BioWorld International Correspondent

MANNHEIM, Germany - There is not going to be a happy ending to the story for small biotech development companies moving forward into the continuing nightmare of the current financial crisis, according to the panel of high level investors and big pharma executives.

The sixth annual gathering of experts for the session "A Day in the Life of Experienced Dealmakers" during the BIO-Europe conference started with doom-and-gloom predictions for biotech companies, and then it went downhill.

Panel moderator James Watson, managing director and head of merchant banking for Burrill & Co., offered a summary of current conditions, warning that it is "not a rosy picture."

All financing is down, he said, ticking off a checklist of funding sources, concluding flatly that "it will be hard to raise any new money." The window to initial public offerings (IPOs) is closed, Watson said, and private equity transactions have fallen in number and value, along with the valuation of companies.

The pace of partnering is slowing, from a average of 300 deals for the past three years to just half of that for this year and that number is not going to climb anytime soon, he said.

Regarding a merger or acquisition as an alternative, Watson cautioned small biotech companies to recognize that such an exit is relatively unlikely.

At his own venture fund, he said, "we must focus on our existing portfolio right now as the participating limited partners and insurance company investors have ratios for performance that we need to maintain."

At that point, when someone needed to throw a ray of hope into the picture, Simon Turton, managing director for Warburg Pincus, said he had only "doom and gloom to offer." We need to recognize we are experiencing conditions not seen since 1929, and it will go on for at least two to three years, he said. "And we have not yet seen the worst of this." Capital markets will continue to deteriorate, there will be redemptions and margin calls, and as far as holding any hope for a return of the IPO market, "there will be nothing next year and only a few, perhaps even rash offerings, in 2010," he added.

Rather than seeking financing, Turton said, biotechs "need to be looking at ways to use the cash that they have to get to 2011."

"Pay close attention to cash-burn management, cutting costs and cutting deeply," he urged the audience of 1,200 biotech executives from primarily small development-stage companies.

Shaun Grady, vice president for strategic planning and business development at AstraZeneca plc, said, "When we sit down to meet with biotech companies, the first half hour of the discussion is no longer devoted to the product but to cash management issues. We are there to do a deal," he said, "but with far greater scrutiny of the asset than before."

AstraZeneca and other pharmaceuticals are willing to look at M&A, he said, "but in our recent experience, owners are not willing to use their current share price as a starting point in the negotiations."

Turton offered that privately held biotechs increasingly may need to look to venture capitalists, but that they will find themselves in a waiting list behind public companies. "When things do get better at some point, the public companies will have faster access to money, which is why we are currently more interested in these companies than privately held companies," he said.

The first crack in the massive wall of pessimism came from Andrew Gengos, vice president of strategy and corporate development for Amgen Inc., who said that while he agreed with the assessment of his colleagues, "In the face of this, there are massive revenues of big pharma companies that will be coming off patents in the next five years, so the fundamentals of this market remain bullish.

"I do not know how to resolve these two perspectives, however," he said. "High-quality assets are getting financed and will continue to be financed."

Yet the fate of companies in development "is the scary part to me," he said.

Simon Moroney, CEO of MorphoSys AG, jumped at this breach in the otherwise numbing discussion, saying "It is shocking how ineffective pharma R&D has been, and with the five-year horizon on patent expiration approaching, the spend can not go on.

"Yet big pharma has not embraced initiatives that are bold enough to make any change," he said.

Turton agreed, saying that even the most forward-looking business development people inside big pharma look no further than results for the next six months.

Moroney continued, saying, "Biotech will struggle in the years to come, yet it is the engine that can deliver the solutions for pharma's problems. Meanwhile pharma has the cash from their current revenue streams," he said, yet no one has found a way to bring this together.

Gengos admitted that at Amgen, "We are seeking late-stage revenue generating projects that will add to the top line in the next two to three years, and there are not many of these deals out there.

"I try to sell a different view," he said, "but it is hard for a management team to wrap their arms around the time scales that are so far out there."

Same story at AstraZeneca, according to Grady who said, "the here-and-now asset is what is happening."

"As far as prioritizing our dollars, this is where they will go," he said. "Yes, we want to support biotech development, but we need to look at the late-stage deals."

Published  November 19, 2008