Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. — The global economic crisis is causing massive reductions in funding for biotechnology companies to the lowest level in a decade, triggering bankruptcies and threatening the development of drugs based on biomedical breakthroughs.

There are exceptions, of course. In the Triangle, for example, Biolex raised a whopping $60 million this quarter. Argos Therapeutics, meanwhile, successfully closed on the second tranche of $35 million in committed funds from backers since its drug pipeline hit development milestones. Last month, CeNeRx closed on $15 million.

However, the sector overall is sick.

What has happened?

Some reports indicate that the amount raised this year by biotechnology companies fell by $9.7 billion through September, or 54 percent, compared with the same period in 2007. The venture capital portion of that fell by $2.9 billion, or 16 percent, over the same period. There has only been one IPO in this market this year. This will mean that work on dozens of potential drugs will stall as companies reduce their spending or outright die as companies fall into bankruptcy.

Some very notable companies have hit the dust. MicroIslet and Accentia Biopharmaceuticals sought bankruptcy protection to reorganize, each citing an inability to raise money. AtheroGenics Inc. in Atlanta filed for bankruptcy after defaulting on $302 million in debt the previous month. Amylin Pharmaceuticals said it would cut 16 percent of its workforce, or about 340 employees, to try to save $80 million in 2009. Unfortunately there are many more to follow in these footsteps.

Who’s in danger?

The drug companies in the most danger are those that are nearing human clinical trials but need additional financing to take them through that phase. The most likely companies to seek bankruptcy are those with less than six months of cash, just a few drugs in development and no definitive clinical data to attract investors.

A Darwinian survival of the fittest will weed out those companies that are not at a point of clearly having something extraordinary to offer investors. Some may think this is not new or even dangerous. The problem is that an inordinate number of companies will be eliminated before they have had a chance to prove themselves, leaving a large gap in the continuum of companies moving through the various levels of drug development maturity.

Awaiting the return

Amid these recent bankruptcies of biotech companies, what will save the remaining ones? One alternative that is seriously being taken is hibernation. That is, reducing the company’s cost and expense structure to only what is needed to keep the company alive until the financing markets recover.

The fortunate companies are those that have the most promise will find acquisition partners and get picked up by cash rich companies.

Investors will likely return to biotechnology once the economy stabilizes because the industry still promises attractive returns. For now, this is an industry that is greatly impacted and investors are only going to stay with the very best and not invest in the most speculative of opportunities.

About the author: Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.