Biotechs confront bankruptcy as funding evaporates

BOSTON (Reuters) - The biotechnology sector looks likely to be hit by a wave of bankruptcies and failures as small companies find themselves out of funding and out of options.

On Thursday, Cell Genesys Inc, which was formed 20 years ago to focus on gene and cell therapies, said it is considering its alternatives, including liquidation of the company, after its experimental prostate cancer drug failed a late stage trial.

Last week, 15-year-old Atherogenics Inc filed for Chapter 11 bankruptcy protection due to an intolerable debt burden that hampered development of its experimental diabetes drug. This week the company's shares were delisted from Nasdaq.

"These are old-school biotech names," said Christopher Raymond, an analyst at Robert W. Baird. "Usually such names can get funding at some level, or someone will buy them before that, so it is very unusual and represents another data point showing that things are not peaches and cream."

The pain being felt by biotech companies who find themselves shut out of the capital markets, or who suffer the blow of a failed product, represents an opportunity for pharmaceuticals companies, which need new drugs to fill their pipelines as major products lose patent protection.

John Lechleiter, the chief executive of drugmaker Eli Lilly and Co, said in an interview that his company plans to take advantage of the desperation in the sector to make further acquisitions, even as it executes its recent $6.5 billion (4.25 billion pound) acquisition of ImClone Systems Inc, which makes the cancer drug Erbitux.

"Certainly traditional sources of funding and the traditional capital markets that biotech companies have accessed are withering right now," he said. "I think you can expect us to be opportunistic."

Over the past two years, shares of small cap biotech stocks, defined as those with a market value of less than $500 million, have fallen an average of 30 percent. Shares of the large-cap biotechs have risen 25 to 30 percent over the same period.

"I think the spread between the two groups will widen and the large biotechs will continue to outpace the smaller companies," said Jordan Schreiber, who helps manage more than $750 million in health-care assets for BlackRock Inc.

Bargains are there for those who care to take them, analysts say.

Lilly has made its intentions clear. Bristol-Myers Squibb Co, which lost out to Lilly in its bid to acquire ImClone but will gain roughly $1 billion in the sale of its shares, has a lot of money to throw at new acquisitions.

But Jeremy Levin, senior vice president of strategic transactions at Bristol, said the company's approach to its transactions will be above all "disciplined."

"The price we pay will be determined less by the fact that the market value of a company has decreased and more by our belief in the strengths of its assets."

Investors are also waiting for Pfizer Inc, the world's biggest pharmaceuticals company, to make a substantive move in the sector.

"This is clearly a buyer's market and products can be acquired at a discount to where they were a year ago," said Bihag Patel, who helps manage a $450 million portfolio at Fort Washington Investment Advisors. "In the short term people will sit on the side-lines, but after that the smart ones will buy."

(Additional reporting by Michael Erman in South Carolina)