PHILADELPHIA - A disease of epidemic proportions hit Room 103A at the Pennsylvania Convention Center on Wednesday, the last day of the Biotechnology Industry Organization's annual international convention here.

A panel of biotech industry leaders apparently held the antidote - creative financing options. About 200 of those infected filled almost every chair, and waited for a prognosis for their companies that were quickly running out of cash.

"I think with this turnout," said David MacNaughtan, executive vice president of business development at Drug Royalty Corp. Inc., "the patient is in stable condition, but could slip into critical condition at any moment."

It was a light-hearted joke about a very serious matter, the survival of biotech companies in a tough financing environment. Using two fictitious companies as case studies, Balboa Technologies and Apollo Drug Delivery, the attendees learned about a variety of financing options.

Toronto-based Drug Royalty, for instance, functions by buying established royalty streams, or by investing in companies in exchange for a percentage of revenue. The panelists discussed the potential of funding initiatives with Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants, by partnering with the National Institutes of Health, or through government contracts.

Brisbane, Calif.-based VaxGen Inc. said its joint venture, Celltrion Inc., of Incheon, South Korea, received a contract recently to manufacture biologic products being developed by New York-based Bristol-Myers Squibb Co. The agreement generates cash flow for VaxGen, which established Celltrion in 2002, along with three South Korean partners, Nexol Corp., KT&G Corp. and J. Stephen & Co. Ventures Ltd.

"It's a very exciting joint venture," said Lance Gordon, president and CEO of VaxGen, at Wednesday's finance session. "We put no cash in it. It's entirely funded by our Korean partners."

The company also has received U.S. government contracts for its biodefense products, including an $877.5 million contract last fall to supply anthrax vaccine for civilian defense. (See BioWorld Today, Nov. 8, 2004.)

Beyond contracts, earlier-stage biotech companies may need to focus on grants as a funding option. Joseph Reiser, CEO and director of Blue Bell, Pa.-based Locus Pharmaceuticals Inc., said he hopes to file the company's first investigational new drug application this year for a cancer compound. It currently is trying to conduct another financing round.

But it is SBIR and STTR grants that are supporting an earlier program for HIV/AIDS.

"We think we can almost completely fund this program to a partnering stage with such grants," Reiser said.

The types of companies that can apply for SBIR and STTR funding may change soon, if a bill before the legislature passes. It aims to limit the grants to venture-funded companies. Currently, the funding, about $2.6 billion a year, is open to small companies with 500 or fewer employees. They must be for-profit, based in the U.S., and apply based on their technologies, not their business plans.

If the bill passes, companies that once had access to those grants might need to turn back to public and private markets, not the best choice in a tight financing environment. According to Stephen Sammut, a Burrill & Co. venture partner based in Philadelphia, the stocks of companies that conducted their initial public offerings this year are, overall, down about 10 percent, a figure that does not "give investors a lot of confidence."

In terms of the private markets, the average amount of money invested in the last year is: $11.1 million for expansion companies, $20.5 million for late-stage companies, $1.64 million for early-stage companies, and about $500,000 for seed companies, he said.

The finance panel at BIO 2005 offered some strategies to make the journey a little easier when accessing financing sources. They took a fictitious company, called Balboa Technologies, as their first case study. As a university start-up with no lead product and a platform technology aimed at several large indications, the company had a founding scientist who held a significant National Institutes of Health grant, as well as a reagents and tools side business.

"The immediate VC reaction to this is you really have to get rid of that reagents business," MacNaughtan said. A side business can be distracting, he said, but a company may choose to keep it for awhile depending on the amount of revenue it generates.

Reiser agreed that a "lack of focus" could be Balboa's downfall, and that it is absolutely essential that the company demonstrate the value of the platform technology, and choose a lead indication.

The company also needs a business plan and objective, Gordon said, calling Balboa "a basis for building a company, in my view. It's not a company itself."

Kenneth Rosenzweig, president of Landenberg, Pa.-based KSR Associates Inc., a management consulting firm, said some companies like Balboa could look for partnership alliances, or turn to their own states for help. Maryland, Pennsylvania and New Jersey, for instance, assist young companies to sell their tax losses.

But the solutions for Balboa might not be the same for case study No. 2, Apollo Drug Delivery, a public company that has out-licensed several products, has milestones and royalties as revenue sources, is still burning cash and has a lead product in Phase II. The panelists said Apollo could turn to debt financings or partnerships. It could sell some of its royalty streams.

Creative funding is a resource, the panelists said, but it sometimes can inhibit the Balboas and the Apollos of biotech from going where they want to go. Angel investments, for instance, can come with options and warrants that make it difficult to complete the next round of financing. And partnerships are not always what they seem. Many have low up-front payments.

"The downside of partnering extensively," Gordon said, "is you can get to the point where the upside is already sold. It belongs to somebody else."

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