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Biotech—Industry may face uphill climb after successful year

Biotech: FDA Approvals, M & As; Likely, But Cash Influx Looks Less Positive

After years in the dark, biotechnology became a golden investment last year.

Biotech raised more than $30 billion in 2000, according to an Ernst & Young industry report.

The excitement over the sequencing of the human genetic code led investors to pour more money into San Diego’s biotechs than ever before.

For local biotechs the financial windfall provided the millions of dollars needed to move their research and clinical development forward. And some companies used the opportunity to go public.

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For 2001, more IPOs, mergers and acquisitions, and Food and Drug Administration approvals are certain, local experts predict.

Only three biotech executives respondended to the 11th Annual San Diego Business Journal/Deloitte & Touche Economic Outlook Survey, but for the most part they thought the industry’s economic outlook is positive.

Asked to compare the prospects for this year with 2000, two respondents said it will be “about the same” and one said “better.”

Others predict the biotech road into 2001 will be more bumpy.

Cautious Investors

Two biotechnology experts predict investors won’t open up their pocketbooks as freely.

Lisa Walters-Hoffert, managing director of venture banking firm Roth Capital Partners in San Diego, said investors are already paying more attention to companies with large market size products.

That is, drugs and devices targeting heart disease, certain types of cancers, rheumatoid arthritis and other diseases affecting a large patient population, Walters-Hoffert said.

Doug Obenshain, health sciences partner at Ernst & Young’s San Diego offices, said a repeat of last year’s biotech success is unlikely in 2001.

Even in 2000, times weren’t all rosy for biotechs.

Biotechnology stocks fell in March, regained momentum in July and then dropped again towards the end of the year.

Several local firms, including Diversa Corp., Sequenom Inc., Illumina Inc., Applied Molecular Evolution, Discovery Partners Inc., and Arena Pharmaceuticals, took advantage of the open window to go public.

Two other local biotechs, Elitra Pharmaceuticals and Stratagene, decided to put their IPO aspirations on hold late last year.

Obenshain predicts fewer local biotechs may brave the market this year.

Many Already Went Public

Another analyst, James McCamant, editor of the Medical Technology Stock Letter in Berkeley, said earlier the “good companies” already went public in 2000.

The jittery market will also affect mergers and acquisitions activity in the industry, Walters-Hoffert said.

In 2000, pharmaceutical firms acquired four San Diego biotechs: Ireland-based Elan Corp. PLC bought Dura Pharmaceuticals Inc. last November; Biovail Corp., based in Mississauga in Ontario, Canada, acquired DJ Pharma in October; Warren, N.J.-based Celgene Corp. bought Signal Pharmaceuticals Inc. in September; and San Diego-based Maxim Pharmaceuticals Inc. bought Cytovia Inc. in June.

The pooling of interests will continue to be strong this year, the analysts said.

If certain anticipated regulatory changes take place this year, more biotechs may be enticed to merge, Obenshain said.

Walters-Hoffert was less optimistic.

“We will see more selective mergers,” she said. “When people are cautious they prefer to buy cheap companies that already went public.”

Challenges Prevail

Joseph Panetta, president and CEO of Biocom, San Diego’s biotech industry association, was upbeat about the abilities of the association’s members.

But he pointed to serious problems.

Soaring electricity rates and housing prices and the need to build a better public transportation system and airport have biotech leaders worried, Panetta said.

“There is tremendous concern on the impact of electricity costs on operating costs,” he said.

In 2000, companies saw their electricity bill soar fourfold. For an industry whose livelihood depends on running large-scale refrigerators, centrifuges and other machinery, saving electricity provides a challenge.

Another problem is the onerous commute through the Interstate-5/I-805 interchange, where many biotechs are headquartered.

“We don’t have mass transit to move people into the UTC and Torrey Pines Mesa area,” he said.

San Diego’s high-profile scientific community will still draw companies and scientists from elsewhere despite these drawbacks, Panetta said. But he counts on newly elected Mayor Dick Murphy to work with local biotech leaders to find solutions.

Three respondents of the survey shared Panetta’s confidence in San Diego’s current political leaders.

Two respondents said they were “very satisfied” with San Diego’s leadership; one said he was “satisfied.”

Panetta said together they will grow San Diego’s biotech industry.

The respondents of the Economic Outlook Survey agreed.

Comparing sales and net income for local biotech companies from 2000 to 2001, two participants predict both indicators will rise by more than 10 percent this year.

One respondent foresees revenues and net income will rise between 1 percent and 5 percent.

Ernst & Young predicted $1.2 billion in total local biotech sales for 2000.

Toolboxes To Drive Growth

Panetta said “toolbox firms” , companies that sell tools and services to larger biotechnology and pharmaceutical firms , and “Insilica research” , companies that combine information and biotech technologies and sell databases of information to large firms, will spawn San Diego’s growth.

Walters-Hoffert and Obenshain agreed.

The sequencing of the human genetic code , undoubtedly the highlight of biotechnology in 2000 , is just the beginning, said Walters-Hoffert.

Now is the time to turn “hopes into reality.”

The same once held true for Internet-based companies.

When asked whether biotechs will crash like many dot-coms before them, the analysts said no.

Biotechs and dot-coms are based on different premises, Obenshain and Walters-Hoffert said.

“The biotech companies have rational, sustainable business models with very high profit margins that are realistically achievable,” Obenshain said.

Most biotechnology firms have solid business strategies and spend much of their efforts on protecting their intellectual property with patents, Walters-Hoffert said.


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