'Big Pharma' feed biotech startups record funds

The biotech industry raised a record $55.8 billion in 2009 despite hesitant stock and venture capital markets, as drug-company partnerships fed the cash-burning startups that develop new therapies.

That represents a jump of 85 percent over the $30.1 billion recorded in 2008, according to Steve Burrill, whose San Francisco firm Burrill & Co. is both an industry investor and analyst.

He said the 2009 results were driven by $37 billion in financial partnerships through which large drug companies license technologies or experimental remedies from biotech startups, a dynamic that enabled many small firms to survive a tough year. But it may ultimately limit their growth if they were forced to cede control over their most promising developments.

"You're not going to grow a lot more Genentechs or Amgens," Burrill said, painting a picture of a biotech industry that is increasingly the farm team that develops remedies that will ultimately be licensed and sold by the major league drug companies, also known as "Big Pharma."

That's the snapshot of the industry that emerges as 6,500 scientists, executives and financiers converge on San Francisco this week for the JP Morgan Healthcare Conference.

Now in its 28th year, the gathering is the health care industry's premier financial event, giving more than 330 companies a chance to make formal pitches to institutional investors. Another 7,500 private meetings are expected to take place from Monday to Thursday when the event ends.

"Success for JP Morgan is for our clients to get a lot of value out of the conference without feeling like it's speed dating," quipped Robbie Huffines, co-head of JP Morgan's global health care investment banking group.

Established in the early days of biotech by the now-defunct investment bank Hambrecht & Quist - old-timers still refer to it as "the H&Q" - the event gives invited companies a chance to pitch their corporate stories to an elite investment audience and also highlights the Bay Area's role as a biomedical discovery center.
Funding partnerships

Edward Lanphier, chief executive of Sangamo BioSciences in Point Richmond, who will be speaking at the conference, said he hopes to use partnerships to fund the costly marathon of developing a biomedical breakthrough while retaining enough control to preserve his company's big league potential.

Founded in 1995, Sangamo is developing a type of molecular switch called a zinc-finger protein that can turn genes on or off. The firm is currently conducting clinical trials to see whether these zinc-fingers can trigger the genes to repair nerves and blood vessels in patients with diabetic neuropathy, extreme forms of which can require amputation of damaged limbs.

Lanphier said the 75-person firm, which ran about $20 million in the red last year, had no layoffs and made a few key hires in 2009, thanks to revenue-producing partnerships under which it has licensed off some nonmedical uses for its technology for purposes such as genetically engineering plants.

But Sangamo has kept the most lucrative medical rights in the hope that zinc-fingers prove useful at switching on repair genes for human diseases, Lanphier said.

John Milligan, president of Gilead Sciences, said it has always been difficult for small biotech firms to make the leap from development firms to drug sellers, although the degree of difficulty may be increasing as partnerships and buyouts become easier ways to raise capital than initial stock offerings.

"How not to get bought was one of the challenges we went through in the early 2000s," said Milligan, recalling the time when his Foster City firm was on the cusp of delivering what have become market-leading treatments for HIV.

With a current stock market capitalization of about $40 billion, Gilead became the Bay Area's most valuable independent biotech firm last year after the Swiss drug firm Roche finalized its takeover of industry pioneer Genentech. But back when Gilead was still in its development stage, Milligan said the company partnered with Roche to commercialize the flu treatment called Tamiflu to raise the cash to develop its HIV line.

Now Gilead is growing through acquisition, last year acquiring CV Therapeutics of Palo Alto to add heart drugs to its product portfolio. As Milligan explained, once biotech firms develop marketable drugs they still face the cost of developing worldwide sales efforts, and adding new medicines through acquisition is one way of defraying their overall sales overhead.
Startups keep growing

So while biotech companies continue to be absorbed, enough startups are created to keep the life sciences industry growing, said Gail Maderis, acting chief executive of BayBio, the regional trade association with some 450 members.

She said BayBio estimates that total life sciences employment in Northern California grew to 129,410 persons last year, up 1.7 percent from 127,241 in 2008, despite the tough hiring climate.

Passage of the health care reform bill pending in Congress would have enormous and complex effects on the medical industry, but one provision provides a boon for biotech by setting rules for the creation of generic biomedicines favored by the industry.

"We see this as a huge win for innovation," Maderis said.

But Kathleen Jaeger, president of the Generic Pharmaceutical Association, characterized those proposed rules as "a sweetheart deal with the brand drug companies" that will make it harder for generic and biogeneric companies to provide cheaper alternatives.

While most of the action this week will take place at the Westin St. Francis Hotel where the conference is being held, the entire Bay Area biotech industry takes advantage of the critical mass of scientific and financial talent in town.

Fluidigm Corp. CEO Gajus Worthington won't have a formal role at the conference, but he will be briefing potential investors, industrial partners and scientific collaborators about his firm's technology to automate the biological reactions performed in early stage biomedical development.

"For companies that are located within striking distance of San Francisco, you can get all three of those groups to your company," he said.

Tom Abate, Staff Writer
San Francisco Chronicle