Subject: Clinton Health Plan Hurts Biotech Firms 
Date: Published: 5/25/93 (147 lines)
Source: Wall Street Journal. Copyright Dow Jones & Co. Inc.

    Enterprise:
    Clinton Health Plan Hurts Biotech Firms
    ----
    By Udayan Gupta
    Staff Reporter of The Wall Street Journal

    If uncertainty about President Clinton's health-care plan is
 denting big drug companies' stocks, it is helping to wreak havoc at
 small biotechnology companies.
    Ever since the administration started talking about health-care
 changes, the fear of price and cost controls has hurt the biotech
 business.  On Wall Street, stock prices of biotech companies have
 plummeted.  Financing has dried up.  And plans for expansion,
 including hiring, new construction and new projects, have been put
 on hold.
    The entire biotechnology industry is under a cloud.  But small
 biotechnology companies are the hardest hit.  With no products and no
 revenue, they need steady access to the capital markets.  The drought
 they now face threatens their plans for research and
 commercialization -- and, for some, their very existence.
    Of course, the industry hasn't helped its own cause.  Problems
 with some highly publicized drugs and the industry's inability to
 come up with new blockbusters have tarnished its image.  And a slew
 of me-too companies backed by venture capitalists have further
 clouded the competitive picture.
    Initial public offerings in the first four months of this year
 fell 63% from the 1992 period to $119.7 million, according to In
 Vivo, a Norwalk, Conn., industry newsletter.  More than a dozen
 companies, including Triplex Pharmaceutical Corp., GenPharm
 International Inc. and Tanox Biosystems Inc., have put their stock
 offerings on hold.  Others, such as Viagene Inc., which had postponed
 previous offerings following other industry setbacks, have simply
 canceled public financing plans altogether.
    "There's no question in my mind that the Hillary effect has put a
 nail in the coffin on our ability to raise money," says Robert
 Abbott, chief executive officer of Viagene in San Diego, referring
 to the first lady's role as head of the Clinton administration's
 health-care task force.
    Relatively more mature companies have fared little better.
 Secondary stock offerings declined 11% to $245.7 million.  But the
 biggest casualty was a package of convertible debt that had been
 expected to bring more than $200 million into the coffers of seven
 small companies, including Celtrix Pharmaceuticals Inc.,
 CytoTherapeutics Inc., Liposome Technology Inc., Neurogen Corp. and
 Repligen Corp. 
    "The uncertainty and speculation surrounding price controls
 killed the bio-bundle.  We hit the market at the wrong time," says
 Misha Petkevich, a managing director at Robertson Stephens & Co.,
 the San Francisco investment bank that put together the convertible
 debt package.
    Strategic alliances with big companies have also been affected.
 Such partnerships, a source of capital and resources such as
 technology and marketing for smaller companies, dropped to 19 in the
 first four months of this year from 26 a year earlier, says In Vivo.
 "The large companies are hunkering down because of the uncertainty.
 They want to know what's going to happen to the overall environment
 before they do more outside collaborations," says Ron Henricksen,
 chief executive of Khepri Pharmaceuticals Inc., Alameda, Calif., and
 former head of U. S. business development at Eli Lilly & Co. 
    "Investors already have been disappointed by the poor clinical
 results of some high-profile companies such as Synergen, Centocor
 and U. S. Bioscience," says Roger Longman, editor of In Vivo.  Now, "a
 host of disparate and confusing reform proposals, ranging from price
 controls to a national list of reimbursable drugs, has thrown them
 for a loop."
    "The biggest concern is price controls for new products," says
 John Kaweske, a Denver manager of Global Health Sciences Fund and
 Financial Strategic Health Sciences Portfolio.  "If price controls
 are put in place you will not see any further financing of these
 biotech companies."
    The Food and Drug Administration is also contributing to the
 industry's quandary.  "The big FDA signals are that the threshold for
 approval has changed from safety and efficacy to safety, efficacy"
 and cost effectiveness, says Steven Burrill, head of Ernst & Young's
 international high technology practice.  For most young companies,
 unfamiliar with the regulatory process, the confusion only adds to
 the already prohibitively expensive cost of clinical trials, he
 adds.
    But at Viagene, which in March abandoned its $30 million initial
 public offering, the implication is clear.  The company has frozen
 hiring and drastically slowed its plans for development and
 diversification.
    Five years ago, Viagene received $20 million from venture
 capitalists to develop drugs based on gene therapy.  Last year, it
 decided to raise $30 million in an initial public offering to
 accelerate the clinical trials of its most promising drug:  a
 treatment that enhances a patient's "killer T-cell" response to
 fight viral infections, including the HIV, the virus that causes
 AIDS.  
    The company filed to go public on April 15, 1992, the same day
 that Centocor's announcement of problems with its septicshock drug
 sent the entire biotech market into a freefall.  Viagene tried again
 to raise money in January, just weeks before Synergen announced that
 its septic-shock drug Antril performed poorly in clinical tests.  The
 company kept its offering on the backburner, hoping that news and
 market conditions would improve.  But in March, "I reluctantly
 terminated Viagene's efforts to raise capital through a public
 offering," Dr. Abbott wrote U. S. Rep. Pete Stark, a California
 Democrat.
    As a result, instead of accelerated testing or diversifying to
 other diseases, Viagene is cutting back on its clinical trials.  In
 its first study it will work with only four patients instead of 12.
 It will also cut out a "quick peek" test that helps ascertain the
 potential impact of the clinical trials.  The revised strategy will
 reduce costs but it will also add six months to the trials.
    Viagene has also stopped hiring.  Between January 1991 and October
 1992, the company increased its staff to 107 from 40.  But now, with
 only about $8 million left, it wants to conserve that cash.
    The company is discovering that there is no U. S. corporate
 interest in its activities.  A major U. S. vaccine producer cut off
 talks about a product-development alliance because of the fiscal
 uncertainty associated with President Clinton's reform, says Dr. 
 Abbott.  Viagene still has five collaboration candidates, but three
 are Japanese pharmaceutical companies and the other two are German.
    Other companies are also scrambling for new partners to make up
 for the paucity of public capital.  Vertex Pharmaceuticals Inc. last
 month signed a collaboration agreement with Japan's Kissei
 Pharmaceutical Co. to develop the Cambridge company's anti-AIDS
 compounds.  As part of the deal, Kissei will invest $20 million in
 Vertex's HIV program.
    Another Cambridge, Mass., biotech company, Procept Inc., was
 counting heavily on a $20 million initial public offering to finance
 clinical tests for its AIDS therapeutic drug.  But it has had to put
 off the offering, says Stanley Erck, chief executive officer.  Now it
 is scrambling to put together an $11 million private financing to
 stay on course.
    But even these private equity markets, traditionally less
 sensitive to industry upheaval, have become wary.  Mr. Kaweske, for
 example, invested $1 million in Incyte Pharmaceuticals, a Palo Alto,
 Calif., start-up, at a price "at least 50% lower than six to 12
 months ago."
    Other venture investors simply won't invest.  "We're rejecting
 deals that three or four years ago we would very seriously
 consider," says Barry Weinberg, managing partner of CW Ventures, a
 New York venture-capital firm.  No more start-ups with products that
 are only incrementally different from others, he says.  "For
 companies that don't offer cost-effective solutions, there simply
 isn't any money."

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