By Jennifer Van Brunt
Casualties in the biotechnology sector continue to mount as the long-running financing crunch exerts its heavy toll on struggling companies. Many firms in this sector are simply running out of money — and alternatives. Public companies with falling stock prices have seen their market capitalizations shrink to critically low levels. Many have dropped below the minimum listing requirements to trade on the Nasdaq National Market; many more have virtually disappeared off analysts' and investors' radar screens. When cost-cutting measures — layoffs, sale of non-core assets, abandonment (temporary or permanent) of early-stage research programs — fail to do the trick, these cash-strapped firms face serious consequences.
In fact, there are few remaining choices. One of these is bankruptcy, but in the 20-year history of the biotech industry only a handful of companies have taken this route. A more appealing path — as evidenced by the frequency with which companies have chosen it this year — is survival through consolidation.
Moreover, the lack of financing alternatives for established biotech firms has even forced some members of the venture capital community to reassess traditional strategies for growing startup outfits. Where once the goal was to grow a young company to the point where it could be taken public — at which point the venture capital investors make their money — today that exit route simply does not exist. Instead, one alternative is to structure fledgling businesses to partner their platform technologies with other biotechs or with big pharma — or even to be acquired. Not all venture capital companies have adopted this approach, but they all seem to be searching for new investment strategies that work within the confines of the current biotech crisis.
"Venture capitalists need a new business model; we need to improve the performance of our investments," stated Jonathan Fleming, a general partner in venture capital group Oxford Bioscience Partners' Boston office. Obviously, public investors are shunning the biotech sector right now — and the situation might not change for quite some time to come. For instance, "Buy-side analysts say they don't want to buy stock in small companies (with market caps of $80 million to $100 million) with just one product in development. They don't want everything to hinge on a single clinical trial," Fleming said.
Over the past decade, the parameters that both private and public investors have used to value biotech companies have changed. Where once it was the number of investigational new drugs in development — with a long time frame to product approval and profitability — today it is a platform technology capable of generating near-term value that attracts investors. If young biotech companies are planning on raising venture capital, they must get better at generating quick returns to their investors, explained Fleming.
One way to do this, he continued, is for the company to focus on one unique technology (generally called a "tool" technology) and understand where it fits in the gene-to-drug continuum — then sell it as a product or service to big pharma and/or biotech companies. If the use of that technology adds value to the customer's product (or discovery efforts), then the young startup can generate short-term revenues. As a venture capital concern, "We would finance the development of that unique technology; if it generates revenues, the company will need less equity capital," Fleming said. If the startup establishes corporate partnerships, it creates another financing channel — once again, requiring less cash from a venture capital investor. Thus a venture capital company might be able to make a modest investment, say $3 million, and still make a considerable return in the end.
In this business model, "We start from the concept that a company has to be 'lean and mean' and we assume that the company will be sold or consolidated rather than go public," Fleming said.
Biotech-Biotech Mergers Grow
Indeed, consolidation seems to be the current watchword in the biotech sector. Even a quick glance at the numbers demonstrates clearly that many biotech firms are choosing the mergers-and-acquisitions road to survival. By the end of the third quarter of 1998, the number of inter-biotech unions — either proposed or consummated — had jumped to 49. This is already more than the total number of biotech-biotech mergers and acquisitions recorded for either 1994 or 1995. (See the graphs below for comparisons of the number and value of mergers and acquisitions between 1994 and the end of the third quarter of 1998.) And by Nov. 9, 1998, another 10 biotech-biotech mergers had been announced, indicating that by the end of this year these sorts of marriages will reach an all-time high.
Two recent announcements underscore the current set of circumstances that have fostered inter-biotech mergers. In early November, Pacific Pharmaceuticals Inc. announced that it was in merger talks with Cambridge, Mass.-based Procept Inc. (NASDAQ:PRCT). Two months earlier, cash-strapped Pacific Pharmaceuticals, of San Diego, had been delisted from the American Stock Exchange and switched to the OTC Bulletin Board (PPHA).
And last week, OraVax Inc. (NASDAQ:ORVX), also of Cambridge, Mass., announced it has agreed to be merged with Cambridge, U.K., biotech firm Peptide Therapeutics Group plc (LSE:PTE). Two months ago, Nasdaq notified OraVax that it no longer met the exchange's listing requirements; it's so low on cash that it got a $3 million bridge loan from corporate partner Pasteur Merieux Connaught to provide working capital for the joint research program until the $15 million merger with Peptide Therapeutics has been consummated. (See the Nov. 12, 1998, issue of BioWorld Today for more details of the proposed merger.)
Big Pharma Acquisitions Increase
As well, there are indications that the major pharmaceutical houses are stepping up the pace of biotech acquisitions this year. In years past, the number of outright acquisitions of biotech companies by big pharma remained fairly low, but in 1998 that situation has changed. By the end of the third quarter, there were 18 biotech-big pharma unions on record; by Nov. 9, that number had risen to 22. And although only 12 of the 22 were complete acquisitions of a biotech firm by a pharmaceutical house, that number is still higher than in previous years. The remainder of the biotech-big pharma unions are a mixed assortment. Several were actually deals in which a biotech firm bought a division of a big pharma company (Menlo Park, Calif.-based SangStat Medical Corp.'s $31 million purchase of the Imtix division of France's Pasteur Merieux Connaught, for instance), or in which a biotech company acquired the big pharma's stake in a joint venture (such as Chiron Corp.'s $115.5 million purchase of German heavyweight Hoechst AG's 51 percent stake in their joint venture Chiron Behring GmbH & Co.). Also, in a few instances, the biotech firm has sold one of its business units to a large acquirer — Centocor Inc., of Malvern, Pa., is selling its oncology diagnostics business to Fujirebio Inc., of Japan, for $37.5 million; Chiron, of Emeryville, Calif., has struck a $1.1 billion deal to sell its in vitro diagnostics subsidiary to German giant Bayer AG; and U.K. outfit Chiroscience Group plc has reaped $50 million by selling a 30 percent stake of its Chiroscience Technology Ltd. subsidiary to Ascot plc, also based in the U.K.
For details of the mergers and acquisitions announced between July 25, 1998, and Nov. 9, 1998, see the chart on p. 3 of this issue. For the deals announced earlier this year, see the charts in the Aug. 3, 1998, and March 16, 1998, issues of BioWorld Financial Watch. *