BIO 2001 International Biotechnology Conference &
Exhibition, San Diego, CA

June 23 – 27, 2001

On the road for Info.Resource, publisher of Oregon-Bioscience.com

By Lorraine Ruff, David Gabrilska and Scott Sipes
Milestones, the critical thinking company
Seattle, WA

Information for this article was gathered from biotech financing
panels at the BIO 2001 convention and exhibition
and from research and interviews following the conference.

Imagine the biotechnology industry as a John Wayne western. Biotech Belle has recently arrived at Boom Town Central, circa gold rush, after 25-years in the gold fields during which she has amassed a collective market cap of USD $441 billion (1). In the last five years, annual revenues have doubled to USD $32 billion. Biotech Belle, still dusty from her travels, observes an entourage of well-heeled "merchants" representing diverse and vested interests. While they don’t necessarily exhibit any interest in digging for the gold, they do wish to control some part of it.

During her gold field years, Biotech Belle has become the innovation arm of the pharmaceutical industry, which is why the merchants are interested in staying close to the gold fields. For most of the 25 years, the merchants clung to any shred of gossip about what was going on to guide investment decisions. As such very few understood the innovation coming out of the gold fields and their investment criteria have has been a series of flashes in the pan.

Fast forward to the 21st century.

"Volatility continues to be [a] hallmark of the sector," said Steve Burrill who has reported the field for most of its 25-year existence in annual reports of financial and management trends.

When viewed as a market, biotechnology continues to be impacted by tangential events.

"When U.S. President Bill Clinton and U.K. Prime Minister Tony Blair made comments on genes and that ’intellectual property of the biotechnology industry should be shared,’ biotech shares went into a free fall losing $40 billion market cap in a day and $100 billion in a week!" Burrill said.

When the dot com bubble burst, it cast doubt on technology-related investment across the board, including biotechnology, because investors couldn’t parse the hype.

And when it was reported that genetically modified (GM) StarLink® corn was inadvertently ingested by humans and may have been responsible for allergic reactions, it cost the industry an additional $1 billion in market cap. This loss wasn’t necessarily recovered when the Centers for Disease Control and Prevention (CDC) reported months later that there was definitively no link between human ingestion of the GM corn product and reported cases of allergic reaction. It appears that confidence is not necessarily restored even when the CDC, a distinguished institution that is charged with the responsibility of monitoring the public health, is called in to evaluate and report.

These tangential events are affecting the market and all tug and pull the sector in disproportionate and unpredictable ways that move valuations by the billions. These vagaries will continue to plague investment and valuations until demonstrable benefits outweigh potential downsides.

Here’s what we learned:

• Corporate venture relationships are growing and could provide a substantial component in the biofunding mix. While some 40 healthcare venture firms have a long, established relationship with the biotechnology industry, 60 additional venture companies entered the space since the turn of this new century stimulated by the industry’s maturity. Technically savvy corporate scouts abound. SR One, affiliated with GlaxoSmithKline, funds drug development hoping to identify innovation for its pharmaceutical and to build bridges to drug developers with novel intellectual property. To date SR One has invested approximately $300 million in deals. Computers, integrated circuits and biology are moving closer together. Intel wants to form corporate venture partnerships with bioinformatics and genomics companies stimulated by the intersection of biology and integrated circuits: biochips. Even though they haven’t closed any biotech deals, just last year, Intel invested $1.3 billion in 300 deals.

• Geography and infrastructure still count. Boston and the Bay Area – areas with leverageable regional infrastructure – dominate biotechnology investment capital. As the industry has developed in other regions, it has been successful when those localities focus on building infrastructure. What doesn’t work is the traditional economic development model, which promotes regional attributes: access to the Mississippi or some bridge, apples, bourbon, or crawfish, or when regions make boastful claims in an attempt to position themselves into prominence. The biotechnology industry demands access to academic excellence in molecular biology, physics, and information technologies; access to capital, technically trained personnel and the arts; good schools for children and, hopefully, reasonably priced homes. Governors, power company executives and chambers of commerce may expect that "if we promote it, they will come." Not so. Not for this industry.

• Preparing for the market at the preclinical stage. In the presentation, "preparing for scientific due diligence," panelists encouraged biotech drug developers to write the product label at the preclinical stage. In doing so drug developers will be focused on designing a product with the end user in mind, desired features and benefits that address unmet needs, and will position the new development against competitive modalities, some of which are already approved and generating revenues for their companies.

• It is now clear that large pharmaceutical companies tap innovation by forming partnerships with biotechnology organizations. Biotechnology company management is keen on forming R&D relationships for products and/or technology platforms. According to Dennis Purcell, managing partner at Perseus Soros Management, L.L.C., the "best value for pharmaceutical companies for partnering relationships occurs at the pre-clinical stage or at the end of Phase II." Pharmaceutical companies are still using both cash and stock to secure these relationships.

• You have to walk in the shoes of pharmaceutical companies. It’s true that the pharmaceutical industry is looking to biotechs for innovation. But nothing kills a relationship quicker than being out of sync with how big pharma makes drug development "go" / "no go" decisions, including adopting the ruthless practice of killing non-performing assets sooner rather than later. If they do not adapt in response to corporate partner imperatives, biotechnology management may be perceived as insensitive to those attributes pharmaceutical companies holds in high regard: time and focus.

• Technology delivers system solutions, e.g., irradiation, GMO, stem-cell research, all of which by their very nature provoke public scrutiny and protest. When viewed from a world perspective, the resulting uncertainties create both problems and opportunities. For instance, the Scotland-based Roslin BioCentre correctly assessed the state of uncertainty for stem-cell research in the United States and communicated to prospects that this research can be undertaken in Scotland without the defocusing fallout of political uncertainties. In 1990, Parliament passed the Human Fertilization and Embryology Act. The intent was to provide a framework for regulating In vitro Fertilization (IVF) clinics, but it also included sections that allowed research on human embryos up to 14 days of development. Last year, Parliament approved an extension to the Act to include stem-cell research. The bottom line is that biological research will be undertaken if the impact of future applied technologies offer or are perceived to offer enough potential benefit.

• The FDA is taking more time to review experimental therapies, from a minimum of13 months in 1998 to 17 months in 2000. Each month of delay can cost a biotech company $1 million on average in operational costs at this stage. The industry has attempted to address this in previous decades, but again, the cyclical nature of this issue is terribly problematic to an industry that is focused on delivering benefits, revenues, and validation of a relatively new science.

• Biotechnology management needs to build relationships and keep track of investment cycles. As deals cash out, investors look for re-investment opportunities. Contact with investors always seems to be "too early "or "too late." On-going relationships bridge that gap.

While we were impressed with what appears to be a broadening array of financing options for companies, it’s not necessarily the case that financial support is becoming any easier to attain. A willingness to invest or the decision to sell still turns on investor confidence in a sector that is largely inexplicable and whose benefits and return are future-based – sector attributes that we believe are contributing to stunning volatility.

Biotech management has very little control on the outcomes of clinical trials, the effect of day traders, or how institutions manage clinical trials in which there have been deaths associated with clinical or oversight irregularities, e.g., University of Pennsylvania and most recently, Johns Hopkins. However, biotech management can step up communications of actual benefits – of which there are many – and eschew future-based hype - e.g. genetically modifying rice with Vitamin A to improve nutrition and reduce disease on a global basis that’s still years away.

We predict that this will go a long way toward fundamentally reinforcing company valuations, and will have a desired secondary effect of minimizing industry volatility at a time when the world is certainly taking notice.

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1. In comparison, Merck and Pfizer have a combined market cap of USD $440 billion.

 

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