By Lisa Seachrist

Washington Editor

WASHINGTON - Noting that smaller biotechnology companies aren't reaping the successes of their larger counterparts, Rep. Constance Morella (R-Md.) chaired a hearing to uncover whether the government could play a role in helping these companies face their unique challenges.

In the end, the biggest challenge turned out to be raising capital in an environment in which Internet companies have become the newest darling for venture capitalists. A panel of investment bankers, biotech executives and economists told the Science Committee's Subcommittee on Technology how venture capital has dried up for start-up biotech companies in the age of "dot com."

"Much of the flow of venture capital money has moved away from the biotech sector and is now going to the software, information technology, communications and Internet companies," said Michael Horvath, economics professor at Stanford University in Palo Alto, Calif. "The venture capital industry is passing biotech by in favor of information technologies. We have no idea what the returns will be in biotechnology compared to information technology."

John Holaday, president and CEO of EntreMed Inc. in Rockville, Md., agreed with Horvath, citing the vagaries of a drug development process that includes lengthy clinical trials and a regulatory process heaped with uncertainty. Nevertheless, Holaday also laid some of the blame for Wall Street's lukewarm reception to the early exuberance of the biotechnology industry.

"Investors are in a way 'once bitten, twice shy,'" Holaday said. "Only in this case, they are two or three times bitten. We, as an industry, made promises we couldn't keep. We promised to make drugs better, faster and cheaper. But, we can't get around the fact that it takes time to develop a drug."

Holaday said the industry must instead make conservative promises it can keep in order to make the investment community enthusiastic. Holaday noted this was especially important because medicine is on the cusp of the biotechnology age.

"Almost two times the number of drugs that are going to be approved in the next couple of years are going to be biotechnology drugs compared to the standard chemical entities," said Dennis Purcell, managing director of life sciences at Hambrecht & Quist LLC, of New York. "The pharmaceutical industry has an almost desperate need for biotechnology because they are outsourcing their research and development."

Purcell noted that at a time when nearly 25 drugs will be coming off patent in the next five years, big pharma is looking to find replacements. As a result, he argued the importance of keeping biotechnology firms well funded, noting that both MedImmune Inc., of Gaithersburg, Md., and Idec Pharmaceuticals Corp., of San Diego, nearly went bankrupt before breaking out with important products.

"Both of these companies spent two or three years teetering on the edge of bankruptcy," Purcell said. "If they hadn't found the capital to sustain their drug development, we would have lost some important new treatments for cancer and [respiratory syncytial virus]."

The panelists called on Congress to help remove the uncertainty that is part and parcel of the biotech industry. They suggested Congress support a permanent research and development tax credit, protect intellectual property and continue the public-private partnerships that have facilitated the growth of the biotechnology industry.

"Anything that can lessen the uncertainty about when an investor is likely to see a return will make that investment more attractive," Purcell said. "If a patent is secure, that is something an investor can place a value on when investing in a company."

In addition to making a more secure environment for biotech investors, Holaday warned the nation is risking a huge brain drain. Because the grants given to universities to train scientists often limit the amount of money they can pay these students, there is a strong financial disincentive to becoming a researcher.

"The brightest people today are choosing to go to law school where they can make $100,000 their first year out," Holaday said. "I think we are losing a number of people to the fact that they will be in their early 30s before they are making better than minimum wage. If they had greater assurance that they could get a better wage earlier, they would be more likely to enter the field."

Like all hearings that deal with medical advances these days, the cost of drugs and a Medicare Drug Benefit became an issue. Rep. Gil Gutknecht (R-Minn.) asked the panelists if they had an answer to the allegation that U.S. consumers are shouldering an unfair share of the research and development costs of drugs when people in other countries such as Canada can get drugs at a substantially lower cost.

"The next great debate will be about drug costs and Medicare," Gutknecht said. "And, we need all the help we can get in answering these questions."

Holaday responded by telling the panel he thought it was unlikely Canada could foster the development of such a thriving biotechnology industry because of the price controls it imposes.