WASHINGTON _ America's brutally competitive and cash-strappedbiotech industry is poised to profit from the shakeout now under way inthe pharmaceutical marketplace, corporate leaders said Friday at theBiotechnology Industry Organization's Fall Conference '94.But the shape of the industry is likely to change, they said, as poorperformers fall away; as new partnerships form and as establishedcompanies forge new financial arrangements to free them from theirdependence on such venture capital firms as D. Blech & Co., nowstruggling after a decade of funding sometimes shaky start-ups."This technology will become tremendously successful, tremendouslypowerful," said Henri Termeer, president, chairman and CEO ofGenzyme Corp. "But I don't think its necessary to have 1,000companies by the year 2000 _ I don't believe its efficient. Thetechnology isn't diverse enough to support that."Russell Ray, senior vice president of Alex. Brown & Sons, aninvestment banking firm, agreed: "There's not enough money in thepublic sector or private markets to justify the number of companies inthe market."One of the toughest challenges is also one of the most basic, saidRobert Beckman, president of Purchase, N.Y.-based IntergenCompany. "We will have to survive this year, and we will have tosurvive next year," he said.By then, the turmoil of the current pharmaceutical marketplace maybegin to settle down, and the turmoil over health reform, including thespecter of price controls, may begin to diminish.Biotech Firms Need Public FaithIn addition, companies with ambition, expertise, innovative ideas andluck will, by then, begin pushing marketable products out of theresearch pipeline.Biotech firms need tangible results if they are to shore up public faithin biotechnology, and boost investor confidence that their outlays willgenerate satisfying returns.At the moment, public faith in biotechnology appears to be at ebbing.Over the past few years, the euphoria over early developments,including the genetic mass production of once-scarce insulin, hasbegun to wane in the absence of new breakthroughs.The growth of the industry is slowing. While new companies wereforming at a rate of about three a week in 1991 and 1992, he said, thepace has fallen off to approximately one new start-up every otherweek.The burst in growth occurred, in part, because the big pharmaceuticalcompanies "didn't absorb the power of this new technology" or itspotential to yield profits, Termeer said.But, he added, it is time for biotech companies to begin thinking aboutconsolidating their efforts."Every CEO can think of three or four competitors who havecompeting patents or duplicative technology. When you have reachedthe point that you are suing your neighbor over two similar patents," hesaid, "you have reached the point of inefficiency."He called consolidation a "powerful multiplier" that can increase yieldof research efforts at lower cost.Ray, of Alex. Brown & Sons, told the conference that companies canbenefit by serious self-examination, to make sure that they areexploiting their "core competencies" and also developing an array ofproducts that match the firm's "disease profile."Raising money will be no problem for companies that back the rightprospective therapies, he said. "Capital will flow to those companiesthat offer a return on investments through a reduction of risk," Raysaid. "Those companies will be extremely successful."One way to reduce risk, he said, will be to form alliances with bigpharmaceutical companies who have expertise in the biotech firm's"core competencies" and are willing to share the risk.Double-Edged Sword Attracts Interest"It's Darwinian selection," Ray said. "Those without a plan to survive,won't survive."Denise Gilbert, vice president and chief financial officer at Affymax,N.V., of Palo Alto, Calif., said that a handful of companies arebeginning to look at innovative financing mechanisms as a way toreduce their dependency of venture capital and improve their cashflow.One technique that has attracted the interest of some firms is called a"double-edged sword," she said.It is a variation on the more accepted "sword," in which a biotechcompany creates a shell corporation to develop a promising product.The shell corporation then enters into a contract with the parentcompany to carry out the research.The biotech company benefits because it can mark off the investmentas an expense and improve its profit and loss profile, she said.In a double-edged sword, the biotech company forms a shell companyto develop the product _ and the shell company enters into a contractwith the biotech firm to develop the product and a pharmaceuticalcompany to do the marketing.Ultimately, either partner could buy out the other, generating profitsthat flow back to investors, Gilbert said. The investors also stand toearn a return from the profits from their original investment.The advantages are that the biotech company "off-loads" the risk ofproduct development; it improves its profit-loss profile; it generatesvisibility for selected products; and it generates attractive returns forinvestors. n
-- Steve Sternberg Special To BioWorld Today
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