By Randall Osborne


SAN FRANCISCO ¿ The mood these days might seem wrong for talk of industry rallies and a resurgence of financing potential, but that's a big part of what attendees heard last week at International Business Forum's Biotech Investing Conference here.

"Life sciences are back in favor," said John Montgomery, a partner with Brobeck, Phleger and Harrison LLP in Palo Alto, Calif., which represents clients in public and private offerings, as well as mergers and acquisitions.

"Right now, there's more money available for life sciences than there ever has been," he added, with more funds coming into the sector while others that had left are returning.

Franklin Berger, managing director of JP Morgan H&Q in San Francisco, even put a timetable on it.

"There is a lot of hope and energy required in order to invest in this area," he said. "In the next 12 months, biotechnology and molecular biology are going to be able to deliver on that."

But it won't be like before, Berger said.

"We're looking at a more seasoned market, with savvier people," he said, adding that changes are happening already, with analysts in meetings with investors talking about long-range business plans.

"Investors are anxious to participate earlier and to seek a greater portion of the returns, with the concomitant acceptance of greater risk at earlier stages," he said. "The relationships between venture capitalists, public investors and analysts are going to change and I think it's going to be very different for all of us, and ultimately much more of an opening for more forms of capital and ways to finance new companies."

Attending the American College of Rheumatology's annual meeting made Berger "feel like a true believer, all over again. Biotech required true believers as investors in the beginning, and you have all been true believers. Nothing has changed in that regard," he said.

Berger and Montgomery spoke on a panel titled "Wall Street: Biotech Pulse," which was among 10 panels attended by more than 300 registrants at the two-day IBF event.

Montgomery said a "flight to quality" is under way in the sector.

"People are trying to put together rounds whereby all the syndicate members have enough capital to sustain the enterprise," he said. "It's a little more difficult in life sciences because you have to, in many cases, partner with the big pharma companies."

As enthusiasm builds, paying attention to the fundamentals will be more important than ever, he said.

"Sectors tend to get hot, [and] there tends to be over-investment," said Montgomery, who has been involved in venture capital for 17 years. "And when there is over-enthusiasm, people get burned."

At the moment, he said, "the life sciences sector is benefiting from the demise of the dot-com and Internet economy, but just be careful of over-investment," he said. "Stick to your fundamentals, and focus on building great companies around great science."

The best strategy otherwise, he said, is for new investors to sign up with experienced funds that have a track record in the sector, and for companies to partner with venture funds also boasting long histories.

Moderating another panel, called "Biotech Investing 2001: Where Do Investors See the Opportunities Today?" was Brook Byers, general partner with Kleiner Perkins Caufield & Byers in Menlo Park, Calif., a venture capital firm.

"Timing is very important in accessing capital," he said. "There may be trends about ideas or the best business model or what's hot in science ¿ something like that ¿ but the capital markets are fickle, especially the public ones."

The private markets, Byers said, "can fill in from time to time, and help companies get started, but what's different about this industry is the huge amount of capital required to build a company." Getting that capital, though, is hardly impossible, he said, adding that he finds "a lot of reasons to be optimistic about biotech."

Management of companies has learned from other firms that pharmaceutical deal-makers have changed their ways of handling smaller partners, treating them more fairly, Byers said. Everybody's grown wiser about navigating FDA rules, he added.

"When we look back 10 or 15 years ago, it's amazing how naïve the young companies were about what it would take to get some approvals," Byers said.

Rodney Ferguson, general partner in J.P. Morgan Partners in San Francisco, noted that one thing hasn't changed and probably will not change. That is, just about every biotechnology company is in somewhat the same business.

"With the exception of a handful of companies like Genentech Inc. or Amgen Inc. that have broken all the way through, at some point along the way, almost all biotech companies are going to sell their product or technology to somebody else," Ferguson said. "The game is really about maximizing that royalty stream."

Different firms do it different ways, but Cynthia Robbins-Roth, founder of BioVenture Consultants in San Mateo, Calif., said biotechnology firms are in a good position to bargain.

"Big pharma is desperate, absolutely desperate, for products," she said. "All you have to do is look at the ImClone deal with Bristol-Myers to figure out how big that desperation is."

In September, ImClone Systems Inc. entered a potential $2 billion agreement with Bristol-Myers Squibb Co. to help develop and promote the former's cancer drug, IMC-225.

For all parties, she said, although "the sector as a whole is still having a tough time," the firms that have products are "very cool again," in the eyes of investors.

"If you go back and look at price performance from last December, it's a pretty small number of the companies in the general public biotech population that are showing net positive performance," Robbins-Roth said. "And if you look at who those companies are, often it's companies that really got knocked down to the ground in previous years, companies like Interneuron [Pharmaceuticals Inc., which began a Phase III trial of its in-licensed incontinence drug, trospium, also in September]."

Interneuron may have the right idea, Robbins-Roth noted.

"What are the magic business plans that people keep talking about?" she said. "Specialty pharma is a model that seems to be popping up all over the place, from the banking side and even the venture funds are talking about wanting to spin out specialty companies from existing companies, or pull together groups that will in-license compounds and make themselves look like specialty pharma companies."

The point is, one way or another, to get a product.

At certain points, she said, "tools will be really hot, anything with '-omics' in the name will be really hot, but the bottom line is, throughout all the fads, real product revenues continue to be a driving force for the behavior of investors."