Biotech funding crisis poses risks to innovation

By Toni Clarke - Analysis

BOSTON (Reuters) - The delicate ecosystem that supports drug development is in danger as funding to the biotechnology industry continues to shrink.

This year, biotech companies have raised just $12 billion, less than half the amount they raised last year, as risk-averse investors seek safer havens for their money.

Without regular infusions of cash to fund their drug development programs, small biotech companies cannot survive.

"I imagine that over the next 12 months many companies will run out of steam, sell their assets, or go bankrupt," said Henri Termeer, chief executive of Genzyme Corp (GENZ.O), one of the world's biggest and oldest biotech companies.

The impact of such a collapse would be to slow the development of new drugs, especially in areas such as neuroscience, an exciting scientific frontier that is fraught with difficulty and failure.

"The companies that win in the long run are those that are willing to take a chance and go into areas that no-one else is in," said Jeremy Levin, senior vice president of strategic transactions at Bristol-Myers Squibb Co (BMY.N). "The problem is that these are the very companies that face financing challenges.

The crisis in biotech coincides with a contracting of government funding for basic research. Over the past five years, the National Institutes of Health budget has remained stagnant, eroding in real terms by 13 percent, according to testimony to Congress earlier this year by Drew Gilpin Faust, the president of Harvard University.

"Investigators are downsizing labs, slowing research and producing more conservative, less ambitious proposals that are more likely to secure funding," she told the Senate Committee on Health, Education, Labor and Pensions, in March.

Biotech companies are an essential conduit in bringing discoveries made at academic institutions to the market. Their role is to take discoveries made in petri dishes into clinical testing and move them far enough along in the development process to become valuable to a pharmaceutical company, which then uses its cash to commercialize them.

"It is not unreasonable to assume that many drugs won't see the light of day because there won't be the money to bring them into the clinic," said Steve Brozak, an analyst at WBB Securities.

The biotech industry has seen financing disappear before, but most experts agree that the current turmoil is so wide-spread that it is qualitatively different.

"I would say that we will see a permanent change in the way the industry finances itself, but I'm not sure what form it will take," said Termeer.

Whatever the form, the drugs that appear on the market 10 or 20 years from now will depend on which biotech companies are funded today. Genentech Inc's DNA.N Avastin is based on research begun nearly 40 years ago by Dr. Judah Folkman, who pioneered the idea of starving tumors by blocking their blood supply.

"People thought his ideas were crazy for years, but the NIH continued to fund him," said Kevin Casey, associate vice president for government affairs at Harvard. "I'm not sure that would happen today."

Today's biotech industry reflects the explosion of interest in cancer research that occurred more than a generation ago.