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7-Business: Despite growth, industry can't pull in venture capital

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                                  PART I
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TITLE:  Despite growth, industry can't pull in venture capital
SOURCE: The San Diego Union - Tribune, USA, by Penni Crabtree
DATE:   Nov 21, 2002

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Despite growth, industry can't pull in venture capital

Button up the overcoat for a long biotech winter.

That was the mood yesterday as the local life-sciences industry assessed 
the first Ernst & Young report on the state of San Diego's biotechnology 
and medical device companies.

The verdict? The life-sciences industry is a growing, innovative sector 
that has taken deep root in the region, spawning an estimated 400 biotech, 
diagnostic and medical device companies that generate more than $1 billion 
in annual revenue.

Yet despite the promise, a financial frost that descended this year 
promises to linger well into 2003, blighting some cash-hungry companies.

"The challenges in 2003 will be more significant than we'd have projected 
nine months ago," said Christian Nolet, a partner in Ernst & Young who 
helped present the survey to a gathering of 350 local biotech executives. 
"We had guarded optimism at the first of the year; we thought the surf was 
up here in California.

"Now we're wondering if there isn't a little bit of a tsunami going on as 
we weather another trough in the industry."

With the market for initial public offerings almost nonexistent, venture 
funding in San Diego's life-sciences industry, which looked promising at 
the beginning of the year, fell to only $28 million in the third quarter. 
That contrasts with $294 million in the second quarter and $63 million in 
the third quarter of 2001, according to a recent venture capital survey.

Nationally, more than 30 public biotech companies have restructured in the 
third quarter alone, many of them laying off employees and cutting back on 
research programs to conserve cash. Among those companies was San Diego's 
Corvas, which laid off 42 of 109 staff members in July.

More than 60 public biotech companies nationwide have less than one year of 
cash, based on operating losses over the past 12 months, according to some 
industry surveys. In San Diego, biotechs Epimmune, Hollis-Eden 
Pharmaceuticals and Genetronics Biomedical have warned in recent regulatory 
filings that their cash is dwindling and that they need to raise more money 
within a year.

And San Diego suffered the first loss of a major biotechnology company to 
bankruptcy when Advanced Tissue Sciences filed for Chapter 11 in October 
and, last week, liquidated its business.

More casualties may follow. On Tuesday, Carlsbad's Immune Response Corp. 
warned of bankruptcy "within days" if it can't find financing, and Alliance 
Pharmaceuticals is in such precarious financial shape that it hasn't paid 
its employees in almost a month, according to Alliance employees who 
contacted The San Diego Union-Tribune.

Gwen Rosenberg, a spokeswoman for Alliance, said yesterday she couldn't 
confirm or deny that the company hasn't paid employee salaries. The 
company, which recently took out a $3 million loan at an annual interest 
rate of 100 percent to keep its doors open, can't discuss finances because 
it is "working on a transaction," she said.

G. Steven Burrill, chief executive of San Francisco life sciences 
investment bank Burrill & Co., predicts there will be more "retrenchment, 
reorganization, restructuring, and refinancing in the next 12 months  not 
to mention a few delistings."

"Many in the industry are expecting the current bear market to continue for 
the next several quarters, and it's going to be a matter of survival of the 
fittest," said Burrill.

The fate of some private, startup biotech and medical device companies is 
also uncertain. While venture capital firms have hundreds of millions of 
dollars to invest, most of that money remains cautiously on the sidelines, 
said Nolet.

Mid-stage venture capital financings, as well as biotech company 
valuations, are down 50 percent from last year, he estimates.

"Right now there are very deep pockets  and very short arms," said Nolet. 
"Access to capital will get worse before it gets better."

Yet despite a general financial gloom over much of the life-sciences 
industry, the sector remains fundamentally sound and full of potential, 
said some industry observers. That strength was underscored by some results 
of an Ernst & Young survey of 111 San Diego biotech and medical device 

Among other things, the survey found that:

- 32 percent of San Diego biotech and medical device companies are more 
than 10 years old, providing the local industry with a seasoned set of 
executives who've led firms through previous down cycles. And 25 percent of 
the companies are 3 years old or less, ensuring a new generation of 
companies to follow.

- San Diego companies raised $1.5 billion in venture capital, private 
placements, debt offerings and other financings in the first half of 2002, 
more than in the entire previous year. So while some companies are 
suffering, others remain well-financed and better able to weather the 
current financial drought.

- About 13 percent of the companies had products in final, Phase 3 clinical 
studies, the last stage of testing before a company can seek regulatory 
approval to sell a drug or device. Another 13 percent have products in mid-
stage Phase 2 trials, and 11 percent have products in the first Phase 1 

There are at least a dozen local biotech companies with products in Phase 3 
studies, and some of them, including La Jolla Pharmaceuticals, Isis 
Pharmaceuticals, Ligand Pharmaceuticals, Amylin Pharmaceuticals and 
Neurocrine BioSciences, expect to know within the next several whether 
their drugs work.

Many in the life-sciences industry are banking on product approvals to 
renew Wall Street's interest in initial public offerings.

"There is a great pipeline of products in late-stage clinicals, and a 
number of global leaders think 2003 and 2004 will see a dramatic increase 
in product approvals," said Nolet. "That will be one of the catalysts to 
set the industry in a more favorable light and direction."

                                  PART II
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TITLE:  Venture capital plentiful for life sciences industry, VCs say
SOURCE: Pacific Business News, USA
DATE:   Nov 20, 2002

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Venture capital plentiful for life sciences industry, VCs say

Biotech specialists in the international venture capitalist community have 
told a Honolulu audience that Hawaii is on track to have a thriving biotech 
industry, but cautioned not to expect it to become a huge sector of the 
economy overnight.

"Have patience and it will happen," Samuel Colella told the University of 
Hawaii's Kipapa lecture Tuesday.

Colella, cofounder of Versant Ventures, who spoke with director Robin 
Bellas of the Stanford Business School Trust and British biotech expert 
Roger Quy, took an optimistic long-term view for Hawaii biotechnology 

The panel said legislation creating tax incentives for companies employing 
new technologies sent a welcoming message to biotech investors, as have 
plans for a new medical school. Also cited was the election of a Republican 
governor, seen in some quarters on the mainland as a shorthand message that 
the mood of the electorate in Hawaii may be more pro-business than formerly.


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