The Download

Kim Hart's The Download -- No Money, No Buyers For Struggling Biotech Firms

By Kim Hart
Monday, March 23, 2009

Times are tough in the biotechnology sector. So tough that some companies are looking for ways out.

The problem is, the most feasible way to do so is to find a buyer, and few companies large enough to make acquisitions are willing to shell out that kind of cash these days. Raising money by entering the public markets is increasingly difficult for companies in all areas of the technology industry.

"A lot of companies have put themselves up for auction in the last six to nine months, but they've failed," said Gordon "Rusty" Johnson, managing director of Piper Jaffray and Co. "There are many mid-sized and small companies that are struggling and are, in some cases, in desperate straits."

Johnson was among the biotech executives, investors and bankers who attended an event put on by the Technology Council of Maryland's MdBio division last week in Rockville.

Big pharmaceutical companies such as Pfizer, GlaxoSmithKline and Merck are the traditional buyers of firms specializing in drug development and other medical products. But many are distracted by their own cash-flow problems, he said. He estimated that at least 100 small biotech firms across the country have enough cash to continue operating for only one year, so many are looking to consolidate.

Some industry followers say firms should still keep their eyes out for potential buyers. As companies of all sizes cut back on funding for research and development, smaller firms with robust research arms will be attractive to acquirers of all sizes, said Bruce Robertson, life sciences investor for H.I.G. Ventures.

Investors also are looking for interesting biotech firms, but they are leery of miscalculating a start-up's value.

"Everybody is window-shopping," he said, adding that investors are waiting for the market to hit rock bottom before they sign any deals. "Nobody wants to be the guy who funds a company and then sees the valuation fall another 40 percent six months later."

Still, some large medical technology companies are taking advantage of the down market to snap up start-ups with potential, even if they haven't completed clinical trials and aren't earning revenue. For example, Medtronic, a Minneapolis-based firm that develops treatments for chronic disease, last month announced plans to spend $1.25 billion to purchase three firms.

Locally, the last biotech acquisition was in October, when Germantown-based Avalon Pharmaceuticals, which develops cancer treatments, announced plans to be acquired by Clinical Data of Massachusetts for $10 million in stock.

"I think we're going to see smaller companies consolidate and then try to be sold to a bigger company," Johnson said, but added that those big-ticket acquisitions may be at least a year away.

In some cases, it may be difficult to persuade board members to make acquisitions in this tough economic environment. In July, Rockville-based MacroGenics, which develops treatments for diseases that affect the immune system, acquired Raven Biotechnologies. But some on MacroGenics' board of directors initially questioned whether the company should spend the money to make the purchase as economic red flags were starting to surface, chief executive Scott Koenig said.

He was able to raise additional investments to seal the deal, but he hasn't been able to lease Raven's former San Francisco offices because of the shaken real estate market.

Robertson said buyers and investors likely will be cautious this year, but that doesn't mean deals won't get done. Working in the biotech industry's favor is the fact that health-care costs are expected to rise in 2009, sustaining the market for new drugs and medical devices.

"It's not recession-proof, but there's an element of health care that's somewhat immune to the overall economy," he said.

Security Challenge

Security companies of every kind -- cybersecurity, video surveillance, encryption -- are in demand, but many don't necessarily have access to the homeland security and intelligence agencies that need them.

In May, small companies focusing on security products will have the chance to show off their technologies for the chance to earn investment money and partnerships with a more established firm working with the Department of Homeland Security.

It's part of the American Security Challenge, which encourages universities, entrepreneurs and research labs to demonstrate their technologies. The inaugural challenge held last year awarded $100,000 to a company called TeleContinuity, based in Germantown, that backs up communication networks in case of a terrorist attack.

"This year, we've upped the stakes," said organizer Roger London, a former technology scout for defense contractors.

Chart Venture Partners of New York has agreed to pump between $200,000 and $2.5 million into a promising company. And another company will win the chance to team up with Alion Science and Technology, a McLean defense contractor.

Interested participants should submit a summary of their product or company by March 31. The applicant pool will eventually be whittled down to six that will present at the May 21 event, held in conjunction with the Homeland Security Science and Technology Stakeholders Conference East.

Kim Hart writes about the Washington technology scene every Monday. Contact her at

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