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Mar 15, 2009 (Vol. 29, No. 6)

Madoff Matters, But Larger Issues Loom

Ponzi Schemer Represents Just a Piece of an Extremely Sour Financial Funding Pie

  • Venture Capital

    Baiju Shah, CEO at BioEnterprise, a Cleveland, Ohio-based biotech accelerator, reports that venture capitalists are less interested in early-stage development, favoring projects that are ready for Phase I or Phase II trials. Shah says he sees an investment trend toward medical devices and healthcare, which are “less risky and less capital intensive.”

    Venture funds are also making smaller investments in second-round financings, seeking to leverage their own cash flows. “That means early-stage companies must become more aggressive about financing,” Shah adds.

    “Venture capital is being more selective,” Giovannettis agrees, “but the VC companies I’ve talked to lately are still excited about ideas that aren’t yet into the clinic. They’re not moving away from breakthrough ideas. They are, however, looking at different strategies.”

    For example, Giovannetti says, exit strategies have shifted from IPOs to mergers and acquisitions, and to transactions that “effectively lock a company up with one suitor.”

    Cephalon, for example, has an option for the right to buy Ception Therapeutics. “Investors have some money, but there’s no guarantee of an exit. This is indicative of the marketplace,” adds Giovannetti. “The focus is on near-term value to get a deal.”

    Strategic partnerships offer another financing option, although some, Quillen says, consider this mortgaging their future. “These deals have slowed down,” he says.

    All options are being considered. Unigene is a case in point. Last autumn, Unigene arranged financing through a nonconvertible debt structure with one of its institutional partners.

    “We tried to pursue different alternatives but, given the climate, the deals couldn’t be consummated,” CEO Warren Levy, Ph.D., says. “The alternatives are either gone or, if they’re still available, the terms are pretty Draconian.”

    That situation is spurring a lot of talk about mergers and acquisitions or creative financing to remain afloat. “If companies aren’t creative, they won’t be around anymore,” Dr. Levy predicts. The expected sell-offs could prove a boon to companies that still have ample cash. “Big pharma and big biotech are seeing an opportunity to pick up technology and programs at better terms,” Dr. Pathak says.

    Some companies still have the money for acquisitions, Quillen assures. “Pfizer, for example, laid off 8,000 employees, but still has a lot of cash.” Other companies are in similar positions. “Some big pharma or big biotechs are waiting a bit longer, anticipating fire sales,” he says.

    Shah also advises companies to seek out disease-specific funds. Copernicus Therapeutics and Vertex, for example, each have received funding from the Cystic Fibrosis Foundation. That foundation, along with several others, has modulated its grant policies to direct funds to those scientists best able to bring therapies or diagnostics to market.

  • Federal and State Funding

    Some have suggested companies turn to federal, state, or regional financing options, including SBIR grants. The prevailing notion is that such grants are too low to be worth the investment of time and effort. That may be true for the initial grant, but subsequent funding is often worth a few million dollars.

    Shah cites Arteriocyte, which received a $6 million grant over a 3.5-year period and frequently receives grants of $500,000 or more. He insists grant writing is not wasted effort. “You can fund a good chunk of research from development to early clinical work this way,” Shah explains.

    States, also, may still have some life science funds. Massachusetts, for example, launched a $1 billion life sciences initiative last June and just made a $7 million grant to Organogenesis.

    Colorado is another bright spot. It has built its biosciences industry from scratch in this decade, thanks in great part to a state commitment that funded start-ups and built the necessary infrastructure.

    “A lot of positive things are happening in Colorado,” according to John Collar, executive director, Colorado Biosciences Association.

    Although the state is facing a budget shortfall of some $604 million, “the legislative groups are doing a good job crafting a budget to go forward with the commitment to biosciences,” including making funds available for proof-of-concept and early-stage companies, he says.

    The final option, Quillen adds, is bankruptcy. “Bankruptcy isn’t exactly a survival strategy,” yet some companies that have reorganized under Chapter 11 have returned stronger.

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