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7-Business: Will biotech replicate dot-com's bust?

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TITLE:  Will biotech replicate dot-com's bust?
SOURCE: East Bay Business Times, USA, by Susan L. Thomas
DATE:   Apr 28, 2003

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Will biotech replicate dot-com's bust? 

Remember E-Stamp? Stretch the memory a little to a world far away, and
you'll recall that E-Stamp wanted to make its buck out of online postage
by ridding home offices and small businesses of those pesky trips to the
post office.

The firm lured $56 million in private investments before wringing $119
million out of the market in its initial public offering in 1999. One
year later, E-Stamp's glory had faded. Its stock was trading at about a

If online postage were going to take off, it would be years before the
business consumers E-Stamp needed would make it profitable. Wall Street
wouldn't wait. So E-Stamp revamped. It used acquisitions to enter the
online shipping and logistics business, then abandoned that idea to
tackle the market for online corporate learning. By then, the stock was
trading in fractions.

It's a classic Web tale of woe - now the stuff of history books. Company
raises lots of money. Company spends lots of money. Investors get
nervous. Company changes direction. Curtain closes. Lights dim.

Now the same likely scenario has begun unraveling again - this time among
some development-stage biotechnology firms. Although some venture-funded
businesses and young public companies have limped along for months with
dwindling cash, their reserves are so low now that some have begun to
close. Others are resorting to the kinds of desperate maneuvers that
often foreshadow demise - reverse stock splits, executive shuffles and
business plan changes.

Lynx Therapeutics Inc. in Hayward, for example, had only $12 million in
cash at the end of 2002, and an accumulated deficit of $99 million. Large
Scale Biology Corp. in Vacaville reported $19.1 million in cash at the
end of its first quarter. Both were dangerously below the $50 million
threshhold typically considered adequate for such firms.

Last week Signature BioScience Inc. in San Francisco and Hayward shut its
doors. DNA Sciences Inc. in Fremont declared bankruptcy this month too.

And industry observers predict more closures - and consolidation for the
lucky ones - in the near future.

Not bust, but shakeout

But those in the industry don't expect an Internet-style bust in biotech.
Developing new drugs to treat diseases differs vastly from selling stamps
online. The return on developing a new drug promises a much greater
bounty, too. Biotechnology's customers are more dependent on the industry
than, for instance, shoppers looking for convenient video delivery or
digital subscriber lines.

Still, biotechnology is going through another shakeout. Some contend
that, as with Internet-related firms, not all biotech companies were
worthy of the venture capital investment they attracted. And, as in other
industries, not everyone will be around to see the shakeout through.

The results, say some observers, will be stronger survivors. Some
intellectual capital may be lost forever, but much of it will resurface
in other businesses.

"The financing environment for biotechs is really tough today, and I
expect that we will see quite a few companies going under in the near
future," said Chris Ehrlich, a venture partner with InterWest Partners in
Menlo Park.

There was a cascading effect in the industry following the mapping of the
human genome, and many investors were bitten by the genomic bug, Ehrlich
said. First the bioinformatics companies sprouted up to collect, store
and analyze data from the human genome. Some of those companies have
switched business plans and others have collapsed. DoubleTwist in
Oakland, for example, closed in 2002.

Since then, Ehrlich added, the tools firms have suffered, as have some in
the pharmacogenics area - an emerging speciality that has scientists
analyzing gene variables to determine individual therapies for diseases.
The tools firms emerged to sell their technology to biotechnology and
pharmaceutical companies to hasten drug development.

"You knew these business models were challenged," Ehrlich said, adding
that the tools did the work, but they didn't actually produce the drugs.

Nearly all of those companies now are trying to develop their own drugs.
But Ehrlich cautions this is a difficult tack. DNA Sciences, for
instance, turned to drug development and then realized it would take
longer than the company could afford.

"I think historically it hasn't been that successful, but it's the right
thing to do," he said of changing business strategies. "In trying times,
good managers have to sort of readapt themselves to the environment."

And even those who are trying to adapt still suffer. "I think what you're
going to see is more M&A," he added, noting that the obstacles to
acquisitions are gone now because many companies no longer have the
choice of whether to sell or not.

Who will hurt the most?

The goal of venture capitalists now is to invest in lower-risk areas
within the industry that give investors quicker exit possibilities, such
as in those further along in the drug development process, and specialty
pharmaceutical companies, Ehrlich said.

Stephen Benson, a biology professor at Cal State Hayward and director of
its biotechnology center, agreed tools companies are hurting the most.

"There's been a duplicate of a lot of technology," Benson said. "A lot of
technology has not matriculated into clinical efficacy."

DNA mining became easier to do, so biotechnology and pharmaceutical
companies started to do it themselves or bought the technology, Benson
said. There is still room in the market for those types of companies, but
they will be boutique firms that develop new, better technology.

Goeff Duyk, chief scientific officer at Exelixis Inc. in South San
Francisco and a member of Signature BioScience's board, acknowledges that
times are tough for biotech, particularly younger firms.

"You probably will see some more of this consolidation and companies no
longer in existence," Duyk said. "It is part of a business cycle.

"There's something Darwinian about it," he said. "The strong companies
will get stronger." Boom's perspective

Duyk, one of the founding scientists at Millennium Pharmaceuticals, says
venture capitalists continue to pour money into biotech firms and
companies continue to make new discoveries. The downtime, he added, comes
also with the perspective of the boom times of 2000.

Indeed, venture capitalists gave $4.7 billion to life sciences firms in
2002, up 70 percent from 1998, according to a study by
PricewaterhouseCoopers, Thomson Venture Economics and the National
Venture Capital Association.

As for the new technologies and biotech discoveries, Duyk believes much
of that will not be lost.

"I'm sure it will take awhile for those (technologies) to get back into
the food chain," he said.

When companies fail, he said, it's usually because management can't
determine how to move forward, not because of the technology.

For his part, Interwest's Ehrlich says biotech can learn some lessons
from the Internet and technology sectors' failures. Companies should
focus on their cash, he added, and take their product to the customers
who might buy it "earlier rather than later."

There may be a few others lessons, too.

Remember It didn't disappear. The company finally edged out
rival E-Stamp, buying many of its assets and patents. Although it's not
exactly a hot stock, the company is ambling along just fine. And with
shares at trading at more than $4 and about $190 million in cash, it
looks a lot better than some biotechs.