Friday, November 21, 2008

Bloomberg: Unprecedented Biotech Bankruptcies

We are still a long way from the bottom...

`Unprecedented' Biotech Bankruptcies Erupt Amid Finance Crisis

By David Olmos and Rob Waters

Nov. 21 (Bloomberg) -- The global economic crisis has cut funding for biotechnology companies to the lowest level in a decade, triggering bankruptcies and threatening development of drugs based on biomedical breakthroughs.

In the past month, at least five biotechnology businesses have sought bankruptcy protection, according to company news releases, and others may be heading toward a similar fate. Those at highest risk have experimental compounds moving into costly human research. Peptimmune Inc., a 6-year-old closely held firm, says it’s struggling to pay for clinical trials of its promising multiple sclerosis drug.

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, according to Burrill & Co., a life sciences investment bank in San Francisco. That may mean work on dozens of potential treatments will stall or die as companies fire workers and shelve early research projects, industry executives and investors said.

“I’m looking down the barrel of a gun,” said Peptimmune’s Chief Executive Officer Thomas Mathers in an interview. The Cambridge, Massachusetts-based company’s cut staff by more than half to 22 people, moved to smaller offices to conserve the $6.5 million on hand and is delaying research on new drugs for Alzheimer’s disease and Parkinson’s, Mathers said.

Biotechnology companies in the U.S. are raising less cash than they have in a decade, according to Burrill, which tracks investment in the life-sciences industry. Financing fell to $8.2 billion through September, from $17.9 billion last year. Venture capital funding fell 16 percent, to $2.9 billion.

Bankruptcies Rare

“For the first time in the history of the biotech industry, you’re going to see unprecedented levels of bankruptcies and dissolutions,” said David Strupp, managing director in the life sciences group at Canaccord Adams, a research and investment bank in New York. “This all will play out in the next six to nine months.”

Bankruptcies in biotechnology have been rare because struggling companies often dodged trouble through mergers, licensing or development deals, or through investors willing to make cash infusions, Strupp said in an interview.

Now, a large number of companies are “not cycling out of this queue,” Strupp said. “Wall Street won’t finance them, and the pharmaceutical industry can’t buy all of them. They keep marching forward without the ability to get saved.”

Most Advanced Drug

Peptimmune’s most advanced drug, PI-2301, is a multiple sclerosis treatment designed to be taken weekly. It would compete with Teva Pharmaceutical Industries Ltd.’s daily treatment Copaxone, which generated $1.7 billion in sales last year. Peptimmune is counting on positive data from a study due in 2009 to show its drug is better than Copaxone.

“If the multiple sclerosis program doesn’t do well, it will be very difficult for this company to raise money,” Mathers said.

MS, which affects about 300,000 people in the U.S., is caused when the body’s immune system attacks the protective coating of nerve fibers. There’s no cure. Four of six MS treatments cleared by the U.S. Food and Drug Administration were developed by biotechnology companies.

Peptimmune, with no products on the market, has raised and spent about $85 million. Biotech companies without products on the market, or those unable to access equity markets by selling shares, are the ones in most need of cash to fund clinical studies, investors and company executives said.

Worst in a Decade

Initial public offerings for biotechnology companies have almost disappeared, with just one, for $5.8 million, so far in 2008. That’s down from 28 IPOs that raised $1.7 billion last year and from 66 in 2000 that garnered $6.5 billion.

The most likely companies to seek bankruptcy are those with less than six months of cash on hand, just a few drugs in development and no definitive clinical data to attract a funding partner, said Andrew Busser, principal at Symphony Capital, a New York-based investment fund. Twenty-five percent of the 370 public U.S. biotechnology companies have less than six months of cash, according to data compiled by the Biotechnology Industry Organization, a trade group in Washington, D.C.

A Darwinian pruning of the weakest companies is inevitable, and isn’t necessarily to be mourned, said Peter Wysong, health- care investment banker for Natixis Bleichroeder in New York, in an interview.

‘Walking Dead’

“Most people would probably say there have been too many biotechnology companies that have been like the walking dead,” Wysong said. “The deaths will be concentrated among companies that have little to offer,” leaving a smaller crop of stronger companies still standing, he said.

On Nov. 10, MicroIslet Inc., a San Diego developer of diabetes treatments, and Accentia Biopharmaceuticals, of Tampa, Florida, sought bankruptcy protection to reorganize, each citing an inability to raise money.

MicroIslet spent $50 million during the past decade developing an experimental treatment for Type 1 diabetes that would involve transplanting insulin-producing cells harvested from the pancreas of pigs into diabetics to allow them to forego insulin injections. The treatment, tested in animals but not in humans, came from technology developed at Duke University in Durham, North Carolina.

With the company $3 million in debt and needing millions more to begin clinical studies, private investors turned away, leaving MicroIslet without money for human tests, said Michael Andrews, the company’s chief executive officer, in an interview.

‘Down the Path’

“We’re at a stage that a lot of companies are in, where it’s time to raise money but there’s no clinical data and you’re not a brand new company coming out of academia,” Andrews said. “I suspect there will be a number of companies that will go down this path.”

In October, AtheroGenics Inc., an Alpharetta, Georgia-based developer of a diabetes drug, filed for bankruptcy after defaulting on $302 million in debt the previous month. Orchestra Therapeutics Inc., of Carlsbad, California, also filed last month. The long-struggling company was co-founded in 1986 by the late Jonas Salk, the polio-vaccine developer who sought to find a way to immunize patients against AIDS.

Amylin Pharmaceuticals Inc., a San Diego biotechnology company, said Nov. 10 it would cut 16 percent of its workforce, or about 340 employees, to try to save $80 million in 2009. Cell Genesys Inc., a South San Francisco, California-based company that recently halted work on a prostate cancer therapy after deaths were reported in a study, said Nov. 6 it will fire 230 workers, or 80 percent of its workers, by year-end.

Lucky Ones

The lucky ones find buyers among bigger pharmaceutical companies to keep research programs alive. That’s what happened to Redwood City, California-based Genelabs Technologies Inc., a developer of hepatitis C treatments, which agreed on Oct. 29 to be bought by GlaxoSmithKline Plc, Europe’s biggest drugmaker, for $57 million. Genelabs’ market value had plunged to $10 million and its stock had lost 82 percent of its value this year before the deal was announced.

“The sign over Wall Street for small biotechs is ‘closed for the season,’” said Frederick Driscoll, Genelabs’ chief executive officer, in a Nov. 6 telephone interview. Driscoll said he considers the company, whose hepatitis C therapies are still in laboratory tests, fortunate.

Other biotechnology companies, unable or unwilling to find a partner, will go into “hibernation, just doing enough to keep the technology alive and waiting for a better day,” Glen Giovannetti, the Boston-based global leader of Ernst & Young’s Biotechnology Center, said in an interview Oct. 31.

Investor Return

Investors will likely return to biotechnology once the economy stabilizes because the industry still promises attractive returns, said Brent Milner, managing director of health care investing at Stanford Financial Group Co., an investment bank in New York.

“Stock-picking will come back in vogue and people will ask, ‘Where are the 30 percent growers?” Milner said. “When that happens, everyone will again look to biotech because everyone loves a lottery ticket. I think there is a long-term silver lining.”

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