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Biotech leaders see light at end of tunnel
Thursday, March 29, 2001 By Frank Reeves, Post-Gazette Staff Writer
Despite a slowing economy and a yearlong drop in share prices, biotech executives believe that the future looks bright and that investors are unlikely to abandon the industry as they have technology stocks.
"This is not a long-term problem," Lance Taylor, president and chief executive officer of Hamar-based Cellomics Inc., said of the recent slide in biotech stock prices. "Over the next couple of quarters, I expect the Nasdaq and the biotech sector to improve. Biotech is key to the future of the economy."
It's a view shared by Paul Schmitt, managing director of Pennsylvania Early Stage Partners, a venture-capital firm based in suburban Philadelphia: "I am pretty bullish about the biotech market."
Even in a stock market wary of tech companies and Web-based businesses, biotech firms with "good management, good science and products in the late stages of clinical trials" are going to be able to attract investors, Schmitt said.
At first blush, such optimism might seem excessive. After all, stock prices for many biotech firms have fallen substantially from record highs of a year ago.
And in today's Wall Street climate, the market for biotech companies going public has collapsed. Earlier this year, for example, Cellomics postponed plans for a $54 million initial public offering. The fast-growing biotech concern, which speeds the development of drugs by helping pharmaceutical companies analyze the behavior of cells, had planned to use the proceeds to expand its sales and marketing operations.
Stuart Duty, a managing director at investment manager US Bancorp Piper Jaffray's San Francisco office, said that although stock prices for many biotech companies were down, they " are still at levels that are two to three times as high as they were before mid-1999." And despite the drop in stock prices, biotech companies "have brought a healthy return over the last two years," Duty said.
Dave Deeds, a professor at Cleveland's Case Western Reserve University's Weatherhead School of Management, noted that the approximately 200 companies on the Nasdaq Biotech Index have fared better than the Nasdaq Composite Index, which is dominated by computer technology stocks. Both have suffered so far this year, but last year, the Nasdaq Biotech Index rose 23 percent, while the Nasdaq Composite fell 39 percent.
Since the early 1990s, investors have poured billions into biotech companies, helping fuel the industry's rapid growth. The Biotechnology Industry Organization, a Washington, D.C.-based lobbying and advocacy group, estimates that the biotech industry generated 150,000 jobs in 1999. Even though the industry as a whole remains unprofitable, biotech companies produced $20 billion in revenue that year, up from $8 billion in 1993, the group said. In addition, it said biotech companies spent $11 billion in 1999 on research and development.
Private capital is particularly important to the promising new science of tissue engineering, said Michael Lysaght, director of the Center for Biomedical Engineering at Brown University in Providence, R.I.
Lysaght said the first generation of artificial organs was heavily subsidized by the government. In contrast, the artificial blood and organs being developed by tissue engineering firms are being paid for by private investors.
In the past, decisions about when "to move products forward were made by [National Institutes of Health] officials sitting around a hotel room drinking bad coffee," said Lysaght.
Today, such decisions are being made by venture capitalists and investment bankers.
It remains to be seen which is the better system, said Lysaght, who is this morning's keynote speaker at the Engineering Tissue Growth International Conference and Exposition. The conference, which ends today, is being held at the Pittsburgh Marriott City Center, Uptown.
Despite the temptation to draw parallels between the recent history of dot.coms and the biotech industry, Ed Abrahams, executive director of the Pennsylvania Biotechnology Association, said there was a significant difference: The paths to success that many biotech firms are following are based on more realistic business models than those pursued by many dot.coms.
While the current situation may be painful for biotech companies hoping to lure investors, such feast-or-famine periods aren't unusual.
"When companies are flush with cash, they expand programs, hire new staff, start more clinical trials or make plans to build a larger facility. Rising stock prices and market caps also attract even more money into the sector until it's perceived as being overpriced," said Jennifer Van Brunt in a recent edition of Signals, an online magazine. Van Brunt is editor of the magazine, which is published by Recombinant Capital Inc., a San Francisco consultant. "Then, as surely as night follows day, the lean times occur and companies shift into survival mode ...Sinking stock prices and shrinking market caps eventually lead to valuations that investors find attractive once more. And the cycle begins anew."
From 1992 through 1994, when demand for biotech IPOs plummeted, many big pharmaceutical companies bought into the nascent companies, gaining potentially valuable intellectual property at bargain prices, Schmitt said.
This could happen again, he said, as biotech companies search for alternative ways to raise capital.
Kristin Carey, a managing director with New York investment manager JP Morgan H&Q, said some private investors "with deep pockets" were still willing to back companies that are poised to issue IPOs, but were holding back until the investment climate is better.
"Time is the healer of bad markets," Carey said.
Some companies are sitting on large sums of money and can afford to wait for more favorable conditions before going public in their quest for financing, agreed Case Western's Deeds.
The outcome of last fall's national elections also has buoyed the pharmaceutical and biotech industries. The pharmaceutical industry spent tens of millions to elect President Bush and a Republican-controlled Congress, according to various funding reports -- partly out of fear a Democratic president and Congress would have responded to public anger over high prescription drug prices by approving some form of price controls. The pharmaceutical industry has long contended that the profits it derives from U.S. sales enable it to pay for the research and development of new drugs and health-care products.
Indeed, even when Wall Street smiles broadly on the biotech and pharmaceutical industries, firms engaged in the early stages of research and product development find it hard to raise capital. Many investors are wary of sinking money into companies whose research might not result in marketable products for a decade.
That is why biotechnology's Washington lobby has been urging states to approve tax and other incentives to aid fledgling companies.
In Pennsylvania, the Pennsylvania Biotechnology Association wants the Legislature to allocate $60 million of the state's $11.5 billion tobacco settlement money to a public/private venture capital fund to help companies in the first stage of product development.
The association also supports Gov. Tom Ridge's $90 million plan to create three biotech "greenhouses," designed to stimulate the industry in southwestern, Eastern and Central Pennsylvania.
Both proposals appear to have bipartisan support in the Legislature.
The state Senate included all the measures in a tobacco settlement bill it approved yesterday. The state House will now consider the legislation.
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