More Small Biotech Firms Are `Living On The Edge'

Directory assistance for the 919 area code in North Carolina no longer lists a phone number for Macronex Inc., a small biotechnology company located in Morrisville. Although technically still a going concern, Macronex currently has only two employees and is in the process of going out of business. STRAPPED: ImmunoGen CEO Mitchel Sayare observes, from hard experience, that "things are not going well for companies that don't have enough cash." "We've pretty much closed our operation . . . a casualty of the current financing environment for biotech companies," explains George Cianciolo, vice president for research and development at Macronex, when reached at home. "We're in the process of selling off our assets." The pressure is on for many biotechnology companies, from very small ones such as Macronex to those with up to a few hundred employees that nonetheless lack a product to sell. For the last several years, financing has become more and more difficult to find. Some, like Macronex, have closed down. Other firms have streamlined, hoping to conserve their precious remaining cash until a "focused" R&D program yields the kind of results that will attract investors again. Any "surprises" during clinical testing, and a firm may be forced to go under. A merger of two small biotechs is also a possibility, especially if one company has cash and no products anywhere near ready for the market and the other has late-stage R&D under way but little money to finance it. In any case, some of the scientists and management staff of these companies on the edge may find themselves looking for new jobs. Macronex was established in 1991 to develop a technology for screening novel drug leads for cancer and several other disorders. Its number of employees peaked at 34 in early 1994. Macronex technology had identified a promising lead that Cianciolo hoped would begin clinical testing by the end of this year. But to do so would have required a new infusion of money. "Our investors didn't want to go further," says Cianciolo, especially since another company--which he declines to name--is interested in buying Macronex's methods and the rights to its best lead. By summer's end, Cianciolo expects Macronex to close the deal, selling the rights to its most promising product. The demise of Macronex, and the way it is going out, does not surprise Mark Dibner, an analyst for the Institute for Biotechnology Information (IBI) in Research Triangle Park, N.C. "Biotech companies don't die very easily," he says. "They often die with a whimper; shut off their phones and slowly go out of business." Macronex fits what Dibner calls the "have-not" profile of a biotechnology company: one with limited financial resources for R&D and few or no products on the market. The "haves" are large companies, such as Amgen Inc. of Thousand Oaks, Calif. (2,200 employees); Chiron Corp. of Emeryville, Calif. (2,000 employees); and Genentech Inc. of South San Francisco, Calif. (3,000 employees), which have successful products on the market supporting a large number of employees conducting a variety of R&D projects. IBI reports that at the end of 1994, the average United States biotechnology firm had 91 employees and an R&D budget of $9.7 million. The median company, however, had 29 employees and an R&D budget of only $2.5 million. (Figures are based on responses from 545 U.S. biotech firms.) The big numbers posted by the "haves" are skewing industry averages, observes Dibner: "Each year, we see the average and median get farther apart." Dibner concludes that this gap reveals a "frailty" in the biotechnology industry in spite of the growth it has experienced. Of the more than 1,000 biotechnology firms in the U.S. that IBI tracks, only a fraction appear to have good prospects for long-term survival, says Dibner, author of Biotechnology Guide U.S.A., Companies, Data and Analysis (3rd, ed., IBI, 1995). MARKET FRAILTY: Analyst Mark Dibner of the Institute for Biotechnology Information points out that the majority of biotechs may not have their first product out by the year 2000. "I think there are too many small companies," he says. Just how many companies the biotech industry can support remains an open question. Some analysts have predicted a significant "consolidation" in biotech to many fewer--but much larger--firms, so that the number of scientists employed and the R&D conducted will still grow (R. Finn, The Scientist, May 1, 1995, page 1). Others point out that consolidation scenarios have been predicted before and have yet to materialize. Even in the miserable funding climate of the last few years, new companies continue to appear. "There's something about biotechnology that lends itself to being worked on by small teams of 10 or 20 scientists," says Carl Feldbaum, president of the Biotechnology Industry Organization in Washington, D.C., and a skeptic of consolidation predictions. In Massachusetts, the biotech companies struggling most are in the "middle tier," according to Susan Moulton, director of education for the Massachusetts Biotechnology Council (MBC), an industry trade association headquartered in Cambridge. They typically employ 100 or more people, she says, and have several products in development. As cash runs short, and with no new financial backing on the horizon, these middle-tier companies are forced into the risky strategy of focusing all of their remaining resources on one product. Other development is shut down, usually leading to layoffs. If a more narrowly focused R&D program doesn't "pan out," she says, "then they're in trouble," facing the possibility of going out of business. RISKY BUSINESS: Massachusetts Biotechnology Council education director Susan Mouton has concerns about some firm's strategy of focusing all their resources on one product. ImmunoGen Inc. of Cambridge, Mass., finds itself in the situation Moulton describes. At the end of last year, a pharmaceutical company Immunogen had hoped would become its partner backed down, according to company officials who decline to name the prospective partner. The deal would have provided financial stability for ImmunoGen's R&D programs in return for transferring to the partner the rights to ImmunoGen's products and technology. The deal's failure "was a big shock to us and our employees," comments ImmunoGen CEO Mitchel Sayare. "That precipitated a strategy we had hoped to avoid." The company quickly dropped from 185 employees before the partnership fell through to 95. It's at 85 today, with nearly all of them working in support of clinical trials of the anti-cancer drug Oncolysin B that ImmunoGen is developing. Meanwhile, says Sayare, the company "continues to search for the appropriate partner to help us with further product development." After a pause, he adds: "Things are not going well for companies that don't have enough cash." SALVAGE OPERATION: CellCor CEO Richard D'Antoni reports that his company's projects will survive a merger with the larger Cytogen, but some of his employees will not. A different fate is in store for CellCor Inc. of Newton, Mass. It is merging with Cytogen Corp. of Princeton, N.J., a company with 127 employees, or about three times that of CellCor. "The transaction hasn't closed, but the two companies have signed a definitive merger agreement," reports Richard D'Antoni, president and CEO of CellCor. MILESTONES: Biotech consultant Robert Gottlieb says that companies need to determine what kinds of results will "signal the markets" that it is time to invest. CellCor is developing a treatment to activate a person's immune response to cancer and infectious disease. A few prospective products are in or near Phase III clinical trials. Since Cytogen's scientific interests are similar to those of CellCor, and the larger company wants to add some late-stage products to its "development pipeline," Of the 45 current CellCor employees, 30 will remain with the merged entity, according to D'Antoni. "The scientific people are being retained. All of the basic research people except one, and all of the manufacturing and clinical research people are staying." The rest, primarily CellCor's management ranks, including D'Antoni, are leaving. "We'll have to find something " he says. SOME GOOD NEWS: Analyst Timothy Wilson of Hambrecht and Quist notes that "financing has just gotten a bit easier." CellCor needed this merger or some other deal like it (the company had been in discussion with several firms) to keep its R&D programs thriving, notes D'Antoni: "If it hadn't gone through, we wouldn't have shut the doors, but we might have laid people off while continuing our R&D efforts, although perhaps on a scaled-back basis." Scientists who work at small biotech firms can find themselves in a bind. If their company is on the edge--when a successful clinical trial can attract investors, but disappointing news may bring the firm down--how do they react? Look for other work now, or stick with the firm only to be laid off in a survival move or when the company expires? Sayare reports that all but one of the employees laid off from ImmunoGen since the end of 1994 have new positions. "The job market is pretty good in the Cambridge area," he observes. MBC's Moulton says recent employment numbers for Massachusetts indicate that growth in biotechnology industry is flat, compared with 30 percent annual growth a few years ago. So instead of needing to import new labor, area firms tap the existing pool of scientists. Much of the hiring is done by new companies, Moulton points out. "Absolutely, there is growth and strength in startups. They're less expensive to operate and doing fine" in spite of the difficult financing climate plaguing biotech over the last three years, he maintains. What surprises human resources consultant Ed Bocko, managing director of Protran Resources Inc. in Sharon, Mass., is the ability of many biotech firms contemplating layoffs to prevent a talent exodus: "When things get tight, [biotech] companies are more open with information about the company's condition with the employees than I see in other industries, like computer companies." Many biotechnology managers will reveal how much cash a company has left, and let employees know where this leaves the company and the employees. As a result, says Bocko, the scientists tend to "hang on to the bitter end" rather than leave for a new, more stable company. "It seems like a lot of [biotech] employees are real believers in their company and the products and research it is doing, so they tend to be loyal if management is honest with them," observes Bocko. Macronex's Cianciolo thinks the opportunities for scientists to find new jobs are shrinking. "In the past, there were always enough startups that if your company closed down, you could go down the street and find a new job. That's coming to an end," he says. Cianciolo moved in 1987 from the Duke University faculty to become a senior scientist for Genentech. In 1989, he went to Sphinx Pharmaceuticals Corp. in Durham, N.C.--where he rose to vice president for pharmaceuticals--before helping to found Macronex in 1991. His prescription for scientists who want to succeed in the industry is to keep their skills up, develop more than one area of expertise, and "be flexible, because things will change rapidly." He also preaches "extreme" computer literacy. "We are in an information age," says Cianciolo. "You need to be able to cull and sort through a lot of information quickly, so you can take advances made in another area [of science] and apply them to your area. And you can't just read the journals. "First, there are too many. Second, by the time something shows up in the journals in your area of expertise, the novel ideas are already being applied by someone else." SKEPTIC: Analyst David Stone of Cowen and Co. doubts that there will be a great consolidation: "The wave is still offshore." Over the next few years, the success of any specific company will probably be tied to its ability to reach certain development "milestones," predicts Robert Gottlieb of Feinstein Partners Inc., a biotechnology consulting firm in Cambridge, Mass. As companies facing a "cash crunch" focus on developing a single product, they need to ask themselves what kinds of results or achievements will "signal the markets that I now have something to invest in," says Gottlieb. There is, however, some good news for biotechnology companies just managing to hang on until new investment or a merger invigorates them. "Financing has just gotten a bit easier," notes Timothy Wilson, a New York senior biotechnology industry analyst for the San Francisco-based investment bank Hambrecht and Quist. "In the last month, stock prices [in the biotechnology industry] have doubled and even tripled in some cases." Behind the run-up is renewed confidence in biotech by investors impressed by the money going into the industry from large pharmaceutical firms and recent clinical-trial successes. "This makes the prospects of the biotechs attractive again," he maintains. Another biotechnology analyst, David Stone, agrees with Wilson. Stone cautions that "investors will probably be more selective than a few years back. They are still more conscious of the money lost in the biotech industry in the last few years than in the money made in the last few months." Stone, an analyst for Cowen & Co., a multinational investment bank headquartered in New York City, is also skeptical of the oft-predicted consolidation of the biotechnology industry to some small fraction of today's companies. "The great wave of consolidation has been discussed every few years, and the wave is still offshore," he says. Stone recalls the days when the industry was just beginning and there were only a dozen biotechnology companies. "There was a discussion about whether the industry might consolidate to three or five companies," he says. "Now it's at 1,000 or more, and people are asking whether 300 or 500 will survive." He acknowledges that investors would like to see a little more size in the companies. The biotech firms "are already in a risky endeavor, so they would like larger, better capitalized operations under one roof. But it's not happening. The scramble for capital and scientists is what seems to make these companies successful." Stone does anticipate a fair amount of turnover of companies in the industry, but he also believes that startups will continue to appear at a brisk pace. "The cast of characters may change. Some companies will get bigger, some will fold, with the scientists and managers going on to the next concept and company," Lee Katterman, a writer based in Ann Arbor, Mich., is editor of Research News, a publication of the University of Michigan. (The Scientist, Vol:9, #16, pg.1 , August 21, 1995) (Copyright © The Scientist, Inc.)

More Small Biotech Firms Are `Living On The Edge'

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