TORONTO _ Every 10 days, a new biotechnology company isformed. Yet the funding models that built the industry are crumblingand the business environment is changing daily. Will the biotechnologyindustry as we know it survive? If it does, what will it look like?Analysts pondered these questions at a workshop here on the future ofthe industry. The bear market for biotechnology stocks, which hasgloomily persisted with a few brief respites since the spring of 1992,has triggered such soul-searching sessions.According to Richard van den Broek of Merrill Lynch, the future mustbring a redistribution of the risks and rewards of investing inbiotechnology. He argued that biotechnology's venture capitalists havemanaged to offload the gargantuan risks of their investments ontopublic investors. The unfair result: venture capitalists routinely tripleand quadruple their original investments and the public routinely loseshundreds of millions on companies that fail to validate their technologyin clinical trials or at the FDA.The flood of firms that completed initial public offerings (IPO) in theheyday years of 1991 and early 1992 provide a case study of thisphenomenon. Just as some of these companies were releasing their firstcredible proof-of-concept data, lock-up periods for venture capitalistsexpired."At the time of the IPO, valuations are ethereal. They are based on thereputations of your scientists and the perceived quality of yourmanagement team," said van den Broek. "But the risks increase later,when real measurements of a company's worth _ such as clinical trialresults _ are available. The venture capitalists generally leave just asthe risk is greatest."Van den Broek said that biotechnology start-ups will continue to beformed despite the glut of existing companies, but that the venturecapital model must change.He offered several possibilities for venture capitalist behaviormodification: incubate companies longer, invest more money and waitlonger for an exit strategy; arrange for a large pharmaceutical companyto invest at an early stage; do smaller step-ups in financing roundsleading to smaller pre-IPO valuations and leaving more upsidepotential for IPO investors; and, finally, lengthen lock-up periods fromthe current standard of six to 18 months and stage them moreappropriately.Robert Friedman, an analyst from Kidder, Peabody & Co., said that thecurrent financing drought and convulsions in the health caremarketplace have rendered the old Fully Integrated PharmaceuticalCompany (FIPCO) model obsolete for biotechnology companies.Meanwhile, large pharmaceutical companies are scrambling to mergewith health care delivery companies and manage corporate and marketcontractions, giving them little time or resources to devote to newproduct development. Biotechnology firms could capitalize on thechaos by filling empty product pipelines but that scenario poses somebig questions."How do you value non-FIPCO companies?" he asked. "Willbiotechnology companies become a mere source of compounds andnew clinical candidates to be handed over to the big boys for furtherdevelopment? Where do we go from here?"Although the death of the FIPCO model is hardly news, it appears thatthe startling ramifications of this demise are being considered onlynow. IPOs, followed by subsequent maturation to profitability, havebeen at the core of the profit paradigm for biotechnology companiesand have fueled the industry from its inception. Until a new, equallycompelling paradigm emerges, the sector may be groping in a fog."A lot of these companies will just have to go away," said van denBroek, "and it's not going to be pretty."L. John Wilkerson of The Wilkerson Group, a New York-basedconsulting firm, said that private and public investors, as well ascompany management, must seriously rethink exit strategies. "Maybethe new exit strategy is to get sold," he said. "Now that's going torequire a massive change in mind-set." Wilkerson said that companiesmust keep their eyes on the prize _ building value _ and be flexibleabout how to get there.Despite the grim and uncertain forecasts, at least one member of theaudience weighed in with an optimistic view. "It's hard to realize whenit's dark that there is a light switch somewhere in the room," he said.
-- Lisa Piercey Washington Editor
(c) 1997 American Health Consultants. All rights reserved.