<p>Figure 1</p>

After several punishing years, the window for biotechnology financing in the US appears to be reopening, though mainly for larger companies with a strong product pipeline, leaving early-stage biotechs to scrap over a tightening pool of federal and local funds. Biotech companies raked in more than $12 billion (US) in 2003, the industry's second highest annual total, but well behind the $32 million raised in the boom year of 2000.

Even more significant, analysts say, is the reappearance of a market for biotech initial public offerings (IPOs) for the first time in 18 months. "I think the nuclear winter could be over," says Ron Spangler, chief executive of Emerging Growth Equities, a biotech investment-banking boutique in King of Prussia, Pa. Investment funds have pent up pools of money to spend, but buyers remain skeptical about the market, says G. Steven Burrill, chief executive of Burrill & Co., a...


Burrill estimates an additional 50 companies are lining up to sell stock. If they all go forward, he says, the biotech market will be flooded. "We're going to have too many deals. I think the markets will react negatively."

In addition to the IPOs, 2003 saw expanded financing in all segments. Public follow-on offerings rose from less than 10 in the first half of the year to 25 in the second half, according to Simon Gill, director of corporate finance at Needham & Company in New York. "These last six months have seen a lot of biotech company financing, and it is based on share prices for biotech-companies increasing by 30% this year and also a 45% increase in the NASDAQ," he says. "That is a very good backdrop for companies looking to do financing." He adds that the main force driving biotech forward is likely to be investor enthusiasm for stocks in general. "And no one can predict what will happen in the equity markets."

Spangler says the emergence of promising new potential drugs is driving some investors back to biotech, after fleeing the painful post-2000 market collapse. "There [were] a couple years of no good news," Spangler observes. "Now people are starting to get some positive Phase 3 data and [they're] beginning to see money can be made in this industry again." He points to Avastin, the new cancer drug developed by Genentech of South San Francisco. Avastin drove up the company's shares dramatically last summer, bringing other biotech shares along with it.

Companies that don't expect to get a product on the market within five years are still having difficulty attracting finance, Spangler says. Indeed, venture funding for biotech firms dropped for the 12-month period ending in September 2003, from $3.43 billion to $2.61 billion, according to the Money Tree Survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. Firms need to show that they will generate sales within the next two years if they hope to receive funding, Spangler adds.


With private capital sparse, companies in early stages of development have turned increasingly to the government for help with financing, but they may find less support than in the past. After five years in which the National Institutes of Health budget doubled to more than $27 billion, spending growth is expected to drop to a range of 2% to 3% in 2004, says Ira S. Loss, a Washington healthcare analyst. "What's more, it is likely to be in that range or worse in the coming years, given the deficit and all the other issues that are complicating the environment for research dollars," he says.

Government spending for biodefense remains robust, but that has not made much of an impact on biotech firms, because many companies are not interested in doing the work, Loss asserts. "Most of the products that result from that are only going to be purchased by government," he adds. "Industry has shown a hesitancy to take a big jump into this area. We're all hopeful that it does not become a recurring expense."

Interest in funding through the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs has soared in the last two years as private financing retreated, says Rick Shindell, president of Zyn Systems of Sequim, Wash., a consultant to technology firms. Shindell's company operates SBIR Gateway, a Web site with information about the federal programs; it attracts as many as 3,000 viewers a day, double what it was two years ago.

SBIR and STTR funding is expected to grow from an estimated $1.6 billion this year to $2 billion in 2005 with the addition of several new federal agencies, including the US Department of Homeland Security. In addition to federal funding, state and local governments increasingly are becoming an important source of early-stage financing for companies that cannot find private backing, says Robert Eaton, president of MdBio, a private nonprofit biotech support organization in Frederick, Md.

Eaton says the reawakening of the finance markets for biotech will take some time to work its way down to startups. "There might be some movement with regard to companies a little further along in their development path, and eventually that will find its way down to the early-stage companies," he says. "But until then, people are looking to a lot of different avenues for their early funding, including SBIR, state and local initiatives, or partnering with other companies."

Budget woes in some states, including Michigan and Minnesota, have lead to reductions in support of biotech. "Many states and regions are trying to get on the biotech bandwagon through public investment," says Barry Teeter, spokesman for the North Carolina Biotechnology Center in Research Triangle Park. "The only contraction will be from the economic pressures that states are under. We have seen some states renege on some of their prior publicly announced commitments, but I think the trend is still upward."

The addition of a drug benefit to Medicare coverage will be a boost to the industry, because it extends drug coverage to 40 million Americans and drives up demand for products, Burrill says. A new, more user-friendly Food and Drug Administration under Commissioner Mark McClellan will spur more approvals and stimulate investment, he adds. In a forward to the agency's new strategic plan released in August 2003, McClellan writes: "We need to make the process for developing new technology less costly. We need to make it less risky, with greater predictability and less time from concept to bedside. In short, we need a more efficient development process."

Yet as the United States enters another presidential and congressional election year, the industry is likely to take some hits on drug pricing as well as continued disagreements over federal stem-cell policy. "Anytime you have a political election dialogue around healthcare legislation and pricing," says Burrill, "that's going to put pressure on the markets."

Susan Warner can be contacted at swarner@the-scientist.com.

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