SAN FRANCISCO _ Lurking behind the excitement of the hottestbiotechnology innovations, such as gene therapy and genomics, is amore sobering reality that a significant number of companies in theindustry are doomed to extinction over the next several years for lackof capital.

Wall Street analysts painted a gloomy picture of the near-term futurefor many of the 250 publicly held biotechnology firms. Theircomments underscored concerns of company executives at the annualmeeting of the Biotechnology Industry Organization (BIO) in SanFrancisco.

Estimates range as high as 50 percent for the number of companiesthat will go out of business or be absorbed by larger biotechnologyand pharmaceutical firms over the next two years.

"There's a significant problem related to the number of publiccompanies," said David Crossen, of UBS Securities, in New York."The probabilities of having successful products and the risk offailure suggest that there has to be a separation of the weak from thestrong."

Mark Simon, of Robertson Stephens & Co., in San Francisco, saidinvestor confidence in biotechnology's ability to deliver products hasbeen shaken by as many as 30 high-profile experimental drug failuresin the last three years.

"Let's hope that Cor Therapeutics and Cephalon aren't numbers 31and 32," he said, referring to the anticipated release over the nextseveral weeks of Phase III trials for South San Francisco-based CorTherapeutics' Integrelin and West Chester, Pa.-based Cephalon Inc.'sMyotrophin.

Integrelin is being developed for prevention of artery closurefollowing angioplasty and Myotrophin is a drug targeted fortreatment of amyotrophic lateral sclerosis, or Lou Gehrig's disease.

Simon suggested most companies that don't survive the current cashdrought will be absorbed by other firms.

"I don't see many bankruptcies," Simon said. "Every company hassome assets. There will be a weeding out. Many companies will hitthe wall and will be sold at fire sales."

But Simon added that the shakeout of weaker companies is normaland healthy for the industry.

Crossen estimated that as many as 30 companies have less than oneyear's worth of cash and he expects the number of firms slipping intothat predicament to grow.

"Over a five-year period of time, there will be a significant amount ofcompanies that cannot make it," he said.

The capital markets' stinginess has forced the biotechnology industryinto a "rigorous efficiency," Crossen suggested. Companies have lessroom for mistakes and have to be more realistic about a drugcandidate's potential for success in clinical trials and on the market.

As for private companies with aspirations of tapping into the pubicmarkets, Crossen observed the climate is different than it was duringthe early 1990s, when a firm's association with a renowned scientistwas all it needed to generate investor confidence.

Of the 50 private biotechnology companies he has tracked, Crossensaid only about two or three could launch a successful initial publicoffering.

"To go public you need to show clinical data or show a uniquetechnology platform that looks innovative," he said. And proof ofunique technology, he added, usually requires endorsements frompharmaceutical companies in the form of corporate deals. n

-- Charles Craig

(c) 1997 American Health Consultants. All rights reserved.

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