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7-Misc: US biotech companies run out of fundings

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TITLE:  Biotech Companies Seek Funds from Non-Wall Street Sources
SOURCE: The Philadelphia Inquirer, USA, by Andrea Ahles
DATE:   June 7, 1999

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Biotech Companies Seek Funds from Non-Wall Street 

If only biotechnology companies could genetically engineer money
to grow on trees, then maybe the capital-intensive industry would
not be experiencing such a tight financial environment. Many
biotech companies are having a tough time raising the money they
need to sustain themselves and their research, experts say. "It's
pretty horrendous for companies looking for money," said G.
Steven Burrill, chief executive officer of Burrill & Co., a
private merchant bank in San Francisco that invests in biotech
companies. Analysts and biotech executives point to several
factors that have contributed to the financial squeeze. With Wall
Street uninterested in biotechnology stocks for the last two
years, many publicly traded biotech companies are unable to hold
public stock sales to generate cash and are instead turning to
venture funds for more financing. Privately held biotech
companies that would have had initial public offerings in the
last two years also are looking to venture capitalists for
funding as they wait for the market to become more favorable.

As a result, start-ups and small biotech companies are finding it
increasingly difficult to get capital for research and
development. For example, LifeSensors Inc. -- a biotech company
in Malvern founded in 1996 -- has relied on private financing, a
National Institutes of Health grant, and its strategic
partnership with the Rohm & Haas Co. for financing through next
May, said Tauseef Butt, founder of LifeSensors. "The venture
capital market has been very cold to biotech, and it's rather
difficult to raise money right now," Butt said. A former
SmithKline Beecham researcher, Butt invested a substantial
portion of his own savings into the company, which has seven
employees, and did not take a salary from the company for the
first two years. S.R. One Ltd., a health-care venture fund in
West Conshohocken, has expressed interest in LifeSensors, however
Butt said the company would continue to look for other corporate
partnerships in addition to venture capital funds to help fund
its research.

With more than 1,300 biotech companies in the United States --
about 200 in Pennsylvania and New Jersey, according to the
Biotechnology Industry Organization -- a lot of companies are
competing for the same pool of money managed by venture funds and
other private investors. Venture funds devoted to life sciences
raised more than $2 billion in 1998 and are continuing to invest
in the biotech sector, said Ash Lilani, senior vice president of
Silicon Valley Bank. But the funds are now looking for deals with
less risk, which usually means more mature companies that have
products close to gaining regulatory approval. This often
excludes early-stage biotech companies. "The focus has changed as
[venture funds] want companies that have a quicker revenue
potential," Lilani said.

It usually takes a biotechnology company 10 to 12 years and
hundreds of millions of dollars to develop a drug and start
generating revenues from its products. This shift is evident,
Lilani said, as some venture funds invest more money into
Internet and information-technology companies that can develop a
product much more quickly than biotech companies can. Some
venture funds have stopped investing in the biotech sector. Oak
Investments in Westport, Conn., which still has older biotech
investments in its portfolio, stopped making new ones on Jan. 1.
Other funds are putting money into companies that provide
services to the biotech industry or produce medical devices that
undergo a shorter regulatory review process than drugs. Boston
Millennia Partners likes device and service companies because
they can grow and start posting revenues relatively quickly, said
Thomas Penn, a principal at Boston Millennia. "You usually take a
huge technical risk [with therapeutic companies], and we're not
comfortable with that," Penn said. These days, venture funds seem
to be the most comfortable with companies that they have funded
before, experts say. Because the public markets are not favorable
for initial public offerings, several biotech companies that have
solid clinical data on their products are completing additional
rounds of venture-capital financing to continue testing their
products while they wait to go public.

The Adolor Corp., a Malvern company that is developing
analgesics, has raised about $30 million during several financing
rounds, and had originally planned to take the company public
this year, but is now unsure, said John Farrar, the chief
executive officer. "When [the market] opens, we'll be ready, but
clearly at this point we're starting to make plans for
alternative ways of raising some money," Farrar said. The
company, which has 34 employees, completed an $8.5 million round
of financing in March and will use the money to advance the
clinical trials of three products. S.R. One, one of Adolor's
venture investors, is supporting several later-stage companies
for a longer time, said Brenda Gavin, president at the venture
fund. But Gavin said she thought this downturn in the market for
biotechs is not just a slump but a change in the industry. "These
companies are going to have to think of new ways and new models
to get money," she said.

One possibility is for biotech companies to model themselves
after information-technology companies, which make themselves
attractive for acquisition by developing a technology or product
that a larger player in the industry wants to add, Gavin said.
Most biotech companies want to go public but need to realize that
investors want a return on their money that can be achieved
through an acquisition, she said. While Burrill's fund is still
investing in traditional drug-development biotech companies, it
has set up a venture fund dedicated to agricultural biotech
companies. Newtown-based Kimeragen Inc. received $3.5 million
from the Agbio fund. West Conshohocken-based Rockhill Ventures
also is trying an alternative way of investing in biotech
companies by financing only virtual companies -- biotech start
ups that usually consist of a few scientists in a laboratory.
"When we birthed a company and nurtured them along, a lot of the
money went to things that didn't necessarily add value, like
infrastructure," said Hal Broderson, managing director at
Rockhill. Instead of providing funding for buildings and human
resource functions, Rockhill limits its funds to research and
development. Since switching to the virtual-company model in
1996, four the seven biotechnology companies in which Rockhill 
has invested started clinical trials within 18 months of being
financed with less than $5 million, Broderson said.

Selectus Pharmaceuticals -- one of Rockhill's first virtual
companies -- has three products being tested for efficacy. It is
now looking to gain a larger pharmaceutical or biotech firm as a
partner to fund the expensive clinical trials needed for
government approval. But most biotech companies are not virtual.
Biosyn Inc. -- a 10-year-old Philadelphia company that is testing
microbicides, which prevent sexually transmitted diseases -- has
just completed a venture-capital round of about $10 million so it
can move into the final phase of clinical testing for one of its
products. "It's frustrating trying to raise capital in the
biotech industry because you're trying to differentiate yourself
from other companies," said Anne-Marie Corner, Biosyn's chief
executive officer. "And as a biotech company, we cannot fund
late-stage studies without access to the public markets."

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