Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

Luke Timmerman 

Biotechnology by its nature goes through booms and busts driven by hope and fear, but now the industry is really in deep trouble. That’s the big headline coming out of this year’s Ernst & Young annual biotech survey, Beyond Borders.

Common sense would tell you that in a global economic meltdown, where mainstays like Citigroup hang by a thread, investors might not want to park their capital in an industry in which 90 percent of product candidates fail. Not to mention that, it also takes hundreds of millions of dollars and a decade or more to determine who the real winners are in developing new drugs. So it should come as no surprise that biotech companies in the U.S. and Europe raised $16 billion last year, a whopping 46 percent drop from the prior year, according to the Ernst & Young report.

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By Jonathan Matsey, WSJ

For many life sciences companies, setbacks during all-important clinical trials can be a death knell. But sometimes it just means you have to go back and tweak the criteria a little.

Trial parameters are key to passing muster with the Food and Drug Administration for both drugs and devices, and companies can have setbacks with good products due to the structure and endpoints established for the study.

Take the case of PhotoThera Inc. Despite failing to meet the endpoints on its previous clinical trial, PhotoThera’s underlying technology earned it a new, $50 million venture round this week as it sets out for another round of human studies.

The company conducted a trial for NeuroThera, a non-invasive device that uses infrared lasers to treat patients up to 24 hours after an ischemic stroke. The device would be a significant improvement over existing tissue plasminogen activator drugs, which work only three hours after, or highly invasive devices.

But the company’s trial, which completed enrollment of 660 patients late last year, was broad in its inclusion criteria, including severely affected patients who were harder to treat.

“It was an all-comers trial that allowed us to get fast recruitment, said Kerry Dance, managing director at Hamilton BioVentures. “We just had a lot of people who ruined our standards.”

In the new trial, expected to take three to four years, PhotoThera hopes to gain the same statistically significant results it did in the earlier trial and be able to meet its primary endpoints. “But just by moving down to slightly less severe strokes, we would have succeeded,” said James Bochnowski, general partner at Delphi Ventures, another PhotoThera investor.

Other companies have recently been successful in raising additional cash for trial re-dos, including Angstrom Pharmaceuticals Inc., which took an additional $3 million in January to launch a new Phase II clinical trial for its lead ovarian cancer peptide treatment after the standard-of-care for the disease shifted mid-study.

And last February, Avera Pharmaceuticals Inc. took a $9 million recap to re-launch clinical trials on a drug for irritable bowel syndrome and overactive bladder after problems with a non-active metabolite.

As in those cases, it was a belief in a strong underlying technology that brought PhotoThera’s investors back. “PhotoThera has a potential treatment for acute ischemic stroke, which is a huge unmet clinical need,” said Bochnowski of Delphi, whose firm joined Warburg Pincus, the lead, De Novo Ventures, Hamilton, Solstice Capital, Vertical Group and individuals in an insider Series D.

From WSJ.com: Health Blog by Jacob Goldstein

Many investors are sticking to cash. Big Pharma shops are spending tens of billions on big acquisitions. So who will support the small biotech shops that typically lose money for years before they have any chance of turning a profit?

Maybe nobody. Burrill & Co., a San Francisco VC shop that invests in the life sciences, says 120 out of 360 publicly traded biotechs have less than six months of cash left. A year ago, only 12 companies were in that position. The WSJ has the story.

Ten biotechs have declared bankruptcy since November, according to the industry’s trade group. Others are in tight spots. Altus Pharmaceuticals said last week its auditors doubt it can make it through the year without more cash. Isolagen, which has filed for FDA approval of its drug, says it has only three weeks of cash left.

Developing biotech drugs is a tough business, and the industry has always seen its share of failure. But G. Steven Burrill of Burrill & Co. says the financial crunch has taken the industry beyond the ordinary.

“[W]e are clearly in unprecedented times,” he told the WSJ. “This isn’t a ‘This too will pass.’” By the end of the year, Burrill says, 100 publicly traded biotechs could fail or be taken over.

By Andrew Pollack, SiliconValley.com 

It is called a reverse merger. And for a failing public biotechnology company, it can represent one last roll of the dice.

The gamble is to merge with a privately held company with better prospects.

The private company takes over the public stock listing and management of the business. The money that the public company had left is then plowed into developing the formerly private company’s products. If those products succeed, the shareholders in the old public company can eventually benefit.

Reverse mergers can be used in other ways, as well. The deal that Merck and Schering-Plough announced last Monday, is being done that way to let Schering sidestep a change-of-control clause in a separate drug partnership it has with Johnson & Johnson.

The reverse mergers in biotechnology are meant to help private companies go public at a time when market conditions have made it virtually impossible for them to pursue conventional initial public offerings.

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By Steve Johnson, Mercury News 

A wave of multibillion-dollar deals this week signals the acceleration of a deal-making frenzy that will likely reshape the life-sciences industry.

In the two latest, South San Francisco-based Genentech on Thursday finally agreed to a $46.8 billion deal with Roche, while Foster City-based Gilead Sciences moved the same day to snap up Palo Alto-based CV Therapeutics for $1.4 billion. Earlier this week, pharmaceutical giant Merck agreed to buy Schering-Plough.

Failing in large measure to develop their own new medicines and facing a slew of generic competitors as their drug patents expire, companies like Roche — often dubbed Big Pharma — increasingly are bolstering their product lines by swallowing up biotech and other drug companies with hot products.

And Bay Area biotech companies are especially attractive takeover targets. Aside from Genentech and CV Therapeutics, companies whose names pop up as possible acquisitions for Big Pharma or other biotech suitors include Affymax of Palo Alto as well as Exelixis and Theravance, both of South San Francisco. Affymax is working on treatments for kidney diseases, Exelixis focuses heavily on combating cancer, and Theravance is developing medicine for respiratory disease, bacterial infections and gastrointestinal ailments.

Some experts fear the trend might blunt the innovative, research-oriented cultures that long have been the hallmark of such legendary biotech firms as the venerable Genentech. Others say Big Pharma may stop work on some promising but expensive-to-develop drugs at the companies they buy or could so dominate certain drug markets they could foist higher prices on consumers.

But others discount such concerns, noting the merger trend has been growing for nearly two decades without stifling biomedical research, and they predict that a lot more deals are likely to be in the works.

“I don’t see any end in sight for the next two to three years,” said Mark Edwards president of Deloitte Recap of Walnut Creek, which tracks these deals.

There were 31 such mergers and acquisitions in 2008, a record number, according to Edwards’ company. That compares with 19 in 2007, 24 in 2006 and 23 in 2005.

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Dr. Brian Druker found a way to defeat a rare leukemia. The result was the miracle drug Gleevec. Now, Druker hopes to build on his success

By John Carey, BusinessWeek 

For Dr. Brian Druker, innovation requires putting up with grueling work hours and taking some big risks. “In science, most things are not very likely to work,” explains the tall, slim researcher. “But there are some that would be so incredible that you have to take a leap of faith and give them a try.”

That certainly describes Druker’s own crowning achievement, the revolutionary drug Gleevec, now a $3.6 billion per year blockbuster. Druker didn’t actually invent the drug, but it would never have made it to the market — and to patients — without him. An advance like Gleevec “only comes along once in 10 lifetimes,” says cancer center consultant Dr. Joseph Simone. “The way Brian stuck with it when people said it was a blind alley and got it into clinical testing was amazing.”

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The markets this year have demonstrated all too well why investors in stocks need a higher tolerance for risk, particularly those placing bets on many new biotech stocks.

Look at the recent roller-coaster ride for shareholders of Alexza Pharmaceuticals, who in 40 percent of last month’s trading sessions gained or lost more than 10 percent.

Shares of Alexza, the Mountain View drug company that developed a technology to vaporize drugs into an aerosol that quickens the rate of drug delivery, were first offered to the public in March 2006 at $8 a share. They’ve lost about four-fifths of their value so far this year.

In June, Alexza released results of a test for its drug designed to reduce panic attacks that proved no more effective than a placebo. The news sent its shares down 14 percent the next day.

On Wednesday its shares shot up 32 percent after Alexza announced positive results from its second Phase 3 clinical trial of its inhalation treatment for acute agitation in patients with schizophrenia or bipolar disorder. They closed Friday at $2.60.

WHY THEY DO IT: An example of why biotech investors endure such risk may be found in the company that supplied our top trader this week with his big payoff — Gilead Sciences, a Foster City biopharmaceutical company that supplies treatments for HIV and other infectious diseases.   

Since going public in 1992, shares of Gilead have gained more than 3,500 percent, comparedwith a 199 percent gain in the S&P 500 over the same period. During that time, 26 Gilead insiders have collectively made about $532.5 million in profit exercising options on roughly 45 million shares.

The allure of such returns might explain the high tolerance for risk that’s a part of the DNA of investors in some other biotechs.

By Julie Schmit, USA TODAY

Almost 40% of small and midsize public biotechnology companies in the U.S. are in danger of running out of cash within a year and government help is needed to encourage investment, industry leaders say.

“We’re at the most difficult time in the history of our industry,” says James Greenwood, chief executive of the Biotechnology Industry Organization.

More than a quarter of the 370 publicly traded U.S. biotech companies with market values below $1 billion had less than six months of cash on June 30, he says.

Bankruptcies, layoffs and drug-research delays have begun as companies save money, says Eric Schmidt, biotech analyst at Cowen and Co. “We’re starting to see the pain. Over the next three to six months, we’ll see more.”

Smaller public biotech firms, crucial for early-stage and cutting-edge drug research, are especially sensitive to economic slumps. They may need 10 to 15 years to create revenue-generating drugs, requiring them to rely mainly on investors until then.

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Biotech companies are facing the new reality of having to contemplate bankruptcy filing in the bad economy.

Bloomberg.com is reporting that five biotech companies have already had to seek bankruptcy protection in the last month, and that more bankruptcies are likely on the way.  According to Bloomberg.com, the companies most at risk have less than six months of cash on hand, only a few drugs in development, and no ”definitive” clinical data.  Bloomberg.com reports that a quarter of biotech companies currently fall into this category.

Bankruptcies have in the past been rare in the biotech world.  Troubled biotech companies have historically been acquired or have entered into licensing and other types of deals to survive.  However, the scope of this particular financial crisis is making bankruptcy filings more likely for biotech companies, since no one is available to bail them out from their current financial situation. 

Bloomberg.com reports on the reasons for this new biotech reality as follows:

The amount raised this year by biotechnology companies fell by $9.7 billion through September, or 54 percent, compared with the same period in 2007. . .  Biotechnology companies in the U.S. are raising less cash than they have in a decade. . . .Financing fell to $8.2 billion through September, from $17.9 billion last year. Venture capital funding fell 16 percent, to $2.9 billion. . . .

So what can biotechs in this situation do to survive?

Well, if they are lucky, they will be acquired by a pharmaceutical company.  Otherwise, they can try to just go into hibernation until the economy is better–a strategy that many businesses out there will likewise be doing.

The biotech community can only hope that this will be a short-lived crisis.  But isn’t that what we all are hoping for right now?

The biotech industry is facing the likelihood of a long IPO dry spell, which could extend beyond what is being forecasted in other industries, according to a report by Reuters.

According to Reuters, the last biotech IPO was in November 2007 with Nanosphere, Inc., which develops diagnostic tests, and in the last few weeks, over half of the biotech companies in the IPO pipeline have dropped out, including drug delivery company CyDex Pharmaceuticals Inc., Xanodyne Pharmaceuticals, which focuses pain management, and Phenomix Corp, which specializes in diabetes treatments. Reuters reports that only  five companies remain in the IPO pipeline.

Instead of IPOs, Reuters reports that biotech companies are continuing to turn to mergers; however, pharmaceutical companies are only interested in biotech companies that have products ready for sale, which means that they need to be past Stage 1 and Stage 2.  Pharmaceutical companies are not interested in investing another five years in research and development right now.  Rather, they are looking for products that can quickly replenish their pipelines.

When the IPO market returns, Reuters reports that biotech companies with marketable therapies for hepatitis C, cancer and Alzheimer’s therapies will be the best prospects for an IPO.

Having said this, Reuters reports that what may delay the return of the biotech IPO is the poor price of biotech stocks, and the fact that the biotech companies who have gone public have not increased their stock prices since their IPO.  Reuters reports:  ”Only seven of the 61 biotech companies to have gone public since 2000 are currently trading above their IPO prices.”

Thus, it appears that biotech is headed for a long IPO dry spell that is not likely to change course, until after the economy picks back up and the industry can show that IPOs make financial sense.   In the meantime, biotech companies will have to continue to rely on alternative exit strategies.