Editor’s note: This is part two of an overview of the state’s biotech industry in advance of the CED’s Biotech 2002 event on Monday. Intersouth Partners is poised to invest in at least two biotech companies this quarter, says the firm’s biotech specialist Garheng Kong. “We’re actively investing,” he says.

But Daniel Egger, a managing partner of Durham-based Eno River Capital, which manages the NC Biotechnology Fund, says, “It’s a tough climate to get new investors into a deal, the toughest I’ve ever seen. It makes the last bear market for biotech in 1995-96 look mild by comparison.”

Egger says that even in venture deals getting funded, “They consider it a success if they get a new investor.”

Egger also says valuations have fallen precipitously for many biotech companies that are being funded.

Lately the entire economy seems like an extended good news-bad news joke, and biotech is no exception. On the whole, however, it is in better shape nationally and regionally than infotech and many other sectors.

In a “Report on the State of the Industry” in April, Bio Industry Organization director Carl Feldbaum said venture investment in biotech has actually held steady the last three years.

Privately held companies raised $1.1 billion so far this year, after raising $3.7 billion last year and $3.9 billion in 2000. And he pointed out that while public offerings lagged behind the giddy peaks of 2000, last year was still the second best year for biotech investment ever.

“The first quarter of 2002 outpaced the 2001 rate with $5.7 billion flowing into the industry,” he said.

A ‘relative’ bright spot

“I think if you look at the biotech sector from the perspective of the overall economy, it’s a relatively bright spot,” says Ford Worthy, a VP with A.M. Pappas, the Raleigh venture firm that specializes in biotech start-ups. “But I put the emphasis on relative,” Worthy says.

Nevertheless, Worthy says, “It’s a very challenging environment for venture backed companies.”

Character and adaptability are keys to survival for biotech companies regardless of whether they are growing on public or private investment, say Egger and Cogent exec Max Wallace.

Eno River organized in 1999 and 2000, “the worst time to start a venture fund in history,” says Egger. “But we’re doing OK.”

Egger admits some of Eno’s portfolio companies had to hustle to alter their business models quickly when the economy nose-dived. “Blue 292 management reinvented the company from scratch and fought hard to realize value for their investors and themselves.”

For private companies founded at the height of the venture boom or public companies that see their stock prices collapse due to poor Phase III clinical trial results, rapidly changing gears can save a company.

“It’s an environment in which character counts: stamina, fortitude, grit. Self-sacrifice. All those qualities you didn’t need to be successful in the roaring 1990s. They’re important again,” says Egger.

Wallace, the president, chief executive and a co-founder of Durham-based Cogent Neuroscience, himself a three-time biotech entrepreneur, agrees.

“We’re in the middle of a really tough capital market partly because terrorists flew jet planes into the World Trade Center towers. Who could plan for something like that?”

To survive, he says entrepreneurs need a cockroach’s survival mentality. “People have to be tough and clever and fight for their lives and find a way to get through this,” he says.

Cogent is in the middle of raising a reported $25 million round it began a week before the Trade Center attack.

Cogent also shifted gears from gene seeking to drug discovery when the market for genes faded. “You can only sell what people are willing to buy,” he says.

Wallace was a co-founder and first president of Triangle-based Trimeris (Nasdaq:TRMS), which may soon be the region’s first billion-dollar biotech nurtured in the Triangle.

When a company such as Trimeris has good Phase III results, he says, it fortunes rise because analysts can use standard mathematical tools to predict the company’s potential earnings the first few years it markets the drug. The closer the company gets to market, the less risk investors see, and the more clearly they can access its future earnings potential.

If a trial fails, however, “All the money it took to get there is sunk cost. Then it becomes a fairly mathematical exercise to decide what you have next and if you can get there,” he says.

Return to normal?

Egger, Worthy, Wallace and Kong all say they see the economy returning to normal.

“I’ve seen a noticeable warming the last couple of months,” says Wallace, who has been trekking to out-of-state money centers looking for that next big round Cogent needs.

Egger’s not so sure.

“The general economy is definitely picking up,” says Egger, but cautions, that “the technology sector suffered a mini-recession within a recession and that’s not coming back yet.”

But Worthy says A.M. Pappas, which invests in both public and private biotech companies nationally, keeping a close watch on the sector, “We’re seeing signs of renewed interest and investment in the sector.”

Worthy also says that the biotech sector may have over reacted to “a number of clinical failures and disappointments the first four months of the year.”

Staggered product lines help

Locally, Inspire Pharmaceuticals (Nasdaq: ISPH), backed by Intersouth, among others, saw its stock price slashed in half when its lead product fared worse than expected in Phase III trials.

But Egger and others say that may not be as bad as it often seems at first. Biotech companies move products through their pipeline like singing staggered rounds of “Michael, Row the Boat Ashore.”

Getting a drug to market often requires the same sort of fugue: The lead product in Phase III is usually followed by others in Phase II and Phase I.

“Many studies say most biotech companies succeed with something other than what they started with,” says Egger. “I don’t give investment advice, but you might actually be able to make some money by investing in a company right after a disastrous Phase III report. Many, many companies have come back from the brink after disastrous Phase III trials.”

Intersouth’s Kong agrees. “If you have a good pipeline – and Inspire does – they’ll survive. Even at best investing in biotech is a crap shoot. You need to have a lot of shots on goal.

“I’m not making a pitch here, but some investors think this might be an opportunity to find some value, because they are suffering from recent bad news, with a healthy pipeline they are likely to recover.”

Kong says a handful of Intersouth’s portfolio companies are seeing more investor interest. “We’re not near where we were, but private equity deals are starting to get done.”

For information on Biotech 2002, visit CED Web site: www.cednc.org

To read Part One of “State of the State in Biotech”:


Cogent Neurosciences Web site: