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By Lori Valigra

January 15, 2003 | It may be a year best forgotten before it even starts. For biotechnology companies, 2003 promises more of the same in the fight for a similar amount of venture funds as 2002 and in the struggle to survive. One possible bright spot: If history repeats itself, industry pundits say, the elusive IPO (initial public offering) window may actually crack open toward the end of the year.

The shake-up of the bio-IT sector likely will continue, especially among software companies, which have yet to convince potential biotech and pharmaceutical customers of the value of their products, says Charles-Andre Brouwers, vice president and bioinformatics specialist at the Boston Consulting Group in New York. "By the end of 2003, we will see what the value of these products is and which companies will survive."

Terry McGuire, co-founder and managing general partner of Polaris Venture Partners in Waltham, Mass., agrees that the ongoing dismal market does have an upside: Bio-IT companies have had to rethink their business plans.

"This has forced people to look at what they do best," McGuire says of the consolidations and regroupings over the past two years. The result in 2003 and onward should be stronger companies with broader product lines or services, led by more experienced entrepreneurs who have weathered the shakeouts.

The news hasn't been bad for all biotech companies. For example, MicroCHIPS Inc. of Bedford, Mass., which is developing an implantable drug delivery system on a microchip, closed a $16 million second round of financing in May 2002, a large amount considering the flat market tone.

Venture capitalists greatly outweigh the public stock market as a financing source for biotech companies. IPOs accounted for only 4 percent of the total amount invested in biotech companies in 2001, according to Burrill & Co., a San Francisco-based life sciences merchant bank. In the first three quarters of 2002, venture capitalists invested $1.5 billion in 154 deals with private companies, and that will be about equal at year's end to the $2.1 billion in 2001 that was invested in 229 deals, according to a PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree survey.

Venture investing peaked in 2000, when $3.2 billion was pumped into 256 deals with biotech companies. By comparison, the public market has all but disappeared since 2000. According to data from the Biotechnology Industry Organization (BIO) and Signals, an online biotech industry analysis magazine, there were only six biotech IPOs in 2002 (the same as 2001), compared to 68 in 2000.

And the capital raised by public biotech companies is an estimated $14.4 billion in 2002, more than the $9.6 billion in 2001, but off sharply from the $28.9 billion in 2000, according to BIO and Burrill.

McGuire and others who watch for historic signals and patterns of biotech market financing highs and lows predict the stock market will open up to IPOs in the last quarter of 2003 or the first quarter of 2004.

"If you look at the height of a previous IPO market and roll back the calendar nine to 12 months, you often find people who were saying, ‘The world has come to an end and the market will never get better,’" says David Stone, managing director of Flagship Ventures in Cambridge, Mass., and a 20-year veteran in the biotech industry. "An opportunity for an IPO also is generally preceded by follow-on offerings, but we haven't seen this yet."

Steve Buckley, New England director of Ernst & Young's Life Sciences Industry Practice in Boston, predicts one or two biotech companies might test the IPO waters in January 2003, but "it's a long shot that they'll be terribly successful," he says. He says other industries will lead the opening of the IPO market, and biotechs will follow. "Therapeutic product approvals could jump-start biotech IPOs."

Share prices for public biotech companies did show signs of a turnaround in October 2002, according to Burrill. The Burrill Large-Cap Biotech Index rose by almost 9 percent in October, in line with the American Stock Exchange's Biotech Index, which was up 8 percent. The Burrill Genomics Index was up a little more than 1 percent in October, boosted largely by a 25 percent gain in the share value of Affymetrix Inc. of Santa Clara, Calif., a genechip system company.

G. Steven Burrill, CEO of Burrill, said he saw one harbinger of the future last October, when molecular biology company Invitrogen Corp. of Carlsbad, Calif., announced that it wanted to buy scientific software company InforMax Inc. of Bethesda, Md. "The informatics platform companies have been crucified this year," Burrill said in a statement when the indices were released. "This deal is a clear move toward integration of tools and scientific strength, and we see it as a positive one."

Stone of Flagship has seen a similar shift in one of his portfolio companies, bioinformatics concern AnVil Inc. of Burlington, Mass. AnVil broadened its business model over the past year to not only sell software but also get revenue from business partners. Privately held AnVil develops analysis and visualization tools for exploring microarrays, cheminformatics, high-throughput screening, and clinical trial data. But the number of customers that could buy or lease only the software was too small to create a healthy business, so the company, with Flagship's help, started collaborations to help partners mine their data. The first such partnership is with HealthSouth Corp. of Birmingham, Ala., the nation's largest health-care services provider.

"Instead of selling the software for $5,000 for a seat license to a few hundred or few thousand customers, or $1 million for a site license to only about 25 customers, AnVil now is a collaborator with HealthSouth, and they split the revenue 50-50," Stone says. HealthSouth has 1,800 outlets worldwide.

Going forward, the investment environment in 2003 is unknown, but the market looks like it’s beginning to settle, says McGuire of Polaris. And the prospect of war with Iraq is looming. "Wall Street already has taken a pretty big discount on the war," McGuire says. "But we'll have to see what happens the day after the invasion.  If there's a bioterrorism aspect, biotech tools may be required even more."

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