BIOTECH FUNDING TRENDS: WHAT'S HOT, WHAT'S NOT

Cabot Adams LLC releases its latest industry report on trends in biotechnology venture funding. Stephen Dunn, Executive Advisor for Biotechnology, Pharmaceuticals and Medical Devices sees changing capital funding risk profiles within the biotechnology sector:

New York, NY - Several factors are combining to significantly affect the near-term risk profiles for biotech investment activity. We anticipate conflicts between the expectations of some biotech CEOs and those of the venture capital and corporate funding community as changes in their risk profiles filter through the biotech funding process.

For drug-discovery companies, the recent string of high-profile drug candidates unexpectedly failing to receive FDA approval has some venture funding sources stepping back and re-evaluating their risk calculations. The indications that FDA approval may now require new drugs to not only be safe and effective, but also to be more effective than existing drugs, is creating additional uncertainty. Combined with a weak stock market making biotech IPO's unlikely as a near-term exit strategy, this has resulted in drug-discovery companies, already a high-risk group, being assigned to an even higher risk profile.

This comes at a time when overall corporate venture funding has slowed as they seek to protect their balance sheets while awaiting a stronger stock market to increase their share valuations. New accounting rules requiring an annual assessment for asset impairment of acquisitions have increased due diligence time, costs and risks resulting in fewer near-term acquisitions, which were the next-best alternative to an IPO as an exit strategy.

The good news is that there are still many areas within the biotech arena that have attractive risk profiles for new funding. Drug-discovery companies that are developing drugs for diseases that have no current treatment, drugs that have multiple disease targets and even drugs that are novel or radical in their approach may have acceptable risk profiles. The recent pledge by the FDA to shorten the review process for biologics is also helpful. However, those companies developing drugs with only incremental improvements or having only one research path are no longer attractive to funding sources. For such companies, we strongly recommend merging with similar, but not congruent, companies to leverage their capital-raising ability.

Drug-delivery methodologies that increase the efficacy of existing FDA-approved drugs, either through improved specificity or penetration, are now areas of increasing interest to funding sources. This is especially true as drug companies search for ways to extend the commercial life of their existing drugs beyond patent expiration.

We feel genetics for sequencing, drug-discovery and diagnostics, such as DNA microarray technology, is too crowded for new funding investment as a consolidation phase has already begun. However, genetic manipulation for therapeutic use, such as antisense DNA, remains a promising area for funding.

For medical devices, simpler is better. Disposables and minimally invasive devices, despite price-sensitive customers, are viewed as attractive capital funding candidates while implantable devices are seen as carrying the same risk profile as drug-discovery companies.

Previously ignored general diagnostic companies are now interesting as their path to commercialization is usually the fastest and easiest. This can provide some return on investment while waiting for better opportunities and exit strategies to become available. Any diagnostics that are faster and cheaper than existing methodologies or are unique in their disease targets are now good candidates for funding interest.

Bioinformatics will suffer somewhat along with the pause in new drug-discovery investments. However, healthcare IT companies addressing the Health Insurance Portability and Accountability Act (HIPAA) issues are attracting funding interest as the Spring 2003 deadline approaches. These companies are viewed as providing a fast return on investment but have uncertain exit strategies.

Environmental biotech companies, especially those associated with drinking water, are seen as having good investment potential. On the other hand, we find defense-related biotechs, while certainly important, difficult to properly assess for risk due to a number of factors.

We would caution those companies currently having difficulty in attracting funding. They should resist the temptation to grant broad usage rights in a bid to gain research funding from corporate partners, except as a last resort. Otherwise they may find that they have significantly reduced their attractiveness for the next round of financing. Again, we believe merging with similar, but not congruent, companies is the best course of action for them to attract capital funding.

Finally, we believe that interest in drug-discovery companies, as well as ancillary sectors such as bioinformatics, will return to previous levels should the high-profile drug candidates currently in the pipeline gain FDA approval in a more consistent manner.

Cabot Adams LLC is a multi-industry capital advisory and venture funding firm based in New York. More information can be found at www.cabotadams.com. Stephen Dunn is Executive Advisor for Biotechnology, Pharmaceuticals and Medical Devices. He can be contacted at sdunn@cabotadams.com.

The information in this report is obtained from sources which Cabot Adams LLC believes to be reliable. All opinions expressed herein reflect Cabot Adams LLC's judgment and are subject to change without notice. No person should act on the basis of this report without considering and if necessary taking appropriate professional advice upon their own particular circumstances. No liability can be accepted for any loss arising from the use of this report. This report is for information only and should not be construed as an offer or solicitation for the purchase or sale of any security. Cabot Adams LLC and its employees cannot be held responsible for errors or any consequences arising from the use of this report.