WASHINGTON _ Venture capitalists say they will invest less moneyin fewer biotechnology start-ups in 1994 due to concerns about pricecontrols and health care reform. Their views were reported in a surveyreleased here on Thursday at the annual meeting of the NationalVenture Capital Association (NVCA).This news may be welcome to those who believe the industry is alreadyovercrowded, but Robert Goldberg, the survey's author and a seniorresearch fellow at Brandeis University's Gordon Public Policy Center,said that the net effect could be less progress against costly and deadlydiseases such as AIDS, Alzheimer's and cancer."For biotechnology, the coming years will be a time of decision," saidGoldberg. "It would be unfortunate if short-term political objectivesundermine the venture capital spirit of success that is one of thebiotechnology industry's greatest assets."The survey, which claims to represent the views of 40 percent of allventure capitalists investing in biotechnology (62 firms out of 160responded), showed that: 51 percent of venture capitalists plan to investless money in fewer firms in 1994; 24 percent view the outcome of thehealth care reform debate vis- -vis drug price controls as the "mostimportant" factor shaping 1994 investment strategies; and 73 percentbelieve price controls would negatively impact their investmentdecisions.Despite the dour views expressed in Goldberg's survey, venturecapitalists appeared downright enthusiastic about investing inbiotechnology last year. According to BioWorld's records, venturecapitalists invested more than $644 million in early-stagebiotechnology companies in 1993, with a record-breaking $288 millionof that going to start-ups _ defined as seed round through secondround. (See BioWorld's 1993 Annual Biotechnology Report fordocumentation.) The 1994 total to date comes to $163 million.Reform Is Not The Only IssueAlan Walton, a general partner of Stamford, Conn.-based OxfordBioscience Partners and an attendee of the NVCA conference, said thatfor his firm, concern about health care reform is "only part of a muchbigger picture.""I'm not sure that it's possible to pull apart health care reform concernsfrom the many other technological and financial issues facing thisindustry right now," Walton told BioWorld. "The situation last yearwas only somewhat tinged by health care reform." But he added thathealth care reform was a hot topic at this year's NVCA meeting.As the political prospects for Clinton's comprehensive Health SecurityAct have faded in recent months, fear and panic among venturecapitalists has also subsided. "Right now, we're a bit relaxed about it(the threat of price controls in health care reform)," Jim Blair, generalpartner of Domain Associates in Princeton, N.J., told BioWorld. Still,he said that price controls remain "the big glitch" in planninginvestment strategies.With or without reform, the U.S. health care system is changingdramatically and will continue to do so, putting steady downwardpressure on prices and raising the cost-effectiveness hurdle for newmedical products and technologies. Blair said that, due in part to thesemarket forces, his firm will structure its deals differently in the future.Domain may discard the initial public offering (IPO) paradigm andbuild companies instead whose end goal is acquisition by a largerbiotechnology or pharmaceutical company.He predicted that by the late 1990's, 15 to 20 biotechnology companieswill have reached the positive cash flow status of companies such asAmgen Inc. and Genzyme Corp. And they'll be out shopping forproducts and technologies to fill their pipelines. "Those companies willprovide the funding for this industry that the public is being asked toprovide now," he said."To me, the future has never been rosier," said Blair. "The wholesource of new products has shifted from large pharmaceuticalcompanies to biotechnology companies."Industry analysts have estimated that at least 100 public biotechnologycompanies are currently short of cash, a situation which makes itincreasingly difficult for later-stage private companies to make theirIPO debuts. The perplexingly large number of companies, theirseemingly insatiable appetite for funding and ever-lengthening productdevelopment timelines have taken a heavy toll on public investors'enthusiasm and patience.Experts say that the public investors' rate of return on investment inbiotechnology has been considerably lower than that realized byventure capitalists who invest earlier and theoretically take higher risks.However, biotechnology companies go public at a relatively early stageof development _ with no products or sales and, in some cases evenbefore a lead product has been identified. As a result, hapless publicinvestors have ended up bearing venture capitalist-type risks absentventure capitalist-type rewards.Too Many Went Public"Too many companies went public too young," said Josh Lerner, anassociate professor at Harvard University's Graduate School ofBusiness who has studied the biotechnology IPO market."Biotechnology has suffered from the same syndrome as that seen inmany other industries. As the pace of IPOs accelerates, the quality ofcompanies goes down."Part of that acceleration is driven by venture capitalists who scrambleto create companies when they sense a public appetite for a particulartechnology, Lerner said. "A lot of what venture capitalists do is verypositive, such as starting companies and nurturing them until they areready to go public. However, there is also a strong element ofopportunism to what they do."Domain's Blair disagrees with this critique of venture capitalists. "Ifpublic investors absorb all the risk, the system doesn't work. We're in apartnership with the public and we hang onto to these stocks for yearsin some cases. The companies have to succeed for us to succeed." n
-- Lisa Piercey Washington Editor
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