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7-Misc: Financial world and biotech industry meet in Seattle, USA

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TITLE:  Dissecting biotech industry's bleak prospects
        5000 gathering to ponder their woes at Seattle convention
SOURCE: San Francisco Chronicle, by Tom Abate
DATE:   May 17, 1999

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Dissecting biotech industry's bleak prospects
5,000 gathering to ponder their woes at Seattle convention

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

"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 Pharmabacker 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
by e-mail:
fax: +1 415 543-2482
or phone: +1 415 777-6213.


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