Biotech Blues : Firms Go Begging for Money to Test New Drugs
The road to riches in biotechnology has never been easy. But now Southern California companies with experimental drugs are finding it especially difficult.
Consider ImmunoTherapy Corp., a tiny Tustin company with a vaccine intended to combat 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 Lillard has nothing to show for it.
His odds of landing capital from traditional sources? About as good, Lillard says, as those of Reggie Jackson coming out of retirement to hit “four home runs in one World Series game.”
While the number of companies like ImmunoTherapy seeking money to test their drugs in the doctor’s office is growing, capital appears increasingly scarce, observers say.
The high failure rate of drugs in clinical trials has always made it hard to raise money from venture firms and public investors. Now there is the added concern that even successful new drugs won’t sell in today’s cost-conscious health care industry.
Industry sources estimate that the total investment in biotech firms nationally dropped to $1.8 billion last year from almost $2.7 billion the previous year.
The companies have been forced to get smarter about drug development.
“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 inventive stock offerings, raising capital overseas and even concentrating on drugs that cost less to develop.
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 approval for marketing. Three out of four drugs don’t make it, so small, struggling biotech firms must fight to stay on track.
“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,” said Howard Wachtler, managing director of Medical Venture Holdings Inc., which manages two health care investment funds.
Gyrating stock values have done little to ease investors’ concerns. Shares of Cephalon Inc., for instance, soared in the week after the West Chester, Pa., firm 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.
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 headquarters jobs--laying off four corporate officers, among others.
Yet with a record number of drugs in the human testing phase, the pressure on such companies to prove themselves in clinical tests is only intensifying, analysts say.
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.”
Facing such odds, 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 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. The rights, which include a share of ALRT stock and two warrants to purchase Ligand stock in five years, closed Friday at $15.75.
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, said Jeff D’Eliscu, an Allergan spokesman.
“We had to give $60 million back,” he said.
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 company in Shanghai to fund clinical trials for his technology for fighting cancerous tumors. He hopes to start clinical trials there this fall.
Many firms, meanwhile, are trying to line up partnerships with big drug firms.
Viagene Inc., a San Diego gene therapy company, recently announced plans to be acquired by its large stake holder, Chiron Corp., a well-financed biotech firm in Emeryville, Calif.
With lots of drugs in the pipeline, Viagene expects to spend $10 million on clinical trials and related activities this year--double its 1993 budget--and it couldn’t wait for the capital markets to improve, said Dr. Robert Abbott, 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.
Careful stretching of resources is key to many biotech companies’ survival in these capital-short times.
Isis Pharmaceuticals Inc. of Carlsbad, Calif., which has attracted multimillion-dollar commitments from major pharmaceutical companies, has done so partly by carefully managing which drug uses it chooses to pursue, said Chairman and Chief Executive Stanley T. Crooke.
By deliberately targeting treatments that require only limited quantities of drugs, Isis has kept its developmental costs down. Able to produce adequate quantities of drugs at its modest, 1,200-square-foot plant, the company has not had to make the kind of costly manufacturing investments that have handicapped other biotech firms.
Isis pushed ahead with treatments for genital warts and cytomegalovirus retinitis, an eye condition common in AIDS patients that can cause blindness. Both diseases can be treated with small amounts of drugs injected locally. In contrast, Isis postponed pursuing applications for treatment of such conditions as arthritis, which require large quantities of drugs administered throughout the body.
Next year, if clinical tests proceed as hoped, Isis aims to seek approval to market its retinitis treatment; the wart treatment will follow six months later.
A small number of biotech companies prosper enough to fund their own research. Thousand Oaks-based Amgen, the largest independent biotech company, with sales last year of $1.6 billion, is one of the fortunate few.
“We actually generate cash,” said Gordon Binder, chairman and chief executive.
Amgen, with five new drugs now in clinical tests, faces its own challenges. It relies on sales of its two blockbuster drugs, Epogen and Neupogen, to fund those tests.
Amgen plans to increase 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 attributes of its drugs.
Also, Amgen is experimenting for the first time with marketing directly to patients. Among other things, Binder said, the company will start running ads in women’s magazines promoting Neupogen as a treatment to avoid infections associated with chemotherapy.
These days, “it’s a tougher sell,” the executive said.
Indeed, the typical biotech firm must struggle just to survive.
ImmunoTherapy Chairman Lillard, whose mother died of breast cancer, cites results of a study last year that suggested the company’s vaccine may help stop the spread of various cancers. Of 15 cancer patients given the drug, he said, two had tumors shrink or disappear and five had tumors stop growing; cancers continued to spread in the other patients.
But ImmunoTherapy has exhausted most of the $1.5 million in past investment on which it has been running for several years. And if it can’t raise a fresh $3.5 million to get into more extensive trials, said Lillard, “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.”
