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Risk-Averse Investors Leave Biotechs

A year ago, Genoptix took advantage of the robust public markets and raised $85 million in an initial public offering that priced above forecast.

The Carlsbad-based company attracted investors who saw potential in its ability to offer full diagnostic reports to physicians who treat leukemia and lymphoma patients.

In today’s suffering economic climate, that marketplace has all but dried up for life sciences companies and related industry sectors.

Many biotechs that registered to go public have withdrawn their attempts to capture a piece of the public markets in lieu of alternative financing.

San Diego-based Phenomix, a Novartis-backed firm developing treatments for type 2 diabetes and hepatitis C, canceled its $86 million IPO attempt Oct. 23. That same day, Phenomix said it had inked a deal worth a potential $340 million with Forest Laboratories of New York to push forward its lead diabetes drug candidate.

“We all know IPOs aren’t the trip to the bank they used to be,” said Standish Fleming, managing member of La Jolla-based Forward Ventures, who led a panel presentation last week at the third annual Biocom Investor Conference at the Hyatt Regency La Jolla. Biocom is a life sciences association representing about 600 companies in Southern California.

Now, the biggest question facing local biotechs is when the markets will return. Secondly, panelists pondered, what will those markets want.

Stelios Papadopoulos, a retired investment banker and biotech veteran, told a crowd of industry executives and life sciences investors that IPOs could reach peak levels when the markets return.

“If and when it comes back, we may see some big numbers,” he said.


Finding Funding

Many analysts agreed, however, that investors have been more selective with their money in recent times.

Private equity funds, such as those fed by endowments and foundations, public pensions and family estates, are struggling to put new money into the pool, says Andrew Busser, principal and co-founder of Symphony Capital, which invests in small public companies and later stage private firms.

Many investors have flocked to companies making reformulated drugs, or products that seek to eliminate previous problems, such as skin irritation or absorption rates, because they involve fewer regulatory barriers.

San Diego-based Adventrx Pharmaceuticals, for example, is seeking FDA approval for new formulations of currently marketed chemotherapy drugs Navelbine and Taxotere.

“We knew we could get approved with just one study versus Phase 1, 2, 3 trials, so, obviously, that’s an advantage for us,” Chief Business Officer Brian Culley told a group of life sciences executives and investors during the conference.


New Strategies

Similarly, companies are looking to complement existing therapies with new product candidates, such as the work happening at San Diego-based Tracon Pharmaceuticals.

Tracon CEO Charles Theuer says the privately held firm has received a healthy helping of investment dollars from Paramount Capital Investments, but came to the conference with the idea of seeking a pharmaceutical partner after the company completes its first human studies.

One of those studies involves a drug candidate that would reverse a patient’s resistance to Temodar, a chemotherapy drug made by Schering-Plough.

“Reversing resistance to chemotherapy is a big opportunity today,” Theuer said.

More often, though, biotechs flock to the investor conference to find investment dollars for human studies.

The two-day event, which attracted an equal mix of private and public companies, about 25 of each, allows industry executives to showcase their latest advancements to investors.

Recently, though, investors have been more cautious with their funds, choosing to invest in late-stage companies with products in human trials before investing in earlier-stage, riskier endeavors.


Out With The Young?

Industry executives have questioned whether early stage companies, known for pushing innovation in the industry, could survive during turbulent times. San Diego is known for its plethora of young, innovative companies.

Fledgling drug companies, those without product candidates in human trials, rely on millions of dollars in investments to get their enterprises into the clinic. Often referred to as the “valley of death,” funding gaps that exist between early stage research and human trials can be fatal for some companies unable to find enough backing.

“It’s important for biotech CEOs that you’re using all the tools in your armaments,” said John Chambers, head of health care investment banking at Merriman Curhan Ford. “The buyers aren’t going away.”

San Diego’s biotech cluster employs an estimated 40,000 people and has a $9.1 billion annual impact on the economy. The area is home to 500 biomedical companies, according to the San Diego Regional Economic Development Corp.

Some industry analysts say innovation will be key to survival, although much of that innovation comes from early stage companies struggling to come up with sufficient funds.

“If we don’t innovate, it’s going to be over,” Papadopoulos said.

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