San Diego Business Journal Biotech: Uncertainty Prompts Careful Cash
Management Practices

An index analyzing the biotech industry's first quarter of 2001 confirms the boom of 2000 is over.

And virtually any publicly held biotech firm that wasn't able to raise money during last year's biotech frenzy , the industry raised a record $36.8 billion in funding , is in trouble, one analyst said.

"Basically anybody that didn't raise money during the period that ended August 2000 probably was struggling pretty badly, anyway," said Doug Obenshain, health sciences partner at Ernst & Young LLP in San Diego.

While most in the industry won't be hurting for cash any time soon, biotechs' seasoned leaders know to manage cash resources cautiously.

In a sector defined by inevitable setbacks and unpredictable failures , often after several years and spending hundreds of millions of dollars in research and development , being able to raise money is key.

Falling Stocks

According to BioCentury, an industry newsletter published in San Carlos, Calif., 100 biotech stocks fell 33 percent during the first three months of 2001.

That encompassed all areas of biotech.

BioCentury reported that during the first quarter worldwide, the industry raised about $2.3 billion in new financing.

That would put the industry at $9.2 billion raised for the entire year. That is merely a fourth of what the sector raised last year.

Yet, companies have no choice but to spend money if they want a shot at bringing a product to market.

"It's a Catch-22," said John McCamant, editor of the Medical Technology Stock Letter in Berkeley. Biotechs can't afford not to pursue a promising drug that excites investors, he said.

No one knows this better than industry veteran Gerald Yakatan, president and CEO of Avanir Pharmaceuticals in San Diego.

When he took over Avanir in May 1998, the firm was on the verge of shutting down.

Avanir was down to $1.4 million in cash and 11 employees. And company stock was delisted from the Nasdaq when Yakatan persuaded the Food and Drug Administration to review data of its oral herpes drug in March 1999.

The FDA approval saved the day. Avanir now has some $24 million in cash equivalents in the bank, he said.

But Yakatan admits it was a daunting two years. Back in 1999, going to Wall Street to raise additional funding would have been out of the question.

He finds, ideally, biotechs should have two years' worth of cash at hand. That's because biotechs cannot change their entire business plans if times are bad.

"You can't just slow everything down because of a bear market," he said. "It's not like you are selling widgets or you can cut back on advertising."

Light In The Tunnel

McCamant agreed, saying it's very important for executives not to become "paranoid" in difficult times.

"If you believe in your products, you need to find a way to get clinical results," he said.

Companies also have to look past dilution when seeking money, he said.

Obenshain agreed that biotechs should raise money whenever possible, even if that means diluting their stock.

McCamant, Yakatan and Obenshain, however, predict that momentum in biotech investments will return this year.

McCamant, who was most optimistic, said the biotech rally is already under way.

He said abstracts released over the Internet from the American Society of Clinical Oncology have piqued investors' interest.

He said stock of first-tier biotech companies rose more than 25 percent since the abstracts became available last week. Interest in smaller companies is brewing, he said.

Yakatan and Obenshain were more conservative in their predictions.

Yakatan said the momentum will return to the industry during the second or third quarter, provided investors see drug approvals.

Obenshain foresees biotechs to come back by April.

"We need a stabilized market where people are not afraid to get into the market," he said.