BioWorld International Correspondent

CAMBRIDGE, UK - "One of the things I know about biotechnology is that it is about the survival of the fittest. And boy, are we under strong survival pressure now." That was how biotech entrepreneur and investor Andy Richards began his keynote speech on the future position of Cambridge in global biotechnology.

He was speaking at the Eastern Region Biotech Initiative 5th annual Biopartnering Exchange at the Wellcome Trust Genome Campus in Cambridge

"The Cambridge cluster will be judged by its big successes and not by the fact that we didn't have many failures," he told the 400-strong capacity audience at the ERBI conference. The notable thing about companies that succeed is that they have all evolved, growing to reach a plateau, then changing and having another growth spurt.

There have been some very positive developments in the Cambridge cluster over the past 12 months in terms of scientific advances, deals, financings and new company formations, and signs the University of Cambridge is engaging more actively with the sector.

"There are so many major developments, but it is damned tough. Almost for the first time I remember, UK companies are failing," Richards said. Others have plans on hold, there is downsizing and forced consolidation. "It is painful being an investor and agony being a manager trying to take companies forward."

Richards is thus suffering on both fronts, being an investor and serial entrepreneur who holds directorships of several companies, including Arakis Ltd., Sirus Ltd., Amedis Ltd. and Daniolabs Ltd.

Despite the current problems, many of the fundamentals underlying the sector remain strong, Edwards said. There is steady growth in revenues and sales in the U.S. and Europe. The value of innovation and inventorship is sustained and the sector is delivering important products such as Enbrel, Herceptin and Tracleer. Of 33 new drugs expected to be registered in 2003, 19 will come from biotech companies. Sixty-three percent of them will be first in class, as opposed to 21 percent of the 14 products that originated in pharmaceutical companies.

"We are selling things, the market is still there, our products are still needed," Edwards said. "The value chain is intact and the margins are high."

But there is a fundamental problem because with the public markets closed the financing escalator that underpins the sector is broken. "With IPOs [initial public offerings] delayed you need more financing rounds [for private companies] and this diminishes the value all the way up," he said. "This is causing a crisis in early stage financing and the value of companies on the public markets makes the whole thing untenable," said Edwards.

Companies with unsustainable business models will be forced to consolidate and everyone will have to recalibrate their views on valuations. "Lower big pharma P/Es [price:earnings ratios] will be the ultimate benchmark for biotech valuations," Edwards told delegates.

"In the immediate future there will be more carnage and more pressure," he said. "Most of us are in survival mode at present, controlling cash and exploring M&As. But we must be prepared for the upturn."

Richard Palmer, CEO of Alizyme plc, advised delegates the best survival strategy was to "stick to the knitting." Alizyme is one of the few public companies to have had a successful fund-raising this year. "The future for all companies is built on the past," Palmer said. "We have had five fund-raisings; each time we said what we would do with it, did it, and then said can we have some more."

Companies must learn to walk before they run. "This [running] is what happened in the UK and as a result institutional investors think we are a bunch of layabouts who spend money and do nothing," Palmer concluded.

Stephen Bunting, managing director of Abingworth Venture Capital, told delegates to run their companies as if there is no financing window until late 2004 at the earliest. "We have said that to all our companies since 2002." Looking at Abingworth's current portfolio, Bunting expects most exits will be through M&As, rather than IPOs.

However, Bunting said there is "heaps of capital" in Europe looking for a home, and Cambridge is in a strong position to attract new investment. "European venture capitalists want to invest in Cambridge because there are management teams that have been through the cycle several times," he said.