When the terror attacks halted air traffic last year, an exception was made for a private jet flying from Southern California to Washington. It carried sheets of human skin cells to treat people burned at the Pentagon.
Now the manufacturer of that biotechnology product, Advanced Tissue Sciences, is itself in need of emergency aid. The company, based in San Diego, filed for bankruptcy protection last month and is still operating, although it has been unable to raise money.
PHOTO: NY TIMES
"What we ran into was the change in the investment climate," said Abe Wischnia, the senior director for investor relations at Advanced Tissue Sciences. "A year or two ago, we would have had no trouble raising additional money."
The biotechnology industry is facing one of its worst financial squeezes ever. The prices of many biotechnology stocks have plummeted, and Wall Street's vaults have snapped nearly shut, making it almost impossible for capital-hungry companies to finance themselves.
As a result, many companies are now fighting for their lives. About 35 percent of publicly traded biotechnology companies have less than a year's worth of cash left at their current spending levels, according to a recent survey by Merrill Lynch. Since the beginning of July, at least 45 biotechnology companies in the US and Europe have announced layoffs or other cutbacks, according to BioCentury, a newsletter.
Among the companies in the most precarious positions are those whose research breakthroughs have attracted much attention in the past. Such technology often tends to be not only far-reaching, but also far out -- in terms of the time when it will start making money. These are exactly the types of businesses that risk-averse investors are now shunning.
The Alliance Pharmaceutical Corp, just down the road from Advanced Tissue Sciences, was the subject of a front-page article two years ago in USA Today for its work developing a blood substitute, a chemical that could deliver oxygen to a patient's tissues when there was no blood available for a transfusion.
Today, Alliance is virtually out of money, unable to resume its clinical trials, down to 90 employees from 180 at its peak and delisted from the Nasdaq National Market. Desperate for cash, it recently borrowed US$3 million -- at an annual interest rate of 100 percent.
Four years ago, the stock of Entremed soared to US$85 a share after The New York Times reported that its experimental drugs had eradicated cancer in mice by cutting off the blood supply to their tumors. Now the stock is trading at US$1.69, and the company, based in Rockville, Maryland, said in September that it had enough cash to last only through the end of the year.
Grabbing headlines
But grabbing headlines does not always translate into business success. Sales have been slow for Advanced Tissue Sciences' artificial skin, which costs up to US$600 a sheet and competes with ordinary bandages. Alliance halted a clinical trial of its blood substitute last year because some patients developed strokes, although the company says the product was not at fault.
Entremed's drugs have not shown the same astounding results in people as they did in mice. Indeed, many of the companies hit hardest have spent tens or hundreds of millions of dollars on drugs and business plans that have failed, but only now are facing the day of reckoning.
The recent bear market, of course, has been hard on many industries. But few depend as much as biotechnology does on investors willing to bet huge sums on technology that may not pay off for years, if ever.
"I see the biotechnology industry as always struggling, always fighting for capital," said Kevin W. Sharer, the chief executive of Amgen, the biggest company in the field and one of the relatively few that are profitable and therefore not that dependent on continually raising money from investors. In the future, he said, "it'll be a lot of losers and not very many winners."
Among the more troubled areas is one that has received much political and public attention in the last year -- stem cells and other aspects of "regenerative medicine," involving the regrowth of damaged organs. Despite the technology's long-term promise, profits are not expected for years, and some of the pioneers are ailing.
Organogenesis, of Canton, Massachusetts, a competitor of Advanced Tissue Sciences in the artificial-skin business, filed for bankruptcy protection a few weeks ago. Nexell Therapeutics, of Irvine, California, which was working largely on blood stem cells, is liquidating itself. The Geron Corp, the widely acknowledged leader in human embryonic stem cells, laid off 43 people, or 30 percent of its work force, in June.
"Stem cells has been a hot area with regard to the press, but it has not been a hot area with regard to investors," said Clayton I. Duncan, the chief executive of Incara Pharmaceuticals, a company based in Research Triangle Park, N.C., that worked on using liver stem cells to re-grow diseased livers.
Incara, which had two drugs fail in clinical trials, ran out of cash at the end of September but has continued to operate. Two weeks ago, to save itself, Incara sold its liver stem cell business to concentrate on more traditional drugs.
Bioinformatics woes
Another sector that has suffered is bioinformatics, which uses computers to analyze masses of genetic data. Several young companies have gone out of business or been acquired for a pittance after sales did not meet expectations.
Companies pursuing another futuristic field -- tailoring medicines to patients by testing their genes -- have also fallen on hard times. Shares of Genaissance Pharmaceuticals, of New Haven, Connecticut; Variagenics, of Cambridge, Mass.; and Interleukin Genetics, of Waltham, Mass., are all selling at around US$1; Interleukin has said that its existing cash will last only until January.
The biotechnology industry periodically goes through money droughts, but some say this one is the worst. "This is the first time we've had a bear market on top of a tough environment for biotech," said Jim Scopa, co-head of health care investment banking at Thomas Weisel Partners in San Francisco.
Many companies, however, have withstood the famine because they raised huge sums in 2000, when investors were in a frenzy about the deciphering of the human genome. The industry as a whole raised more than US$30 billion that year, several times as much as in any previous year.
"The last stop at the gas station was two years ago, and people filled up their tanks very well," said Stelios Papadopoulos, a health care investment banker and vice chairman of S.G. Cowen Securities.
Still, the feeling of wealth led some companies to spend profligately. Like Internet start-ups, some biotechnology companies decided to spend heavily to build their business while ignoring the need for profits.
Money burn
So now, even companies in no immediate danger of running out of money are slowing their "burn rate" -- the speed at which they go through cash -- in case the market downturn lasts for years.
DeCode Genetics, a company searching disease-causing genes in the relatively homogeneous population of Iceland, its home, cut 200 employees in September -- on the same day that it announced a collaboration with Merck & Co. worth up to US$90 million.
In Alameda, California, Avigen, which is developing gene therapy to treat hemophilia, cut 28 percent of its work force last month so that its cash will last for four or five years instead of three, said John Monahan, the chief executive. Even Human Genome Sciences, with US$1.5 billion in cash, and Abgenix, with US$464 million, are facing investor pressure to preserve cash.
With the public markets virtually closed, public companies can still raise money by selling stock privately to investors, though often on onerous terms. And venture capitalists make their returns when those start-ups go public. With the market for public offerings effectively closed, venture capitalists are starting to cut back as well on the amounts of money they offer to companies.
"We're starting to see values fall pretty aggressively," said Brian G. Atwood, a managing director at Versant Ventures in Menlo Park, Calif. He added, "Almost every private company I know is considering doing a layoff."
In some cases, venture capitalists must now put additional money into companies in their portfolios that would normally have gone public by now, leaving less for new companies. And with the valuations of publicly traded companies so low, some venture firms are tempted to invest in public companies rather than private ones.
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