- The Washington Times - Monday, February 12, 2001

Biotechnology companies in Maryland are trying to revolutionize medicine, and make a lot of money, by discovering gene-based drugs for diseases that have plagued civilization for hundreds of years.
While their goals are clear, the road to success is anything but clear. Analysts estimate that biotech businesses must spend 10 to 15 years, and between $500 million to $1 billion, getting a product to market. Such numbers would, no doubt, scare many dot-com entrepreneurs into a new line of work.
But the potential payoff is so high that speculative investors continue to pour money into biotech companies. In the long run, a decade or so from now, the drug makers could have cures for deadly illnesses like cancer and AIDS. It's about saving the world, all the while turning astronomical profits.
Some makers of gene-based drugs spend so much time and money that they end up shutting down. Those who have failed, and those determined not to, look to local biotech giants like Human Genome Sciences Inc. and Celera Corp., both of Rockville, and Gene Logic Inc. of Gaithersburg for the keys to success. They not only survived, but grew tremendously, because they formed critical partnerships at the right time with larger industry players, pharmaceutical companies, academic groups and government institutions.
"When you have a potential product that may not be generating revenue or profits for five, eight, 10 years, people just have to have a lot of faith in you … to develop that faith you need to surround yourself with the correct academic affiliations and pharmaceutical companies," says Steven Newby, chief investment officer of GenomicsFund.com, a mutual fund based in Gaithersburg.
When it started in 1993, Human Genome stayed afloat because it won giant drug maker SmithKline Beecham PLC as its first client. Late last year, the two companies announced they would develop Repifermin, Human Genome's most advanced drug, which spurs growth of skin cells healing wounds like burns and sores.
Just weeks after the announcement, Human Genome signed a deal with Dyax Corp., of Cambridge, Mass., that made Dyax the exclusive purifier of BLyS protein. BLyS fights immunodeficiency disorders that come with illnesses like AIDS and cancer, and as side effects to organ transplants.
Another pharmaceutical leader, Schering-Plough Corp. of Madison, N.J., made a deal with Human Genome in the fall to develop and commercialize the drug.
Other pharmaceutical giants like Takeda Chemicals Industries Inc. of Japan, Synthelabo of France and Merck KGaA of Germany also are increasingly relying on their smaller, biotech cousins to do the lengthy and costly research and development that leads to drug making.
Analysts say these relationships are win-win situations for both parties: Pharmaceutical companies get to keep the high expenses of research and development off their corporate balance sheets, while biotech businesses get the cash infusions they so badly need to face years of working without profits.
"The top 20 pharmaceutical companies spend about $35 billion a year on discovery research, but now they are giving more and more of it to little biotech companies because they do it faster, cheaper and quicker," says Alan Walton, scientist and partner at Oxford Bioscience Partners, a Boston venture capital fund that focuses on the industry.
Government agencies, likewise, are inking deals with biotech companies. In January, the U.S. Department of Energy and Celera announced an alliance to mine the map of the human genetic makeup for useful information. The partners said they would team up with Compaq Computer to write software and build a powerful computer to go through the genome sequence and find out where the genes are and what they do.

From genes to drugs

Developing a gene-based drug is no easy quest. Typically, biotech companies start by raising the money that they need to either design their product or create a venue through which to sell it.
For biotech start-ups, this process can take a long time. Biotech companies must raise a much larger sum of money than other businesses. Then they spend up to a decade or more on research and development, burning through millions and sometimes billions of dollars before making a profit.
Once they have a potential drug, biotech companies must apply for approval from the Food and Drug Administration (FDA) to sell the product commercially. This process takes up to 18 months, and it's only then that biotech companies can begin marketing and selling.
Some biotech start-ups never get the initial funding that they need. Or they do, but their products don't turn out.
Nevertheless, investors are lured by the long-term potential of biotech companies and have poured money into them, expanding the industry's market capitalization the amount of money it has to work with to $97 billion last year from zero in 1993, according to Ernst & Young LLP.
Although biotechnology is not fully developed, nor its model fully proved, the industry's total sales have more than doubled to $13.4 billion in 1999 from $5.9 billion in 1993.

Finding partners is the key

"It's hard to say right now [how many of the biotechnology start-ups survive] because the industry is so young, but I'm sure 60 to 70 percent of them will never amount to much," Mr. Newby says.
He says Celera and Human Genome have been successful because they established relationships with drug makers and academic groups.
While it was mapping the genome, Celera began attracting subscribers to its gene database, which contains its research. Among those subscribers today are Pfizer Inc. of New York, American Home Products Corp. of Madison, N.J., Pharmacia Corp. of Peapack, N.J., and Novartis AG of Switzerland.
Academic groups also are popular partners for biotech companies, especially when they are just starting out and need the most guidance and direction. University medical schools, like Johns Hopkins University, provide staff expertise and free research that biotech start-ups can use as basis for their own work.
Among such clients of Celera are the Weizmann Institute of Science in Israel and the Hospital for Sick Children in Toronto.
These subscriptions, which typically last five years, give Celera the money it needs to continue researching individual genes in search of cures for diseases.
For fiscal 2000, the company posted sales of $42.75 million, a dramatic increase from 1996's $159,000. Meanwhile, the company continued operating in the negative, with a net loss of $92.74 million ($1.73 per diluted share), up from $2.6 million in 1996, when it was still private.
Diluted shares reflect the value of options, warrants and other securities convertible into common stock.
"Unlike starting up an Internet company, a genomics company may take years and years of losses before any profits can be seen," Mr. Newby says. "That's why they need to be substantially funded."
Celera has a little more than $1 billion handy today, he says. With this kind of cash, the company has more time to focus on developing its products.

To sell or not to sell

Few biotechnology companies can raise money with such ease, because the majority of industry players are privately held.
In 1999, just 327 of the 1,283 biotech companies were publicly traded. That's a slight increase from 1993, when 225 of 1,231 biotech companies were public.
When start-ups can't raise enough money to stay afloat, some seek to be swallowed up by larger biotech companies or pharmaceutical giants. This happened in the mid-1990s when Gaithersburg-based Genetic Therapeutics Inc. was acquired by Novartis, the world's third-largest pharmaceutical company.
"There are a lot of midsize, private companies in Europe that say to us they have no discovery arm," says Dr. Walton, who was one of Genetic Therapeutics' founders. "[They say] 'We need to be selling products, so if you can show us that you can build a little [biotech] company … we'd be interested in buying these companies.' "
He adds that European companies often look to buy small biotech businesses in America. In the fall, for instance, Germany's Lion Bioscience AG said it was looking for smaller, American biotech companies to acquire. The German company had sent a delegation to the United States to announce a partnership with Celera.
Locally, Dr. Walton has backed two other companies. In fact, Psychiatric Genomics Inc. and Avalon Pharmaceuticals Inc. operate out of the same building in Gaithersburg that once housed Genetic Therapeutics.
Psychiatric Genomics seeks drugs or therapies for mental illnesses like depression, schizophrenia, anxiety and autism; Avalon wants to cure cancer.
The sister companies are studying genes related to these particular diseases because million of people suffer from them, creating a large pool of patients with unmet needs.
Dr. Walton, of Oxford Bioscience Partners, says that's why Psychiatric Genomics and Avalon were started. In a rather unusual approach toward investing, Dr. Walton doesn't wait for companies to come to him with their ideas. Instead, he gathers a dozen scientists several times a year to discuss what diseases have substantial unmet medical needs and how viable it is to start a business addressing those needs.
Psychiatric Genomics was born at such a meeting in 1999. Dr. Michael Palfreyman was appointed as chief executive officer, and the company was born in January 2000 in Boston. Two months later, it moved to the Washington area.
Today the company has 29 employees and $12 million in venture funding.
Aware of the importance of partnerships, Psychiatric Genomics' management struck a deal early on last year with Gene Logic to use the biotech leader's gene database.
Now for the next six months to a year, the company's scientists will search Gene Logic's database for the multiple genes involved in psychiatric disorders. They will try to figure out how the genes work and look for potential drug targets.
Dr. Palfreyman hopes that, in about three years, the company will have several drug candidates, which would be subjected to clinical trials.

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