Subject: (A Special Report): Biotech Boom Date: Published: 11/13/89 (203 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. Technology (A Special Report): Biotech Boom --- Watching and Waiting: Biotechnology Holds Great Promise, but Investors Are Still Waiting for the Payoff ---- By Udayan Gupta THE BIOTECHNOLOGY revolution may soon bring you a better mouthwash. It won't only get rid of bad breath, but also will use an antibacterial agent to help prevent and treat gum disease. A better mouthwash is nice, you say. But where are all the miracle drugs, you wonder, that were promised when the biotech era began a decade ago? Where are all the profits gene-splicing companies were going to make on those drugs? Where is all the money you were going to make investing in their stock? Keep gargling -- and wait a few more years. With 1990 fast approaching, the high-water mark of the biotech industry for many investors remains Oct. 14, 1980, the day Genentech Inc. went public, its stock soaring to $89 from an initial offering price of $35. Nothing that has happened since then seems to have matched the excitement of that frenzied Tuesday. Indeed, rarely has Wall Street paid so much attention to so many companies that have lost so much money so long. Hundreds of millions of dollars have been poured into biotechnology by venture capitalists. Scores of companies have gone public, their stock often gyrating wildly with the latest rumors of imminent breakthroughs. While no one doubts that biotechnology will change the world of medicine in the future, the questions remains when it will. Biotech companies say that they will start to deliver on their promise in the next few years. Though only nine biotechnology-based drugs have come to market in the industry's first decade, many more are in the wings. Eight biotechnology products are awaiting regulatory approval, the final step before they are sold commercially, and another eight should follow soon. Moreover, the FDA estimates that nearly 150 products are in human clinical trials, and many of these will reach pharmacy shelves in the next few years. For investors and others who have bet on biotech, it will be none too soon. Of the 1,100 or so companies involved in the industry, fewer than 275 are profitable, concludes a recent study by Ernst & Young. Hundreds of them don't even have a single product; most companies are still only developing products in the laboratories, far from the marketplace. Cities in at least 30 states that rushed to build "biotechnology parks" to attract companies and jobs are finding the offices hard to fill. Worcester, Mass., for example, opened its site in 1985, projecting 2,500 jobs within a decade. Nearly five years later, the office park -- which provides low-cost real estate to biotechnology companies only -- is well behind schedule with 422 employees and 17 tenants. What went wrong? Mostly, too much was promised too soon. Sales of biotechnology-based drugs, in fact, are close to $1 billion -- a not-insignificant figure -- and by 1993 should exceed $3 billion, analysts predict. The problem is that far more was expected. "We were venturing into terra incognita," concedes New York venture capitalist Fred Nazem. Seduced by the science, entrepreneurs and venture capitalists hyped prospects. And surrounded by extensive scientific research, companies "took a long time focusing" on products, Mr. Nazem explains. In retrospect, people should have known better. "Remember, it took more than a decade before the transistor was embodied into any significant commercial product and another decade before transistor-based circuits were applied in computers," says venture capitalist James Swartz of Accel Partners, Princeton, N. J. Drugs and pharmaceuticals, even the non-biotech types, have a development cycle of 10 to 15 years, Mr. Swartz notes. Still, even after settling on the right products, biotech companies often misjudged the time it would take to prove their products worked and the difficulties of the regulatory process. Take the example of Liposome Co., based in Princeton. It was launched in 1981 because its founders believed that liposomes -- water-filled, fatty membranes -- could help make delivery of drugs more effective. But $65 million later, the company still has no marketable products and is at least two years away from being profitable. Faced with a plethora of choices, Liposome found that its first problem was figuring out the diseases it would try to attack. "We must have screened nine million product possibilities before settling on five," says Mark Ostro, the Liposome scientist. The company then tackled the customary pharmaceutical-development riddle -- developing by trial and error the technique by which drugs could be delivered through liposomes. Simultaneously, Liposome also had to find ways to manufacture the products on a large scale. "Just because you can develop something in the labs doesn't mean you can produce it commercially," Mr. Ostro explains. Finally, Liposome faced the problem of proof. Because the company targets the delivery of highly toxic drugs to diseased parts of the body, "we not only had to prove that the drugs were safe but they worked better than those that already exist," says Mr. Ostro. Liposome still needs regulatory approval for its drugs, a time-consuming process. Five federal agencies have jurisdiction over biotechnology products. And in the absence of clear guidelines, they have created obstacles that are insurmountable for many companies. "It has made capital formation difficult for everyone," says Stuart Weisbrod, a biotechnology analyst for Prudential Bache Securities in New York. Certainly, regulators have been the biggest impediment to the profitability of Cambridge BioScience Corp., a Worcester, Mass., company that is developing AIDS tests. Cambridge BioScience has received approval from the Food and Drug Adminsitration for a five-minute AIDS test. But it has been waiting since March 1988 for approval on a second, high-volume AIDS test based on recombinant proteins -- while burning capital that small companies can scarcely afford to spare. "If we could only predict the regulatory cycle, we could better plan spending and forecast revenue," says Gary Buck, the company president. Uncertain about when the regulators will decide, Cambridge Bioscience continues to pay heavily for a manufacturing facility that it can't operate at full capacity, salesmen it can't let sell, and inventory that has a limited shelf life. "We were a small company that developed an advanced technology," Mr. Buck says. "Giving it to the FDA was like future shock." Mr. Buck doesn't just worry about the regulators. He says he is constantly looking over his shoulder for competitors, many of whom happen to be well-heeled drug and pharmaceutical companies. "The longer the FDA delays, the more time competitors have to catch up," he says. That, in effect, could blow him out of the water. Still, for the moment, Mr. Buck isn't panicking. Of the $51 million his company has raised from private and public investors, $25 million is still intact. And while the company had hoped to be profitable this year, it now is projecting profitability sometime next year. Another company, Crop Genetics International, says it has had to spend $6 million to $8 million to prove to state regulators that its products won't alter the environment. "And we hadn't even started testing the product," says John Henry, chief executive officer of Crop Genetics, a Dorsey, Md., developer of biotechnology-based herbicides. For all their problems in the 1980s, biotechnology companies are slowly learning the rules of the game that should help them fare better in the 1990s. Instead of waiting for the perfect home-run pitch, some are scratching out runs with bunts and bloop singles. "We are looking first at companies that can generate revenues within 18 months," says Robert Foster, managing partner of Commonwealth BioVentures Inc., a Worcester, Mass., venture firm specializing in early-stage investments. Companies are learning to conserve scarce capital by focusing first on products that they feel will face little regulatory resistance and bring early revenues. Then they will try for bigger markets. Others are approaching big corporate partners for help with manufacturing as well as marketing. Applied Microbiology Inc., Brooklyn, N. Y., is doing both. It has successfully narrowed its initial products down to two and has found a host of corporate partners, including Pfizer Inc., Calgon Vestal, a division of Merck & Co., and Burns, Philp Ltd. of Sydney, Australia, to bear some of the risks and costs of its work. Even though the company started with a multitude of research projects, it quickly recognized the need for small niches that bigger competitors wouldn't be interested in. "We knew we couldn't compete with the bigger pharmaceutical guys," says David Guttman, founder and chief executive of the company. Applied Microbiology also began looking for product applications where it could minimize the need for regulatory approvals -- which is how it got the idea for mouthwash using an antibacterial product that research had proved to be effective in preventing and treating gum disease. It already has formed a strategic alliance with Pfizer to develop and use the product in a mouthwash, a move that has brought $400,000 or so into Applied Microbiology's coffers. And once Pfizer begins to commercially market the mouthwash, more revenue is expected. "We haven't sacrificed anything," says Mr. Guttman. For the moment he is planning to ride Pfizer's coattails. Later, he says, he will look for applications that will bring in additional revenue -- and new regulatory headaches. The Applied Microbiology strategy makes perfect sense, says Mr. Foster, the venture capitalist. "If the industry is to make believers of its investors," he says, "it will have to supplement its research with an equal emphasis on products and markets." --- Mr. Gupta reports on venture capital and small business from The Wall Street Journal's New York bureau. [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]