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A Biotech Research Focus: Funding

By Arlene Weintraub On June 20, a group of venture capitalists and consultants will reenact a typical discussion between a biotech CEO and the VCs who plan to invest in his startup. The session, titled "The Dance at Closing -- a Mock Negotiation," will be one of dozens of panels presented at the annual convention of the Biotechnology Industry Organization (BIO) in Philadelphia.

But this dance may look more like a tragic ballet than a happy waltz. The biotech exec will have to accept a "down round," meaning his company will be valued at a lower rate than it was in its first funding round. What's more, the VCs will tell him that they're kicking him out of the CEO's suite.

RECORD TURNOUT. The point isn't to depress the many eager biotech entrepreneurs who will be attending the convention but rather to educate them about the harsh realities of raising capital. "It can be a bitter pill," says one of the panel's co-chairs, Eileen Gorman, CEO of DNA Bridges, a consulting company in San Francisco.

The tightfisted financing environment for biotechs has indeed been hard to swallow for an industry that's otherwise feeling quite optimistic. After all, more biotech drugs are in the pipeline than ever before, some of which may be quite close to reaching the market (see BW, 6/13/05, "Biotech, Finally").

About 18,000 biotech execs from 61 countries are expected to attend the BIO conference -- a record turnout for the event, which starts June 19. They'll spend five days discussing some of the industry's hottest issues, including stem-cell research, advances in cancer research, and biotech's use in agriculture. And they'll hear from celebrities who have benefited from biotech, including rock star and cancer survivor Melissa Etheridge. The theme of this year's conference -- innovation.

BEYOND TRADITIONAL SOURCES. But as any biotech entrepreneur knows all too well, you can't innovate without cash. And that has been hard to come by of late. This year, the American Stock Exchange Biotech Index has been flat, despite the rapid rise of Genentech (DNA), which has seen its stock jump nearly 50% this year on strong performance from its cancer-drug franchise. Shares of the 40 biotechs that have gone public in the last two years have fallen an average of 7% -- prompting other outfits in the field to hold off on plans for initial public offerings.

Plenty of private capital is available, but VCs are getting picky, preferring to invest in later-stage companies that are close to bringing drugs to market. "There is capital available, it's just a little ugly out there," says G. Steven Burrill, CEO of life-sciences merchant bank Burrill & Co.

That's why many of the sessions presented at the conference are designed to educate biotech entrepreneurs about financing options beyond traditional VCs. One increasingly important source of capital, for example, is venture funds that are owned by big pharma and, more recently, biotech companies. Among the biotechs that have started funds in recent years are Amgen (AMGN) and MedImmune (MEDI).

AVOIDING MICROMANAGERS. These companies tend to invest in startups that are working on the same diseases they are. MedImmune, for example, has taken a number of bets on smaller biotechs developing drugs to treat infectious disease, oncology, and autoimmune disorders -- all areas of interest for the 19-year-old Gaithersburg (Md.) concern.

Wayne T. Hockmeyer, president of MedImmune Ventures, says investing in early-stage startups allows MedImmune to form relationships with businesses that might lead to deeper partnerships down the road -- perhaps licensing agreements or acquisitions. "This lets us put placemarkers down," says Hockmeyer, who will be speaking on a panel at the BIO event. In February, MedImmune doubled the size of its venture fund to $200 million.

Some biotech execs prefer to get cash from bigger industry players, rather than forming full-fledged drug-development partnerships with them. Investors who throw money into the pipeline -- but don't have a direct ownership stake in any one drug that comes out of it -- tend not to micromanage as much as development partners might. On the other hand, big-pharma investors often offer valuable advice on difficult issues such as manufacturing and regulatory challenges.

DON'T GIVE UP. That has been the experience of San Diego-based Conforma Therapeutics, which recently raised $41.5 million from a consortium of investors, including venture funds held by Eli Lilly (LLY), Novo Nordisk (NVO), and GlaxoSmithKline (GSK). "All three make splendid contributions to the discussions," says Stuart Collinson, a Conforma board member and partner with Forward Ventures, a San Diego VC firm that also invested in the biotech.

Among the other funding options that will be discussed at the BIO conference are "structured financings." Here's how they work: First a biotech licenses a drug it's developing to a private investment fund. The biotech is given the right to buy back the drug at a predetermined price at some point in the future, assuming it proves promising in early trials. "It's a way to accelerate the pipeline without giving up your birthright to the drugs," says Mark Kessel, a BIO panelist and managing director of Symphony Capital, a New York firm that arranges structured financings.

Of course, in any financing relationship, biotech entrepreneurs have to be prepared to give up something. That sacrifice might be as simple as having to share the profits on an eventual product or as painful as being forced out of the CEO's job, as the poor exec in Monday's mock negotiation will have to endure.

Still, those holding the cash will pass on one important piece of advice to those seeking it: Don't give up. "It's a tough time," Burrill says. "But good companies find a way to get capital. I'm not discouraged." Judging from the thousands of entrepreneurs flocking to Philadelphia to tout their up-and-coming products, the tough hunt for cash won't deter the biotech industry from continuing to innovate. Weintraub is BusinessWeek's science department editor in New York

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