Biotech's New Watchword: Partnership


Consider 1997 the year of the new best friend in biotechnology.

Last year, tiny biotech outfits struck multiple partnerships with pharmaceutical-industry titans to speed development and marketing of new drugs. Investments in such arrangements more than doubled nationally in 1997 to $5.9 billion, compared with $2 billion the year before, reports Burrill & Co., a San Francisco-based merchant bank.

Indeed, partnerships accounted for much of the overall 60% increase in funding for the biotech industry last year. Along with public offerings, venture capital and other private investments, financing totaled $11.7 billion, up from $7.3 billion in 1996, according to Burrill.

The bank's G. Steven Burrill predicts that partnerships will remain popular this year because they're intended to meet desperate needs of both small and big firms. "Both sides need them more than ever," he says.

Recent mega-mergers of multibillion-dollar drug manufacturers are creating gigantic firms with huge demand for new drugs that can sustain corporate growth and satisfy shareholders, Burrill says.

At the same time, biotech companies can't afford to fund the costly pre-market tests of innovative drugs that regulators require, he says, let alone the marketing and distribution of drugs once they're approved.

The result? Partnerships that create close collaborations between big and small firms but stop short of full-scale business combinations. While the deals are differently structured, they usually involve cash and equity investments and marketing and distribution rights.

A deal announced last month by Aurora Biosciences Corp., the La Jolla biotech, and New Jersey-based behemoth Merck & Co. is typical.

Merck got its hands on Aurora technologies used in drug research and development, while Aurora stands to gain up to $33 million in research funding, licensing fees and other payments.

Aurora has done several such collaborations, but the Merck deal is the largest, possibly attracting as much as $100 million from Merck if the arrangement yields useful products, the company says.

The sudden popularity of such partnerships last year helped boost drug development, despite a sharp falloff in Wall Street investment in initial public offerings by biotechs.

A two-month dry spell in initial offerings last spring, followed by the October stock market crash, spooked issuers and investors, causing the value of funds raised through new issues to plummet to $709 million last year, compared with $1.5 billion for the year before.

Some partnerships resulted from two biotechs teaming up.

Last month, for instance, Genentech Inc. of South San Francisco and New Jersey-based Alteon Inc. announced plans to collaborate on an experimental treatment for kidney disease in diabetic patients.

In a deal Alteon hopes will yield investment of about $200 million, Genentech made an initial equity investment of $15 million to develop Alteon's drug Pimagedine.

Genentech also promised to buy as much as $48 million in Alteon stock and eventually pay $50 million if the drug passes muster with U.S. and European regulators.

In exchange, Alteon gave Genentech exclusive rights to sell Pimagedine in all markets worldwide except for certain ones already committed in previous agreements with other firms.


Biotech Funding

The U.S. biotechnology industry raised 60% more funds in 1997, largely through increased strategic partnering. Funds raised, 1996 and 1997, in millions of dollars:


1996 % of total 1997 % of total Initial public offerings $1,465 20.0% $709 6.0% Secondary offerings 2,766 37.7 3,005 25.7 Private investment 537 7.3 1,297 11.0 Venture capital 449 6.1 609 5.2 Other 103 1.5 213 1.8 Strategic partnering* 2,004 27.4 5,892 50.3 Total $7,324 100.0 $11,725 100.0


* Based on upfront payments and equity investments only.

Source: Burrill & Co.

Researched by JANICE L. JONES / Los Angeles Times

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