By Randall Osborne

West Coast Editor

It's all about money.

Much is made in the popular press about advances made in biotechnology toward curing the health scourges of the world, such as AIDS and cancer, as well as finding fixes for rare, deadly genetic diseases caused by enzyme and hormone deficiencies.

Such cures, the industry vows, are on the way.

Once upon a time, the occasional article would take on ethics. Not ethics related to medical privacy and insurance, which has become well-trod ground, and as an issue will continue to rage in the years ahead. Not the ethics of denying access to experimental drugs by nontrial subjects, either – a quandary that's been remedied somewhat by “compassionate use“ practices.

These articles, now history, dealt with the rightness of biotechnology firms targeting specific, virulent disorders known to have massive profit potential, and only those disorders.

How ruthless and money mongering is that?

Skeptics carped that biotechnology research (pharmaceutical research in general, for that matter) was geared solely toward the bottom line, with company scientists working only on treatments that might command top dollar per dose.

Industry boosters countered that the most serious ailments are the most deserving of investigation. Patients who need carefully designed drugs for hard-to-fight diseases, they said, ought to pay premium prices, or their insurance companies ought to, and nothing's wrong when firms that do the work get the rewards of it.

The whole argument seems quaint now.

As biotechnology marched ahead and investors flocked to the sector, the exotic shine wore off and moral arguments became more refined, although not always much more pertinent. Disputes these days range from bizarre skirmishes over the unlikely prospect of cloning full-blown human beings, to more credible fights such as the one over stem cell research, based in the larger political issue of abortion.

The lay of the biotechnological land is clear. And it's still all about money.

In 2000, it was more about money than ever before. Biotechnology raised a record $7.21 billion in 91 initial public offerings (IPOs), with an average value of $79.26 million each. In 67 follow-on offerings, the industry hauled down $16.42 billion, with an average value of $245.12 million.

Figuring all sources of fund-raising together, the industry raised $36.9 billion during the year, more than three times 1999's amount.

The IPOs proved most satisfying, as firms sought early in the year to capitalize on an upbeat market. Investors were excited about the mapping of the human genome, and “dot-com“ fever had fueled interest in technology stocks.

In 2000, “the industry redefined the stage at which companies can go public,“ said Eric Schmidt, vice president and analyst in the New York office of Boston-based S.G. Cowen Securities Corp. “Now, most of the good companies have gone out, and buyers are sick of evaluating five companies a week.“

Slowdown Follows Banner Year

Schmidt said that an overload of IPOs and high valuations came after “institutions took their eyes off the stocks, and why they should own stocks.” By early 2001, analysts were “covering too many stocks on the sell side,“ he said. “There's too much paper, and we're getting indigestion.“

Some firms “got out“ that analysts might never have expected, a year or two earlier. Others had to be restrained, said Thomas Dietz, managing director of Pacific Growth Equities, in San Francisco.

“We turned a lot of deals down,“ Dietz said. “The companies were way too early.“

By mid-year, things had changed. And, by fall, the harvest had been reaped altogether, stalks were bare and the mood was grim, right into the new year.

“You've got a real slowdown in global economics,“ Dietz said in February 2001.

“We had some hope things were going well, and then we had a turnaround. A lot of funds ended up with 25 percent or more of their portfolio in biotech. They were dumping between 5 [percent] and 10 percent of their biotech holdings.“

The upshot, Dietz said, is “a marketplace where it's very clear new paper isn't wanted by institutions. They want tried and true.“

Peter Drake, managing director and senior biotechnology analyst with Prudential Vector Healthcare, of Deerfield, Ill., said he would “broaden“ that perspective.

“Great companies can raise money in any market,“ he said. “The question is, what are the financing prospects for the near great, and the not so great? If you look at the performance of [last year's] IPOs, you won't be blazingly confident. I would say institutional investors that can buy structured paper, and late-stage venture players, are going to see a lot of potentially attractive deals come their way this year. We started to see it at the end of last year.“

The tendency will be to hunker down, at least in the first part of 2001, Drake said. “Companies that don't need money right now are not going to try to raise any,“ he said. Harsh times mean attempts at financing could add up to more than they're worth, and firms won't stick their necks out needlessly.

“If they have a couple of years of cash, and they're a private company, they will wait it out,“ Drake said.

Dietz predicted that, among the financings that do happen, “secondaries and PIPEs [public investments in private entities] are going to get through first. We've seen a few deals get done again, a couple of PIPEs and a follow-on. The valuations have been reset. Things that were not attractive last year have become attractive this year, but the IPO market has not returned. On the other side, money inflows are still at record levels into funds.“

Venture Capitalists Might Move Into Public Arena

A likely trend, Dietz said, will be venture capitalists “starting to play in the public arena. They've raised tremendous amounts of money, and there's a thought that they will start investing in public companies. What they're giving up in multiple-fund returns is liquidity, which they don't often get for years, because they're private investors.“

As an example, he cited the July 2000 financing by Adolor Corp., of Malvern, Pa., which raised $36.6 million in a private placement of preferred stock, led by new investor MPM Capital LP, of Cambridge, Mass.

In early February 2001, JP Morgan Partners (formerly Chase Capital Partners) – “classic venture capitalists“ – led the $35.3 million private financing by La Jolla Pharmaceutical Co., of San Diego, Dietz noted.

Goodbye, then, to IPOs for a while?

“I don't' think the IPO market is dead for the year, but it's going to be the later-stage companies [that go public],“ Dietz said. But the primary action will be among the venture capitalists, he predicted.

“They have big pots of money, and they need to make it work,“ Dietz said. “A lot of companies are going to these guys.“

Schmidt said PIPEs won't save the day, and if investors are hearing from some quarters that they might, they're “probably talking to some of the bankers who are doing them.“ Secondary offerings, though, will pop up often enough to provide encouragement, he said.

“Aviron's was a pretty successful offering,“ Schmidt said, referring to the Mountain View, Calif.-based company's $400 million fund-raising in early February 2001. With a biologics license application accepted by the FDA for its FluMist nasal influence vaccine, Aviron sold 4 million shares at $50 per share, plus $200 million worth of convertible notes.

The pricing upped Aviron's original target offering of 3 million shares to 4 million, and increased the offering of 5.25 percent convertible notes from $150 million in aggregate principal to $200 million.

“There's an appetite for that quality of paper, and those stories will continue to trickle out in the early part of 2001,“ Schmidt said. “But it's tough to know what the trigger will be for the IPO window opening up again.“

PIPEs, he said, “are a good way to raise money in down markets, but everybody would rather have the secondaries back, and I don't think you're ever going to see the size of the PIPEs we saw last year.“

Firms find reassurance in secondary offerings, which have a more traditional, formatted feel and often can be completed by talking with familiar faces, and shaking hands they've known from before.

“Companies can take their stories on the road, and it's a good way of going back to old investors,“ Schmidt said. Old investors are smart investors, he added, noting that “biotech is still not an industry for novices.“

But it is, the analysts agree, an industry in which companies can make money. Schmidt said they have every cause for long-term optimism. The frenzy of early 2000 has subsided into the kind of steady, measured growth that promises to endure, he said.

“Biotech is priced to perform,“ Schmidt said. “With the industry up about 130 percent in the last 24 months, I wouldn't be surprised if it moves sideways for a while.“