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A Dip in Time

The TR Small-Cap 50 Biotechnology sector has taken a beating since December, leading some to speculate that the market is changing the way it looks at drug development.
May 3, 2005

A series of disastrous drug-development trials sent the biotechnology sector into a tailspin over the last two months, prompting some to speculate that the way new drugs are financed and brought to market will soon be overhauled.

The bad news started when San Diego-based Ligand Pharmaceuticals revealed on March 28 that its Targretin chemotherapy trial for lung cancer had failed, causing a 28 percentage point drop in its stock by April 26.

Then Elan Pharmaceuticals, once an industry powerhouse, saw its stock fall 43 percent after its March 30 announcement that two patients had died while taking its newly approved multiple sclerosis drug Tysabri.

The proverbial nail in the coffin was then hammered home when one most highly watched cancer vaccine trials, CancerVax’ Canvax, imploded on March 5. Since then, the company’s stock has since declined by 54 percent.

The high-profile busts, helped along by an already sluggish market, dropped the TR Small-Cap 50 Biotechnology sector down 2 percent since December 31. As the stocks continue to decline, the reality is that it will become much more difficult to raise operating capital from both the public markets and private equity sources.

The drop has already had an effect on venture capital sources. According to a PricewaterhouseCoopers survey, venture investments in the biotech arena dropped to $1.08 billion in the first quarter of 2005, down from $1.6 billion the previous quarter.

The empty well couldn’t come at a worse time, either, as biotech firms need cash to capitalize on the sector’s predicted growth. The biotechnology industry as a whole is on the verge of a golden age of new drug approvals. According to the Pharmaceutical Research and Manufacturers Association (PhaRMA), there were 324 biotech drugs in clinical trials at the end of 2004. Even more impressive is the fact that there are more than 250 phase III trials of biotechnology compounds, many of them on different applications for the same drug.

Since three out of four phase III trials historically make it to approval, there should be hundreds of new biotechnology drugs available in a next few years to add to the handful that are already in circulation.

The rub, though, is that it takes at least $100 million to market a drug once it has been approved. And it takes even more (the industry standard is $800 million from discovery of a molecule to FDA approval) to guide the hundreds of other compounds that are in earlier phases of trials through to the approval finish line.

“We’re seeing a dramatic limitation in drug development,” says Brian R. Buxton, a co-founder of Easton Associates, a biotechnology consulting firm. “Now companies have to pick and choose the very best drug candidates and invest only in those. That means that a lot of potential treatments aren’t being developed.”

It’s difficult to say how many drugs fall out of the development cycle since companies loathe putting out releases about failed experiments; however, news of some cutbacks is already leaking out.

Australia-based Prana Biotechnology, for instance, recently cancelled a phase III trial of an Alzheimer’s treatment because of a “manufacturing” hiccup. Another company that has shifted into low gear is Guilford Pharmaceuticals, which shopped its promising GPI1485 compound for Parkinson’s disease to the highest bidder.

At the heart of the problem is that as many biotechnology companies mature, they fall into the chasm between blue sky investors looking for the big hit and traditional investors looking for solid earnings and sales growth, says Kate Winkler, an analyst for San Francisco-based investment bank Merriman Curhan Ford & Co.

For those firms that can’t navigate the fraying rope-bridge across the divide, the next few quarters could be perilous.

“There are a lot of great compounds that won’t be tested and a lot of great companies that might not make it if the capital crunch lasts a long time,” says Winkler.

On the bright side, each previous downturn led to innovations and better business practices. The emphasis on bringing products to market came only after the mid-1990’s decline precipitated by a lack of blockbusters. A new-found passion for marketing bloomed after the 1992 hiccup.

This time, Buxton thinks it will cause a revision in how the industry looks at drug development. Too many drug development executives want one big drug, rather than pursuing multiple candidates.

“They have to fall out of love with the blockbuster model,” says Buxton.

In other words, biotechnology executives must stop trying to swing for the fences with a single home run shot and start peppering the infield with multiple line drives.

Math hasn’t changed, but technology certainly has. Buxton points out that it’s now possible to choose patients with a specific genetic marker that shows they might benefit most from a specific drug. That limits the immediate revenue potential.

“But at least you have an approval, and that means you have revenue,” says Buxton.

He says the model for such trials has already occurred: the cancer drug Velcade.

Millennium Pharmaceuticals chose only subjects whose genetic screening showed a specific pattern to test Velcade, a treatment for multiple myeloma which received FDA approval in 2004. Now the company is involved in multiple studies to expand the uses of Velcade. Buxton expects a flood of such trials in the years to come.

In the meantime, biotech executives – along with the investors – hope to sweat out the dry spell of the current downturn. If they can make it through this one, the next upturn could see a new era for the companies and their products.

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