10/04/2009 Downturn threatens biotechs' viability

Companies had difficulties raising funds to keep going

By Thomas Kupper
Union-Tribune Staff Writer
2:00 a.m. October 4, 2009

The San Diego biotechnology company Adventrx Pharmaceuticals hit bottom in March.

With the recession in full force and the stock market at a 10-year low, it had become nearly impossible for biotech companies to raise money. Efforts to find a buyer for Adventrx had failed, and the company cut its work force to five people.

The company, which had more than 30 employees a year earlier, issued a news release that said it would discontinue nearly all operations.

"We were really at death's door," said principal executive officer Brian Culley. "I was calling my banker friends and saying, ‘Are you sure there's nothing out there?' "

It was an industry crisis that brought more than a third of San Diego's publicly traded biotech companies within a year of running out of money if their spending continued at the previous year's pace.

Today, the severe cash crunch appears to have eased. That's good news for the local industry, which employs thousands of people at nearly 50 public companies and hundreds of smaller firms.

Adventrx raised $4.5 million from June through August, enough to support the company as it completes an application to the U.S. Food and Drug Administration for approval of its first product, a new chemotherapy formulation.

Of the 17 other local public companies that had less than a year's worth of cash at the end of June, 11 have raised money since then. In some cases, the companies raised enough to keep going for at least a few more months, but others have extended their lifelines well into 2010 or further.

"It's safe to say it's improving," said Joseph Panetta, head of the local industry group Biocom. "But there are still a lot of guys who will tell you it's not improving for them."

The ongoing quest for cash is characteristic of the biotech industry, in which the vast majority of companies are unprofitable and dependent on periodic infusions of investment capital.

It is a process that has always been subject to boom-and-bust cycles, roughly paralleling the stock market. In good times, such as during the market boom at the start of this decade, it's easy to raise money and companies load up on cash.

In bad times, they starve. The result is that many of the local companies have had to cut employees, suspend research programs or cut costs.

One longtime biotech company, La Jolla Pharmaceutical, is planning a shareholder vote this month on liquidation. Another, Metabasis Therapeutics, cut all but seven of its 52 employees and is exploring "strategic options" such as a sale of the company.

A third company, TorreyPines Therapeutics, announced liquidation plans this year but was able to arrange a merger with Northern California-based Raptor Pharmaceutical Corp.

Even those companies that have raised money continue to face difficult circumstances. Low stock prices - shares of Adventrx closed at 15 cents Friday, for example - mean that companies often have difficulty raising much money.

Jim Greenwood, head of the national Biotechnology Industry Organization, acknowledged during a visit to San Diego last week that one function of the periodic funding slumps is to weed out companies that haven't lived up to their initial hopes.

"Clearly, there's something Darwinian about what we're seeing," Greenwood said. "But there are some companies that are doing everything right, and they just run out of money."

The trend isn't limited to San Diego. Data from investment company Burrill & Co. show that investment in biotech companies, whether ownership stakes or loans, fell to $10.1 billion last year from as high as $27.4 billion two years earlier.

This year, funding has recovered significantly, with $9.3 billion in financing through June, according to Burrill. But by then, the firm estimated that more than 110 of the 343 publicly traded U.S. biotech companies had cut costs by slashing staff or putting projects on hold.

San Diego's Somaxon Pharmaceuticals is one company that has taken advantage of the increased availability of capital. Earlier this year, the FDA declined to approve the company's insomnia drug, Silenor, and the company had to make austerity moves including cutting its staff to seven people.

But Somaxon resubmitted its application to the FDA and was able to raise $6 million in July. Chief Executive Richard Pascoe said potential investors studied the company's progress with the FDA before putting the money in.

"The companies that have been successful in raising money in the last six to nine months have had to be very direct with investors," Pascoe said. "The amount of scrutiny has increased."

Even some larger companies have faced challenges. Arena Pharmaceuticals, a San Diego company that employed almost 500 people as of March and plans to apply for FDA approval of a weight loss drug, suffered a setback in March when study data weren't as strong as some had hoped.

The company, which burned through $240 million last year, was down to $39.6 million by the end of June and cut 130 jobs in April to conserve cash. It has since gotten additional study data, and reassured investors have enabled the company to arrange a $100 million loan followed by $52.1 million raised in a July stock offering.

John McCamant, editor of the Medical Technology Stock Letter in Berkeley, said good study data or progress with the FDA have been keys for those companies that have been able to raise funds in recent months.

"There are companies out there raising money. That's important," McCamant said. "What we're basically seeing is that companies are able to raise money around specific positive events."

One question is how much of a long-term effect the slump will have on the industry.

Adventrx's Culley said that even with the recent fundraising success, the company is unlikely to increase its staff to its former size. He has a team of about 20 people working on an FDA application, but all of them except for two are either consultants or part-timers.

While Culley has plans to raise more money, including a proposed stock offering of up to $10 million, he said the experiences of the past year will probably lead him to continue running a very tight operation.

"We're going to be survivors in a very tough time," Culley said. "But we're not going to forget the lessons that we learned in trying to get to the other side."

Thomas Kupper: (619) 293-1037

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