Report Says Biotech Ventures Will Face 'Uncertainty' in ' 93

In the coming year, biotechnology companies will continue to confront an unstable business climate, characterized by volatile financing markets and an unpredictable regulatory environment, according to a recent report on the industry's future. Company heads also say that biotechnology faces an added degree of instability injected into its plans by the prospect of change in Washington. Industry leaders are responding to these factors by using a number of tactics to "accelerate commercialization," the report finds. Their goal, continuity and longevity for their research-intensive companies, is seen as likely to benefit not only stockholders but also researchers, whose jobs will be at stake. The report, "Biotech 93: Accelerating Commercialization," released in September, is the work of G. Steven Burrill and Kenneth B. Lee Jr., analysts with the accounting and management consulting firm of Ernst & Young in San Francisco. "To deal with the uncertainty and unpredictability that is a given in this marketplace," says Burrill, "CEOs are adopting a series of strategies that are really vehicles to have a more effective integration and a more stable environment." "Companies are trying to increase their predictability in a period of what we would call increased uncertainty," says Lee. "The issues for the industry become significantly more tactical as we move forward." Despite the instability, Burrill and Lee find that the biotech industry is continuing to expand rapidly. They report that sales were up 35 percent this year over last, to $5.9 billion; revenues were up 28 percent, to $8.1 billion; and stockholders' equity in biotech companies was up 27 percent, to $13.6 billion. Losses were also up, however, 32 percent over the previous year, to $3.4 billion, as were expenses for research and development, which jumped a full 42 percent, to $4.9 billion. Overall, Burrill and Lee predict success for biotechnology companies, anticipating profitability for the industry as a whole by the mid-1990s. Through 1991 and into early 1992, unusually large amounts of capital flowed into the biotechnology industry, according to the report. Lee says there were several reasons for this sudden upsurge in investment. "One was a rush to recession-proof stocks," he says, "of which the health care group is a notable example." Biotechnology stocks are seen as a subset of health care industry stocks. The high- profile success of some biotech companies, such as Amgen Inc. in Thousand Oaks, Calif., also attracted some investors, Lee says. "During the past 18 months," he adds, "131 companies raised about $5 billion in public transactions. That marketplace started to dwindle at the end of the first quarter of 1992." Recession fears had receded somewhat by then, so that cyclical money began to move out of the so-called recession-proof stocks, dramatically dropping the cash influx rates, according to Lee. To cope with such volatility in the investment markets, heads of biotechnology companies have adopted a number of strategies to stabilize their financial underpinnings. Biogen Inc., in Cambridge, Mass., is one company using these methods to strengthen its position in the market. Biogen entered into a licensing agreement with Schering-Plough Corp., Union, N.J., in the 1980s, and Biogen's alpha-interferon product is now marketed by Schering-Plough. "It's fairly classic as far as the benefits to both," says Ken Bate, vice president of finance and chief financial officer to Biogen. "You've got the drug companies that have no investment in biotech, no ability to develop these kinds of drugs, and they find a research fountain, if you will. They look at that and say, `What do we bring to the party? We bring money.' You work financial arrangements where the costs of the development moves to the big drug company, and you get a not-insignificant chunk of the ultimate profits. They have a drug they could never have gotten on their own, and you have profits that you probably never could have realized." In early 1992, American Home Products Corp., New York City, acquired 60 percent of Genetics Institute, Cambridge, Mass. Here again, the partial acquisition of a smaller biotechnology company by a larger pharmaceutical company was seen as bringing the innovative energy of a research-based organization into a corporate structure with the resources to see a product through development and testing to marketing and distribution. Says Gabriel Schmergel, president and CEO of Genetics Institute, "The figure of $150 million in terms of the full cost of developing a pharmaceutical product is real. Increasingly, there is a recognition that, while, yes, we want to keep our products and do it all on our own, it's not a realistic way to pursue things for most of the [biotechnology] companies, most of the time." Schmergel also told one reporter that the partial acquisition of Genetics Institute by American Home Products had prevented an employment freeze or cut in the company's 120-person core research group. Acquisitions, partial and total, can increase research workers' job security by making the acquired company more financially stable, says Linda Sonntag, president and CEO of SyStemix Inc., Palo Alto, Calif. In December 1991, Sandoz AG, based in Basel, Switzerland, acquired 60 percent of SyStemix for $392 million. "The company's much more stable and secure because we don't have the uncertainties, the whims, of the market," she says. "One of the great problems of high-tech companies is that hiring is usually done cyclically, according to funding cycles, whereas, here, we can build for the long term." Jerry Caulder, as president and CEO of Mycogen Corp. of San Diego, has been working in the same vein, to vertically integrate his company from basic research to the marketplace. But he has also been trying to achieve niche integration, a term used in the report to describe efforts made to penetrate a particular, usually specialized market. In this case, the niche is the market for Mycogen's MVP and M-Trak products, which were the first genetically engineered biopesticides to receive Environmental Protection Agency approval. "I've made a couple of strategic acquisitions that better integrate me into the marketplace," Caulder says. "One of them was Soilserve [Inc., Salinas, Calif.], a company that's in the consulting business for how farmers protect their crops against pests." The multiple advantages to such acquisitions are straightforward, says Caulder. "It spreads my risk and also gives me business units that are already operating in the marketplace into which I want to bring my products." The influence of Washington on the biotechnology industry will continue to be significant, if mixed, according to Burrill and Lee. They anticipate that the industry's dealings with the Food and Drug Administration will remain difficult. They also, however, see positive returns resulting from the February 1992 federal policy decision not to regulate food produced through biotechnology any differently from more traditionally developed food products. "One would have to calibrate the FDA situation as one in which we have increased the unpredictability during the last year or so," says Burrill. "One the one hand, we have the FDA trying hard to be user-friendly, to find vehicles that accelerate the approval process. On the flip side, we see increased enforcement and a reluctance to aggressively deal with the product approval backlog." They point to the problems of Centocor Inc. of Malvern, Pa. The company's fortunes fell dramatically after FDA found insufficient evidence to establish the efficacy of its product Centoxin. Prior to this decision--and based partly on earlier FDA reviews-- expectations had been high for Centoxin. "Certainly, the Centocor example is a wonderful example of the confusing [signals from FDA]," says Burrill, "where a committee says, `Yes,' and eventually says, `No,' so that, notwithstanding the FDA's revitalization dialogue, the industry's relationship with the FDA has increased uncertainty." Biogen's Bate suggests that problems that appear tied to FDA decisions are sometimes actually reflections of financing problems. Underfinanced companies may find themselves in situations in which they are depending on a positive decision from FDA for their corporate survival. "I don't think the FDA treats a biotech company any differently, any better or worse, than it treats a pharmaceutical company," says Bate. "I think it is a very rigorous, very serious, and lengthy process. "Any delay in the process, even if it's routine by the FDA's standards," he adds, "tends to wreak havoc on companies that need that good news. "While they see continued difficulties in the drug approval process, Burrill and Lee are encouraged by the government's policy decision concerning regulation of biotechnology food products. Agricultural biotechnology companies represent a sector of the industry likely to fare well in the coming year as a result, say the analysts. "By determining that biotechnology-based foods are not inherently riskier than foods developed through traditional crossbreeding, the Food and Drug Administration opened the farm gates for the ag-bio segment," they write. Interviewed before the November 3 presidential election, industry leaders expressed confidence that biotechnology and other high- technology industries would be reasonably well supported in Washington whatever the outcome of the contest. But they were concerned that Democratic candidate Gov. Bill Clinton's desire to control the prices of drugs might translate into trouble for the industry. "Clinton has said he'd like to do something about the costs of drugs," says Biogen's Bate. "That's got to be negative to anybody that's selling drugs, including the biotechs." Bate notes that an important bill to control drug prices has been introduced to Congress by Democratic Sen. David Pryor, from Clinton's home state of Arkansas. "The attacks Clinton has made on drug prices could be pretty devastating," agrees Mycogen's Caulder--although his agriculturally oriented company would not be directly affected-- "when you're trying to get into profitability, to suddenly have the government step up and control the prices on the key products coming out." "Both candidates are recognizing the phenomenon that small companies, entrepreneurial businesses with high intellectual capital are a major driver in the U.S. economy," Bate says, "and that it's not the Rust Belt that delivers jobs anymore."

Report Says Biotech Ventures Will Face 'Uncertainty' in ' 93

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