As Some Products Get Closer to Market, : Investment Dollars Are Harder to Find
The road to riches in biotechnology has never been easy. But now Southern California companies with experimental drugs find it especially hard.
Consider ImmunoTherapy Corp., a tiny Tustin company with a vaccine intended to treat cancer. Jeff Lillard, the company’s chairman, wants to raise $3.5 million to fund tests in cancer patients. He’s talked with more than 100 venture capital firms, investment bankers and big drug firms, but has nothing to show for it.
He fancifully likens his odds of landing capital from traditional sources to former Yankee slugger Reggie Jackson coming out of retirement to hit “four home runs in one World Series game.”
While the numbers of companies seeking money to test their drugs in the doctor’s office are mounting, capital appears increasingly scarce, market observers say.
Venture firms and public investors who traditionally speculate in experimental drugs are oftentimes reluctant to invest in new drugs because of the naturally high failure rate of drugs in clinical trials.
Also, there is concern about new drugs not selling in today’s cost-conscious health-care industry.
Industry sources estimate that, nationally, total investment in biotech firms dropped to $1.8 billion last year from almost $2.7 billion the previous year.
As a result, local companies have been forced to get smarter about drug development. It generally takes six to nine years and an investment of $50 million to $120 million for an experimental drug to clear human tests and gain regulatory approvals to be marketed.
Three out of four drugs don’t make it to market. So, small struggling biotech firms must figure out new ways to attract the enormous investments to keep them on track.
“They’ve had to get pretty creative about keeping themselves going,” said Cynthia Robbins-Roth, editor-in-chief of BioVenture View, a newsletter that tracks the industry. Among other strategies, biotech firms are striking alliances with large drug companies, testing out inventive stock offerings, raising capital overseas, and even concentrating on drugs that cost less to develop.
“Many of these biotech companies are primarily funded by existing investors and it’s extremely difficult for them to get new investors to jump on,” adds Howard Wachtler, managing director of Medical Venture Holdings Inc., which manages two health-care investment funds.
Gyrating stock values haven’t eased investors’ concerns either. Shares of Cephalon Inc. of West Chester, Pa., soared in one week after it announced its drug Myotrophin slowed the advance of Lou Gehrig’s disease in clinical tests.
But shares of Cor Therapeutics, in South San Francisco, tumbled on news that its anti-clotting drug Integrin didn’t do much better than a placebo in preventing death or other adverse outcomes in angioplasty patients.
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Such clinical disappointments have forced companies to slash their research and development budgets. Earlier this year, San Diego-based Gensia Inc., faced with disappointing results for a cardiovascular drug, cut 35 jobs at its local research and development center.
Yet, the pressure on such companies to prove themselves in clinical tests is intensifying, industry observers say. Record numbers of drugs are in the human testing phase now.
Frederick Dorey, president of the Bay Area Bioscience Center, a regional clearinghouse for companies and researchers, predicts that the number of experimental drugs failing in late-stage tests will increase as the huge number of companies started in the 1980s get ready to test their ideas on human subjects.
“The odds are daunting,” said Mark Edwards, managing director of Recombinant Capital, a San Francisco consulting firm. “They will fail more often than they will succeed.”
Some companies are taking pains to make themselves more attractive to public investors.
Ligand Pharmaceuticals Inc. in San Diego and its larger partner, Irvine-based Allergan Inc., launched a new company to develop drugs using their combined technology for naturally occurring hormones called retinoids. The new company, dubbed ALRT, or Allergan Ligand Retinoid Therapeutics, went public June 3 with an initial offering of 3.25 million rights, priced at $10 each. Each right includes a share of ALRT stock and two warrants to purchase Ligand stock in five years.
What’s more, the deal gives Ligand the right to buy the new company’s stock back for $120.7 million, or $37.13 a share, in five years--a prospect that gives investors the chance to earn a substantial return on their money. The offering, which sought to raise $32.5 million, was so popular that it attracted $90 million from the public, says Jeff D’Eliscu, an Allergan spokesman.
“We had to give 60 million back,” he noted.
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Other companies are scouring foreign markets for investors.
“We are very close to coming out with some major therapies for cancer, and the funding has gotten pathetic,” said Alan Epstein, director of scientific research at Techniclone in Tustin. So, Dr. Epstein, who is also a USC professor of pathology, turned last year to a private company, in Shanghai, China, to fund clinical trials for his technology for fighting cancerous tumors. He hopes to start clinical trials there this fall.
Of course, many firms are trying to line up partnerships with big drug firms.
For instance, Viagene Inc., a San Diego gene therapy company, has lots of drugs in the pipeline. It expects to spend $10 million on clinical trials and related activities this year, double its 1993 budget, and it can’t wait for the capital markets to improve, says Dr. Robert Abbott, its president and chief executive.
“We don’t expect the availability of capital over the next several years is going to improve a lot,” he said.
Viagene recently announced plans to be acquired by its large stake holder, Chiron Corp., a well-financed biotech firm in Emeryville, Calif.
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Meanwhile, with capital scarce, biotech companies must find ways to stretch their resources.
Isis Pharmaceuticals Inc., in Carlsbad, has attracted multimillion-dollar commitments from major pharmaceutical companies to help fund its clinical tests. It’s done so partly by carefully managing which drug uses it chooses to pursue, says Stanley T. Crooke, its chairman and chief executive.
Isis has kept its developmental costs down, he says, by deliberately targeting disease treatments that require only limited quantities of drugs. That way, the company has been able to produce drugs in commercial quantities out of its modest 1,200-square-foot plant in Carlsbad.
It thus avoided having to build a multimillion-dollar manufacturing plant to pump out huge quantities of its drugs for test purposes--something that’s proven a costly problem for other biotech firms.
“That meant we could move much more rapidly,” Crooke said.
Isis pushed ahead with treatments for two diseases: genital warts and cytomegalovirus retinitis, an eye condition common in AIDS patients that can cause blindness. Both diseases can be treated by small amounts of drugs injected locally. In contrast, Isis postponed pursuing applications for conditions such as arthritis, which require large quantities of drugs administered throughout the body.
Next year, if clinical tests proceed as hoped, Isis aims to seek regulatory approval to market its retinitis treatment. And it aims to follow that six months later with the wart treatment.
A small number of biotechnology companies prosper enough to fund their research out of profits. Thousand Oaks-based Amgen, the largest independent biotechnology company, with sales last year of $1.6 billion, is one of the fortunate few.
“We actually generate cash,” noted Gordon Binder, its chairman and chief executive officer.
Amgen, with five new drugs in clinical tests now, faces its own challenges. It relies on sales of its two blockbuster drugs, Epogen and Neupogen, to fund those tests. And like most drug companies, it faces rising pressures to persuade providers of managed health care that its medicines are superior.
These days, “it’s a tougher sell,” Binder said. As a result, the company is stepping up its efforts to educate the marketplace.
Amgen plans to hike its overall sales and marketing budget by 10% this year to about $370 million. Its sales force of 300 will be calling on more health professionals and visiting them more frequently, attending more medical conferences, and developing marketing material that shows the financial and medical attributes of its drugs.
Also, for the first time, Amgen is experimenting with marketing directly to patients. Among other things, Binder says, it will start running ads in women’s magazines for Neupogen as a treatment to avoid infection associated with chemotherapy.
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Meanwhile, the typical biotech firm struggles to just keep going.
ImmunoTherapys Chairman Lillard, whose mother died of breast cancer, cites results of a study last year that suggests the company’s vaccine may help treat and stop the spread of various cancers. Of 15 cancer patients given the vaccine, he says, two had tumors shrink or disappear and five had tumors that stopped growing, though cancers continued to spread in the other patients.
But ImmunoTherapy has exhausted most of the $1.5 million of past investment it has been running on for several years. And if it can’t raise the $3.5 million now just to get it into more extensive trials, Lillard said, “We’ll have to cut an already thin program back even further, and that will hurt our ability to advance the vaccine into the clinic.”
