Biotech In Decline "Darwinian winnowing" has become a brutal reality at J.P. Morgan's annual biotech conference, long considered the bellwether for the industry.

By David Ewing Duncan

No high technology sector has been riskier for investors than biotechnology, which means that many of the hundreds of companies anxiously trolling for investors at J.P. Morgan's annual biotech conference in San Francisco last week faced a bleak future.

In an era when safe-as-houses investments like mortgages are felling banks left and right, investors are understandably reluctant to roll the dice on an industry like biotech, where it takes 10 to 15 years and as much as a billion dollars to produce a single drug, and new medicines in human testing fail about 87 percent of the time.

Even the industry's lobbying group, the Biotechnology Industry Organization, says that 45 percent of publicly traded biotech companies will run out of cash in the next 6 to 12 months. A mere 10 percent of the 370 listed companies have a positive cash flow.

For decades, investors have been willing to be patient, in hopes of striking it rich eventually. But investors' patience is running out. In 2007, 41 biotech I.P.O.'s raised $1.9 billion, in 2008 a single I.P.O. raised $5.8 million.

BIO President and CEO James Greenwood has asked the incoming Obama administration for a biotech stimulus plan, but gave the odds of such a bailout succeeding in Congress at only one in three.

Hope for government aid comes as investors here talk about a dramatic contraction in private funding from venture capitalists and others that see little prospect for pay-outs for small and many medium-sized companies.

"The biotech model over the last 25 or so years has been to assemble innovative science, raise two or three rounds of venture capital, advance your R&D program to a point at which you can go public, and then continually tap the public markets to meet your capital needs," said Richard Aldrich, co-founder of RA Capital Management, a Boston investment firm.

"But the backdrop for all of this was the greatest bull market in history," Aldrich added. "It was a very permissive financial environment, which is what early stage biotech needs. The bull market has ended, and the biotech model we all came to know and love, has ended with it."

Aldrich and others said they still see companies worth investing in, but not many.

"There will be a Darwinian winnowing," says Bryan Roberts, a partner in Venrock, a venture capital firm in Palo Alto, California. "The mediocre middle will certainly go away. There will still be winners, but far fewer."

Much of the activity at the J.P. Morgan conference involved companies and investors that still have money shopping for deals. "We are being visited by a number of companies," said Jay Flatley, CEO of the genomic sequencing company Illumina, based in San Diego.

Illumina recently announced an $18 million development deal with Oxford Nanopore of Britain for its next-generation genetic sequencing technology. Illumina has remained profitable with a healthier-than-average stock price even during the downturn.

It's a great time to be looking for acquisitions if you have the resources, Flatley said. "There is a sugar daddy aspect to it," he added, though he is finding only a few worthy prospects.

For many struggling biotech companies, however, the sugar may be running out out.

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