Staff Writer

TORONTO - The money sat up front.

And the biotech entrepreneurs sat huddled, empty pocket to empty pocket, in hundreds of packed-together chairs, with their eyes focused on the money.

They came to the finance session on Monday in Room 718A at the Metro Toronto Convention Centre to find creative ways to attract capital during a volatile market. It was the first finance session offered to the 15,000 attendees of BIO 2002.

What they heard was that E.M. Warburg, Pincus & Co. LLC recently raised a $5.3 billion fund, its eighth fund to date. "Not all of that money will be going into the biotech industry, but a significant amount will," said Jonathan Leff, managing director at the firm.

They also heard answers to two very pertinent questions: Where else is the money? What does one need to do to get it?

A plethora of ideas followed. You need a good product, a good pipeline, a good management, they heard. You should consider real estate financings, or the advantages of tax benefits. You must use your assets to bring in revenue - and you mustn't lose control of your company with an unwise partnership.

In a tough market, a company must have a backup plan, said Peter Crowley, managing director of CIBC World Markets. Financing alternatives, such as a private equity deal or an equity line of credit, could be a solution. Or a company could pair up its technology-rich assets with a cash-rich company through a merger or acquisition. Such is the case when Exelixis Inc., of South San Francisco, acquired Genomica Corp., of Boulder, Colo., in January in a deal valued at $110 million at the time.

"We could grow old waiting for the window to open," said Julia Gregory, executive vice president and chief financial officer of Lexicon Genetics Inc., of The Woodlands, Texas. The window remained closed from 1992 until the summer of 1995, and it could be another year or so before this one reopens, she said.

Gregory offered some creative ways for a biotech company to produce cash flow in the meantime through real estate financings, equipment leases, state tax benefits and the acquisition of companies with cash, as well as asset sales.

Lexicon Genetics, she said, creates revenue by providing OmniBank on the Internet to researchers, in return for holding the right to license discoveries or the right to receive a royalty. It is through this and other lines of revenue that the company has seen more than 100 percent of revenue growth year after year for the last several years, she said.

"The business model that seems to work today is the company that owns and sells its own products," said Deepa Pakianathan, a partner at Delphi Ventures. "That's how you build a $1 billion biotech company."

Gregory urged young biotech companies to consider purchasing their office space, rather than leasing it, especially with the low financing rates of today. And state tax benefits also can be an untapped source of revenue, she said. In New Jersey, for instance, Lexicon is able to sell its tax losses to qualified buyers.

Eric Aguiar, a partner at HealthCare Ventures, believes that the biggest financing problem facing biotech companies today is a mismatch between the timing and expectation of investors and the product development cycle of a company.

Health Care Ventures, a firm started in 1985, has raised $838.1 million and has invested it in 57 companies, Aguiar said. It typically creates its own companies, taking large positions of 50 percent to 60 percent at the initial public offerings.

"There are very few industries where you can take a very small amount of capital and leverage it into a big company," he said. "We try to look at new technologies or new products that are going to change the practice of medicine."

Sometimes sticking with a company even during a closed market can prove to be worth it, he said. HealthCare Ventures invested $6.5M in Gaithersburg, Md.-based MedImmune Inc., which was started in 1990. It weathered some ups and downs, even when the company's stock price dipped below $3 at one point. But the firm pulled out of the company in 1997, making a tidy sum of $171.8 million, or 26.4 times the money it invested.

If HealthCare Ventures, however, had stuck with MedImmune to this day, it would have made several hundred million more dollars than it did, Aguiar said.

Warburg, Pincus now has the task of deciding where to put the $5.3 billion in its newest fund.

"It's hard to describe what you're looking for, but you think you know it when you see it, and hopefully you're right," Leff said.

Investors, he said, look for companies that meet unmet medical needs and those with multiple "shots-on-goal," or more than one egg in its basket. They also want companies with strong management and those that hold control of their own destinies, and are not tied down by partnership agreements.

Warburg, Pincus founded Transkaryotic Therapies Inc., of Cambridge, Mass., with a seed investment in 1988, and led several subsequent financings until the company went public in 1996. It distributed its position in 1999, but made another $100 million investment in TKT in 2000 under a new fund. Only a year later, TKT got its first product, Replagal (agalsidase alfa), to market in the European Union for Fabry's disease, and it did not rely on a pharmaceutical company to get there, Leff said.