LONDON ¿ The cycle of biotechnology and health care does not bear any relationship to general economic cycles.

¿It has its own cycle and companies have to master it regardless of what is going on elsewhere in the economy,¿ Paul Haycock, director of Apax Partners Ltd., told a session on ¿Biotech financing in hard times¿ Tuesday at the second annual BioIndustry Association European CEO and Investor Conference held here. ¿But what we are doing is real, actual and not a dot-com bomb.¿

One of the unusual aspects at present is that while the public markets are closed, there is plenty of money for private companies. Ian Dixon, director at Pricewaterhouse-Coopers, said it was not clear when the public markets would reopen. ¿Therefore, there is potentially a risk of failure of public companies because they are on the verge of running out of cash, and the next six to 12 months will be very interesting.¿

And while there is money for private companies, valuations are under severe pressure. Dixon said the situation could be summed up by a couple of companies that tried to go public two years ago. ¿They are now glad they failed because they wouldn¿t have been able to raise follow-on funding at present.¿

Dixon¿s advice to private companies is to ¿take the money and run. Get your hands on any money you can.¿ Although there is a trend for fund raisings to be scaled back, companies should resist this because, ¿Cash is king and you don¿t know what conditions will be like going forward.¿

Management needs to ¿bite the bullet¿ on valuations. ¿Many companies find agreeing to a valuation is a very painful process,¿ he said. ¿You have to think of it in the terms that if you had raised money two years ago, you would be struggling to maintain that valuation now.¿

Public markets are closed but they will reopen at some point and companies that want to go public need to position themselves now. This means deciding on the market, selecting advisers, preparing for due diligence and forecasting cash flows. ¿This will be time well spent to make sure you are at the front of the queue,¿ Dixon said.

Although there is plenty of private equity available in Europe it is not evenly distributed, said Gordon Duncan, managing director of the consultancy International Private Equity Exchange, which advises companies on raising venture capital. ¿If you are not in the UK or Germany, times are hard.¿

In 1999 there were 54 financing deals in Europe worth US$600 million; this year to date there have been 99 worth $1.1 billion, he said. ¿But in 2001 most of the money has gone to the UK, and seven deals this year took over 70 percent of the money, while the four biggest deals [took] more than 40 percent.¿

There have been 22 deals in Germany this year, but seven of them took over 60 percent of the German total. ¿So all the start-ups in Germany that raised money in 1999 and [have] come back for more now are having a pretty tough time indeed,¿ Duncan said.

Biotechnology financing is challenging not only because the market goes through its own distinctive cycles, but also because the curve going in and out is always extremely steep, Paul Drayson, chairman and CEO of PowderJect Pharmaceuticals plc and chair of the BIA, told delegates. ¿But the market is never completely closed. You have to take the dilution but even in difficult times we found we could do deals.¿

Drayson believes funding will remain difficult in 2002, and this will prompt a wave of consolidation. ¿There will also be further company failures, but this is capitalism in action, not the end of the world for biotech.¿

The evidence from the current downward spiral is that the impact on individual companies is in reverse relation to size, said Chad Floe, managing director and head of international health care at Lehman Brothers. ¿Companies of $5 billion and bigger have done better because they are seen as defensive stocks like big pharma. In other words, size matters.¿

Although the cash position of biotech companies overall is fairly sound, there are an ¿alarmingly high¿ number of companies in the $50 million to $100 million market capitalization bracket, Floe said. There needs to be more merger and acquisition activity to create businesses with a critical mass. ¿It would be better to do deals in times of strength, rather than waiting until the oxygen level is dangerously low.¿