotech, where companies have
been able to bring products to market quickly
because they escape most FDA scrutiny, could be
stalled by European regulators. The Europeans are
demanding that American food producers label crops
grown from genetically modified seeds. Remember
the Boston Tea Party? This time, it could be the
British or Germans in war paint, dumping cargoes of
genetically produced corn or soybeans exported from
the United States to their side of the pond.
''I'm afraid we could be headed for a trade war with
Europe over food,'' said David Flores, publisher of
the BioCentury newsletter in San Carlos.
Surveying the industry's current woes, even
optimistic Mark Edwards, managing director of
Recombinant Capital in San Francisco, voiced this
lament: ''Things do seem to have fallen to wrack and
ruin at the moment.''
But as tough as times are right now, Edwards and
other observers insist that better times lie ahead.
''The irony is that the industry has many more drugs
in late-stage clinical trials than ever before,'' said Carl
Feldbaum, president of the Biotechnology Industry
Organization.
As the sponsor of this week's trade show in Seattle,
Feldbaum expects a record 5,000-plus attendees to
peruse the show's 370 exhibits of everything from
test tubes to video-conferencing systems for
travel-weary execs.
Feldbaum is not alone in believing that the industry's
strong product pipeline means Wall Street is missing
a bet. Scott Morrison, a biotech consultant with Ernst
& Young in Palo Alto, has counted 305 drugs from
U.S. biotech firms in late-stage trials. Even if only 20
percent pass FDA review, as has historically been
the case, that would mean 60 new drugs on the
market within two years.
''There are a tremendous number of undervalued
companies out there,'' Morrison insists.
The industry has roared back from down cycles
before. After the lean years of 1993 and 1994,
biotech stocks and IPOs took off in mid-1995. The
current crop of small firms was fertilized by capital
from venture firms and Wall Street during the latest
boom cycle.
But the good times in biotech ended last summer
when the broader market went into a decline. Other
sectors quickly rebounded. So did large biotech
issues like Genentech and Amgen. But the vast
number of small to midsized biotech firms have never
recovered, causing cash-flow emergencies at dozens
of firms, according to Jon Duane, biotech consultant
with McKinsey & Co. in Palo Alto.
''It now takes $300 million to $400 million to develop
a drug, and if a young company can't raise money on
Wall Street, it doesn't have a prayer,'' he said.
Duane says the latest biotech IPO occurred last
August. In a bid to break the dry spell, two Bay Area
firms filed public offerings earlier this month.
VaxGen is a Brisbane firm working on an AIDS
vaccine. BioMarin Pharmaceutical in Novato is
testing a drug to treat a rare disease deadly to
children.
Both firms are in quiet periods, but what happens to
their IPOs over the next few months will speak
volumes about Wall Street's willingness to bankroll
early stage biotech.
Meanwhile, cash-starved firms are striking Faustian
bargains with large pharmaceutical companies. Big
drug firms have pockets deep enough to fund biotech
experiments. But if the biotech firm strikes gold with
a hit drug, its Big Pharma backer will lay claim to
most of the profits.
Even so, local biotech firms are fortunate that Big
Pharma has filled the funding gap caused by Wall
Street squeamishness. Edwards, at Recombinant
Capital, says Pfizer is indicative of this trend. Flush
with profits from Viagra, the New York drugmaker
recently opened a Bay Area office to plow at least
$150 million a year back into deals with Bay Area
biotech firms, he said.
The brewing trade war with Europe over genetically
modified foods has far less effect on the local
industry than the funding crisis because ag biotech is
largely a Midwest phenomena.
But food labeling is an issue that could rear up in the
United States as it has in Europe. Industry says
genetic modifications to crops -- generally meant to
increase their resistance to insects -- are an
environmental plus because they lessen the need for
insecticide sprays.
Americans have been swallowing enhanced corn and
soybeans for years with no ill effects, says BIO
President Feldbaum, who calls European insistence
on labeling ''irrational.''
But Doreen Stabinsky, environmental studies
professor at California State University in
Sacramento, calls labeling a consumer protection.
''Irradiated food is labelled,'' she said. ''If people
want to know how their food is produced, they should
have that right.''
Stay tuned for more on the food fight.
Look for BioScope every Monday in the Business
section. Send your bio- feedback to Tom Abate by
e-mail, abate@sfgate.com; fax, (415) 543-2482; or
phone, (415) 777-6213.
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