5) Sustain Investors' Confidence

5) Sustain Investors' Confidence
As the biotech industry sweats its way through this economic downturn, capricious investors want strong evidence that ideas will pan out. That's never easy, but last October, Idun Pharmaceuticals Inc. got lucky. The tiny San Diego company was one month away from running out of cash when its co-founder, H. Robert Horvitz, won the Nobel prize for discovering the genes that control cell death -- the science at the heart of Idun. Horvitz knew that understanding the pathway to cell death could lead to treatments for dozens of diseases, from Alzheimer's to cancer to AIDS. He and his colleagues were on the verge of stringing together $22.8 million in venture capital, but they feared the whole thing might fall apart, as so many biotech financings had. The VCs "wanted to know how much money they would make and how fast," says Horvitz, an investigator at Massachusetts Institute of Technology. His Nobel sealed the deal.

Many biotechs have harrowing tales to tell. Hundreds of small fry -- the very companies that are laying the foundation for breakthroughs -- are strapped for cash and shunned by investors who fear a dot-com-like crash. Big Pharma won't jump in to finance startups until they see positive late-stage trial results, and they're not willing to make oversize bets anymore. The top 10 biotech deals of 2002 were worth just $3 billion, down from $25 billion in 2001, according to PriceWaterhouseCoopers. VCs are staying away, too, because they're afraid they may never see a return on their investment. "I regard this as the bio Ice Age," says Alan G. Walton, partner at life-sciences VC firm Oxford Bioscience Partners.

A fallback option for startups is to license early-stage discoveries to deep-pocketed competitors. There is an eager market. James Mullen, CEO of Biogen Inc. in Cambridge, Mass., says he looks at several potential licensing deals a week in hopes of finding one or two gems each year. "It's a matter of reconciling the potential payoff with the estimated cost of moving the research to the next phase," Mullen says. In January, Biogen partnered with Sunesis Pharmaceuticals Inc. in South San Francisco, Calif., which is developing drugs to treat autoimmune diseases, one of Biogen's three specialties. The deal could be worth more than $60 million to Sunesis.

Licensing should only be a temporary solution, though. While it keeps the science alive, it forces innovative young companies to sacrifice potential future profits from their valuable intellectual property. Sunesis, for instance, forfeited the right to commercialize drugs that come out of the Biogen partnership. For biotechs to outgrow the licensing crutch and regain investors' interest, the industry will need to grapple with each of its other four hurdles. Without that, it may never break the cycles of hype and havoc that have dogged this sector since the 1970s. The endgame, however, will be worth the risk: In 10 years time, Amgen and Genentech -- with annual sales of $6.3 billion and $3 billion, respectively -- could be sharing the stage with half a dozen biotechs of comparable size. That means, for the first time, the newcomers would have the financial heft to sustain long-term research -- the kind that leads to blockbuster drugs.

Biotech's hopes and challenges are summed up well by George B. Rathmann, who co-founded Amgen more than 20 years ago and is now chairman of Nuvelo Inc., a Sunnyvale (Calif.) gene-discovery company. "Genomics has given us a burden of riches: thousands of genes we don't understand," he says. Yet as the pieces fall together, knowledge of DNA will open the door to personalized medicine. "We know all that is possible," he says. All that -- and so much more.

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