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
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
“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
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
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
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
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
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
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
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.”
[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.]