Staff Writer

SAN FRANCISCO - At the 27th annual J.P. Morgan Healthcare Conference, discussions from the crowded hallways to the private meetings rooms predicted that biotech is in for a year of consolidation, but that the industry will emerge leaner and stronger.

The consolidation is well under way, as evidenced by the bankruptcies of biotechs like Introgen Therapeutics Inc., MicroIslet Inc., AtheroGenics Inc. and several others - as well as by mergers and acquisitions proposed by Cephalon Inc. with Ception Inc. The Medicines Co. with Targanta Therapeutics Corp. and Endo Pharmaceuticals Holdings Inc. with Indevus Pharmaceuticals Inc.

Yet the mood at the J.P. Morgan conference - which is widely viewed as a barometer of biotech industry sentiment for the coming year - was far from gloomy. The event buzzed with a frenetic, slightly desperate energy as the 6,600 attendees and thousands more hangers-on rushed to one-on-one meetings with CEOs, venture capitalists, fund managers, bankers, analysts and potential partners.

One CEO told BioWorld Today he had more than 50 meetings scheduled - 14 on each of the four days of the conference, which ended Thursday.

The feverish pace of the conference seemed to reflect the industry's intense focus on surviving, on getting the job done despite limited cash and no prospects of a near-term market recovery. In presentations, breakout sessions and private meetings, biotechs emphasized their cash reserves, cost-cutting initiatives and plans to obtain any further funding needed - from committed equity financing facilities to pending partnerships.

Since the industry seems likely to see a separation of the wheat from the chaff, there was also plenty of speculation as to which companies will end up in which category. Candidates for the chaff, according to various conference-goers, include those struggling on the Pink Sheets, those that have spent $100 million and only managed to advance their lead candidate into Phase Ib trials, those with me-too products unlikely to survive the increased cost-justification scrutiny expected to accompany health care reform, those with late-stage product failures and those with bloated infrastructure.

Attempts to avoid the latter category led to restructuring and layoffs at more than 80 biotechs last year, and if there was a dark cloud hanging over the J.P. Morgan conference, it was concern for unemployed friends and former colleagues. Yet one recruiter at the conference told BioWorld Today that some displaced workers may find a home in 2009 as biotechs seek to take advantage of the talent available on the market and "upgrade" from executives who aren't serving shareholders' interests.

Others may find jobs in new companies: Several VCs told BioWorld Today they are actively evaluating early stage investments, which are inexpensive and avoid the "down round" stigma currently plaguing Series B, Series C and later financings. Additionally, since the typical biotech exit is several years in the future, a company founded now could be poised to take advantage of an eventual market recovery, the VCs said.

Start-ups to debut so far this year include cancer companies Kolltan Pharmaceuticals Inc. and Forma Therapeutics Inc., trimeric protein player Anaphore Inc., flu vaccine maker Vivaldi Biosciences Inc., Alzheimer's company Satori Pharmaceuticals Inc. and Swiss antibody company CT Atlantic AG. (See BioWorld Today, Jan. 7, 2009, Jan. 9, 2009, Jan. 12, 2009, and Jan. 13, 2009.)

Yet other VCs remained concerned that the need to prop up existing portfolio companies with no hope of an exit could mean less money available for new investments. And as the valuation grieving process ends and boards of directors come to terms with the new prices, term sheets for the follow-on private rounds are beginning to circulate, a VC reported.

On the public financing side, the outlook is still grim, especially among the investors who suffered losses last quarter. But one investor speculated that biotech could become a hot commodity again as buyers seeking to recover their losses are tempted by returns offered by stocks like Dynavax Technologies Corp., which jumped 569 percent in a single day after signing a deal with GlaxoSmithKline plc. (See BioWorld Today, Dec. 18, 2008.)

Most investors were less optimistic, but some acknowledged that money could funnel into the biotech sector in 2009 if big pharma acquires more large-cap biotech stocks. For example, if F. Hoffmann-La Roche Inc.'s $44 billion bid for Genentech Inc. goes through, even 5 percent of the money being reinvested in the biotech space could have a significant impact.

Yet the experts aren't expecting an explosion of M&A activity next year. Several bankers predicted that M&A will increase over 2008 but noted that pharma is guarding its cash carefully and does not appear to be in a hurry to scoop up all of the undervalued biotechs on the market.

So far this year, pharma has appeared more interested in partnerships. This week ZymoGenetics Inc. signed a $1.1 billion HCV deal with Bristol-Myers Squibb Co.; Apitope Technology Ltd. inked a $203.3 million multiple sclerosis deal with Merck Serono; Micromet Inc. entered a $396 million antibody deal with Bayer Schering AG; Santaris Pharma AS inked an $847 million deal with Wyeth; Forma Therapeutics Inc. signed a $200 million deal with Novartis AG; and Biotica Technology Ltd. inked a $127.7 million per-compound deal with GSK. (See BioWorld Today, Jan. 13, 2009, and Jan. 14, 2009.)

Perhaps that explains the air of collaboration at the J.P. Morgan conference, from companies eager to work through rather than fight through intellectual property disputes to venture capitalists showing more of their cards and bankers swapping ideas regarding new financing vehicles.

As one venture capitalist noted, the industry wants to see its people succeed.