Commentary: Biotech Breakdown: As Funding Dwindles, New Drugs Stall

By Catherine Arnst

The plaintive letter Cel-Sci Corp. (CVM ) sent out to shareholders on May 31 is both poignant and typical. The biotech company, based in Vienna, Va., is developing novel immunotherapy treatments for AIDS and aggressive forms of cancer--but despite some promising data, its stock is down from $9 a share in 2000 to $1.40 in early June. The stock's collapse, along with the rest of the biotech sector, comes just as Cel-Sci is laying plans for costly late-stage clinical trials. "The faith of even the strongest believers is severely tested at times like these," writes CEO Geert R. Kersten. To persuade his shareholders to stay in the fold, Kersten runs through a history of today's biotech stars--how Amgen (AMGN ), IDEC Pharmaceuticals (IDPH ), and Biogen (BGEN ) once struggled for survival.

History, it seems, is repeating itself. It's not a great time to be a biomedical startup, even though it's a rare week that there isn't news of an amazing new biotech drug aimed at previously untreatable cancers, brain diseases, or immune disorders. The deciphering of the human genome, combined with advanced drug-discovery technologies and huge leaps in knowledge about the inner workings of cells, guarantees that these discoveries will continue at an even faster pace. In fact, a record 21 biotech medicines were approved by the Food & Drug Administration last year, and there are 350 more in advanced stages of development.

And yet the Nasdaq biotechnology index fell 25% in the first three months of 2001, compared with a decline of 19.71% in the overall index. Though the index has climbed back in recent weeks, biotech stocks are nowhere near their highs of last year. As a result, only three biotech companies had gone public by May 31, compared with an average of 25 initial public offerings per quarter last year.

UNFAIR. Private funding is not picking up the slack. PricewaterhouseCoopers says venture-capital financing in biotech dropped off 37% in the first quarter from the previous three months (chart). "The biggest issue facing the biotech industry today is access to capital," says Hollings C. Renton, chairman of startup Onyx Pharmaceuticals Inc.

Virtually everyone in the industry agrees that biotech has suffered collateral damage from the punctured dot-com bubble. This seems particularly unfair, given that health care was always the poor relation at information technology's groaning board. Market research firm VentureOne Corp. reports that the percentage of the total venture-capital pie devoted to life sciences shrank from 27% to 9% over the past five years, despite big increases in biotech financing. Several large diversified funds, among them Mayfield, Accel International, and Menlo Ventures, exited the life sciences field altogether. "The Internet was uncharted territory, and when you are making 100 times your money in a year, it's hard to get excited about other sectors," says James B. Tananbaum, a managing partner of Prospect Venture Partners.

Biotech does have its negatives, of course, not the least of which is its own speculative bubble in the early 1990s. Back then, fortunes were raised and squandered by startups ill equipped to shepherd their discoveries from lab to market, typically a 10- to 15-year process. Today, biotech has a proven track record and big scientific advances behind it, but it still can't promise a quick return. A recent survey by the journal Nature Biotechnology found that 82% of 361 publicly traded biotech companies have revenues of less than $50 million, and only 21% are profitable. Since it can take anywhere from $100 million to $500 million to bring a new drug to market, investors must display considerable patience.

OUT IN THE COLD. The biggest loss for society may be the plight of the small fry. Well aware of the slow payoff, big venture-capital funds rarely get involved in biotech startups. The funds that do specialize in biotech are being very selective--and all too often, the lone scientist with a great idea is left out in the cold. "There is plenty of private money around, but it's not being spent," says Alan G. Walton of Oxford Bioscience Partners. "Venture funds are using their money to keep their existing companies going, and that probably means there are somewhat fewer startups."

In this business, though, the lone scientist with a new idea is often the one with enough passion to slog through the harrowing development process. There are 373 companies developing just one drug, says a new survey by market researcher Pharmaprojects. These treatments will not all pan out, of course, but it's sad to think that potentially lifesaving drugs will fall by the wayside for lack of funding.

As an object lesson, look at Gleevec, a new treatment for a previously incurable form of leukemia. Novartis came close to abandoning Gleevec when it inherited the drug after its merger with Ciba-Geigy Ltd. (CBGXY ) The drug's discoverer, Oregon Life Sciences University scientist Dr. Brian Drucker, lobbied long and hard to keep it in the pipeline. Let's hope other remarkable treatments don't land on the same sacrificial altar as Inc.

Senior Writer Arnst covers science and medicine.

    Before it's here, it's on the Bloomberg Terminal.