By Nancy Volkers

Special To BioWorld Financial Watch

"Survival of the fittest" rules in biotechnology, and April financings reflected the industry's difficult adolescence as it continued to consolidate, convert and fight its way to maturity.

Not surprisingly, given market conditions, private financings remained popular. U.S. companies such as Pharmadigm Inc., Sequenom Inc., and Kinetix Pharmaceuticals Inc. completed private financings, while Circe Biomedical Inc. freed itself from W.R. Grace, and raised more than $16 million from private sources.

InterMune Pharmaceuticals Inc. executed its spin-off from parent company Connetics Corp. InterMune also raised $6 million through a self-managed private placement.

Phytera Withdraws IPO, Others Turn To Convertibles

Other companies, though, weren't so fortunate: Phytera Inc. withdrew its proposed $35 million initial public offering (IPO), due to tough European financial markets. The company is based in Worcester, Mass., but has a large European presence, and plans to wait until the markets improve. LXR Biotechnology Inc. plans to close out operations after preclinical results of its Elirex were less than encouraging. LXR had much of its fate riding on the heart-attack drug, which failed to reduce infarct size in three of four studies.

Convertibles never a preferred method did provide funds for Corixa Corp. and SangStat Medical Corp. Corixa secured a $50 million credit line with Castle Gate LLC, issuing 12,500 shares of preferred stock convertible at $8.50 per share. SangStat completed a $10 million convertible financing of securities, carrying an interest rate in the mid-single digits. The securities mature in five years and can be converted into common stock at any time before maturity.

BioStratum Inc. used a different method; the company financed $6 million privately and received a $16 million grant. The money will provide funds for Phase I trials of Pyridorin and a diabetes research project in Scandinavia. BioStratum, based in Research Triangle Park, N.C., received the grant from the Novo Nordisk Foundation, of Copenhagen, Denmark.

One company went public in April: Immtech International Inc. raised about $11.5 million through an IPO, but received a lot of help from foreign investors. Hong-Kong-based companies, including New China Hong Kong, and China Everbright Securities, underwrote half the amount. Westport Securities in the U.S. also underwrote the deal. Immtech, headquartered in Evanston, Ill., sold 1.15 million shares at $10 each.

Immtech is not the usual biotechnology firm. Rather than putting time, effort and money into drug discovery, the company focuses on discoveries made through a university consortium that includes the University of North Carolina at Chapel Hill, Duke University, Auburn University and Georgia State University. Immtech also has licensed technology from Northwestern University and Rush-Presbyterian St. Luke's Medical Center.

"Our concept is to establish broad licensing arrangements with universities that have broad platforms," CEO Stephen Thompson told BioWorld Today last month. "Essentially, we are a clinical management and commercialization company. It's a concept that's efficient in spending dollars, and investors like that." (See BioWorld Today, April 30, 1999.)

Immtech's strategy reflects the larger role of universities in biotechnology. Some, like Stanford and the Massachusetts Institute of Technology, have been players for a long time; the Bayh-Dole Act, passed in 1980, allowed universities to commercialize federally funded research, which set the stage for even more university involvement. In 1998 alone, American universities received 2,645 patents.

As it becomes more and more difficult for biotech start-ups to get under way, many universities as well as states and private groups have provided an alternative to venture capital: business incubation.

Incubators help fledgling companies grow while they are most vulnerable, providing management assistance, access to financing, shared office services, access to equipment, and flexible leases. Most businesses "graduate" from an incubator after two or three years.

The University of Maryland's College Park campus is the home of the Technology Advancement Program (TAP) the state's newest high-technology business incubator. TAP's new building can house 15 to 17 companies. Five biotechnology firms call it home, including Oncoimmunin Inc., Claragen Inc., and NeuralStem Pharmaceuticals Ltd. Graduates of the program include Digene Corp. (which went public last May) and Martek Biosciences Corp. (which went public in 1993).

Since TAP began in 1984, 300 companies have applied for space, but only 60 have made it through the screening process. The state recently made the process even more difficult. TAP companies must agree to stay in the state for five years after graduation, or pay penalties.

Claragen has been at TAP for two years and just signed on for a third, said Mark Zimmer, co-founder of the six-employee company. Claragen focuses on therapeutic uses of a naturally occurring human protein, CC10, or human uteroglobin. Research could lead to treatments for adult respiratory distress syndrome, septic shock, acute renal failure, bronchopulmonary dysplasia, pancreatitis, asthma and allergy, and rheumatoid arthritis.

"When we started up, we had technology that we licensed from the National Institutes of Health," said Zimmer, "but we started from a standing start. We wouldn't have been able to get commercial space."

TAP charges $9 to $14 a square foot for its space, about half the going rate in the area. It also requires that companies give a 1 percent equity stake each year to the program and the state.

Zimmer said the pooled resources of TAP provided a big plus.

"We're doing some bacterial fermentation, and they have a facility here, part of the university, that allowed us to do a lot of process development and strain testing that, had we contracted out, would have been extremely expensive and labor intensive," he said.

Richard Garr, president and CEO of NeuralStem, which has been at TAP for two years, said the decision to apply to the program hinged on resource allocation.

"It would have cost us close to $1 million to build these labs, and any way you look at it that's a lot of money," Garr said. "We could instead hire more people and push the science forward."

NeuralStem, which employs 18 people, plans to "leave the nest" within the next year. The company is researching treatments for neurodegenerative diseases.

Zimmer and other TAP-company heads say that being a part of the program can help attract investors, validating the company as a reasonable risk without the high rent and capital expenditures associated with a start-up.

"There's a certain level of validation that comes from getting into the incubators," Garr said. "Seed-money-level investors do seem to take some comfort in that."

Nearly 90 Percent Of Incubated Firms Still Going

But, he added, not all investors will look favorably on the incubator label. "Later investors, institutional and venture capital investors . . . there comes a point where they're not going to accept just the validation of being in an incubator."

Sally Hayhow, of the National Business Incubator Association (NBIA), in Athens, Ohio, believes incubation makes a company much more attractive to investors, and gives the company crucial connections with potential investors.

"Biotech companies have to move quickly into the market," she said. "An incubator helps them have a pretty substantial infrastructure, so even something [as] simple as trying to have a meeting with a banker you have a decent conference room to do that in."

A 1997 study by NBIA found that 87 percent of all incubated companies were still in business. "[Business incubation] is a very diverse field," Hayhow said, "but I do feel comfortable saying that [incubation is] a huge advantage. If I were an investor, that's where I would look first. The success rate would be easy to determine the work is already done for you." *