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Biotech Industry Solid, but VC Funding Forecast Gloomy

Biotech Industry Solid, but VC Funding Forecast Gloomy

Biotech: Several Well-Known Firms Struggling, Though Survey Notes Industry Here Is Maturing

BY MARION WEBB

Senior Staff Writer

Several San Diego-based biotechnology firms with drugs in late-stage development are well-positioned to file for U.S. Food and Drug Administration approval next year.

Those firms wanting to raise venture capital funding, however, received rather bleak news from Ernst & Young biotech experts at a recent gathering of local biotech executives.

First the good news: The local industry made up of medical device firms, platform technology and biotech product firms generated more than $1 billion in annual revenue.

Local biotechs are “well-positioned” in the current economy and biotech stock slump, according to a recent Ernst & Young survey.

The flipside: Venture capital funding in the life sciences sector fell to $28 million in the third quarter of this year.

That compares to $63 million in the third quarter invested in the local biotech sector in 2001, according to a survey released in October by PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree.

“The money is there, but (the VCs) are doing more due diligence,” said John McCamant, editor of the Medical Technology Stock Letter in Berkeley. That means less money for biotechs in the earliest stages of development.

The forecast for 2003 is even more grim.

“Access to capital gets worse next year,” Christian Nolet, a partner of Ernst & Young, told members of Biocom, the local life sciences trade group.

Overall, stocks in the biotech sector have plummeted 48 percent this year as the 2000 biotech bubble continues to deflate, said Rich Mejia, a San Diego-based partner of Ernst & Young.

In 2000, the biotech sector raised a record amount of money , $35 billion , cashing in over the excitement of the mapped human genome and the failure of many dot-com and tech firms.

Nationally, more than 30 public biotechs have restructured in the third quarter alone, the survey showed.

In San Diego, several biotechs have cut costs by laying off workers, slashing programs and selling off assets.

Tough Times

La Jolla-based Advanced Tissue Sciences, after filing for Chapter 11 bankruptcy in October, recently elected to liquidate the company’s assets.

Immune Response Corp., a Carlsbad-based HIV vaccine firm, warned it may cease operations and file for bankruptcy soon if it is unable to raise money.

Alliance Pharmaceuticals Corp., after laying off 35 employees, said last week New Hope, Pa.-based imaging firm Photogen Technologies Inc. agreed to buy all rights to Alliance’s contrast agent, Imagent.

If the buyout falters, Alliance will have to pay Photogen a break-up fee, the firms said.

Financial details were not disclosed.

Other local firms, including Hollis-Eden Pharmaceuticals, Genetronics Biomedical Corp. and Epimmune also warned in recent Securities and Exchange Commission filings they need a cash infusion.

Corvas International Inc. in July cut nearly half of its 109-person work force, a move expected to save $8 million annually.

But even biotechs with enough cash to pursue costly research-and-development programs are being cautious. Isis Pharmaceuticals Corp. recently cut 25 workers in its GeneTrove unit, amid a lack of clients for its functional genomics database.

The public firm remains in a strong cash position with $292 million in cash.

Some private biotechs still managed to raise cash from venture financiers in recent months.

Among them is San Diego-based medical device firm NuVasive Inc., which secured $15 million in a fifth round of financing in July.

Industry Growing Up

Ernst & Young found San Diego’s biotech sector remains promising, based on the responses from 111 firms in the survey.

Thirty-two percent of San Diego-based firms have been in existence more than 10 years. Many are run by “seasoned executives” who’ve led firms through previous down markets.

About 23 percent of biotechs are less than 3 years old.

Fifty-two firms surveyed have a combined 86 drugs and diagnostics in Phase II and Phase III trials, with 135 more in development.

Several firms plan to file for FDA approval next year: Among them are Isis for a cancer drug; La Jolla Pharmaceutical Co. for its lupus drug; Amylin Pharmaceuticals for a diabetes drug, already deemed “approvable” by U.S. regulators; and Neurocrine Biosciences, which develops a sleep drug.

At the same time, local firms will continue to rely on bigger companies to help finance the hundreds of millions of dollars needed to develop a single drug.

About 85 percent of San Diego biotechs currently seek alliances, Ernst & Young said.

Several pharmaceutical firms with expiring drug patents face generic competition, including Kenilworth, N.J.-based Schering-Plough’s drug Claritin. The shortfall of promising drugs in their pipelines could aid biotech partnerships.

Irish drug giant Elan Corp., which is being investigated for its accounting practices, has severed multiple partnerships to cut costs. Locally, firms including Ligand, Isis and FeRx Inc. have all been negatively affected by Elan’s cost-cutting.

Nolet expects at least one large pharmaceutical merger in the next 12 to 18 months.

He also foresees more biotech-to-biotech mergers, such as Maxia Pharmaceuticals Inc. in San Diego recently acquired by Incyte Genomics Inc., in the Bay Area.

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