More willing sources of capital seen on horizon

Biotechnology firms hungering for new capital should find more receptive audiences in 2004 than in recent years.

The early-stage companies that make up the bulk of Maryland's biotech sector may still find it difficult to land financing, however. More established biotech ventures will land most of the new capital, through angel investments or initial public offerings of common stock, experts say.


"I think it will depend on the IPO market," said Tom Salemi, editor of the Venture Capital Analyst/Healthcare trade journal in Wellesley, Mass. "If the new crop of biotech shares perform well, it will open the [financing] spigots for venture capital."

Maryland has identified biotechnology as a pillar of its future economy. The state has more than 300 biotechnology firms, employing more 17,000 people. But the median size work force is only 14, meaning that many are small companies, said C. Robert Eaton, president of MDBio Inc., a nonprofit group that promotes the state's biotech sector.


As a rule of thumb, the smaller the company, the more difficult it is to get financing. Early-stage biotechs often have no revenue and products in clinical trial that are years from being ready for sale. After the recent tech investment bust, investors have been more wary of the sector, experts say.

After a huge run-up between 1997 and 2000, venture capital investment in bio-pharmaceutical firms tailed off drastically, reported Ernst & Young, the accounting and consulting firm. Venture investment in biopharmaceuticals peaked at $4.23 billion in 2000, up from $1.15 billion in 1997. The flow slowed to $3.57 billion in 2001, to $3.17 billion in 2002 and to $2.08 billion last year, Ernst & Young reported.

That has forced early-stage companies to seek more creative ways to find backing, said Lawrence Tamarkin, president and chief executive officer of Cytimmune Sciences Inc.

His College Park biotech is using a new technology to develop a drug it believes will be effective in finding and reducing solid cancer tumors. The company needs money to conduct clinical trials, but is not proven enough to shop a stock offering. Venture capitalists would want a huge percentage of the company in return for capital - essentially eradicating the promise of future rewards for Cytimmune's founders, Tamarkin said.

So the company has struck partnerships with other companies on development and testing. It has also brought in money through "private placements," investments from individual investors with net worths high enough to qualify for making such investments - "a good deal for [all] parties," Tamarkin said.

Meanwhile, money is building up on the sidelines, in tech-oriented mutual funds and in venture funds that attract investment capital from institutions and rich individuals. Buildups of cash put pressure on the fund managers to seek investment opportunities promising large returns, because investors don't want their money sitting inactive.

Those IPOs and secondary offerings - the sale of shares in already-public companies - create a "trickle down effect" and will open opportunities this year for early-stage companies, like those that make up much of Maryland's biotech community, Salemi said.




Genentech Inc. opens in San Francisco, considered the birth of the biotechnology industry.


Venture capital investment in biotechnology peaks at $4.2 billion, more than triple from three years earlier.


Biotech investment is expected to rebound after a three-year fall to $2 billion by 2003.