Staff Writer

WASHINGTON - What does a biotech company do when it has a viable drug candidate but few resources to propel it forward?

The plan for many companies is to execute global activities and operations, but it's hardly an easy task in a tough financing environment.

In a morning finance session at the opening day of the Biotechnology Industry Organization's annual convention at the Washington Convention Center, three biotech executives, a banker and an attorney attempted to provide valid options to help smaller companies grow into profitable, worldwide businesses.

According to attorney Michael Braun, a partner with Morrison & Foerster LLP, which has offices in San Diego and San Francisco, among other areas, the biotech company has one of three options: maximize value by selling the company itself, finance with an entity such as Silicon Valley Bank, or partner with a large pharmaceutical company.

Braun has handled several partnerships and collaborations between biotech and pharmaceutical companies.

"For the pharmaceutical company, the idea of getting a new product and limiting exposure to increasing fixed costs is very attractive," Braun said. "For the biotech company, pharma is experienced. They've been around for awhile and can provide a lot of advice and support."

Two companies represented at the workshop session Monday, Acambis Inc. and Ligand Pharmaceuticals Inc., both went the route of partnering with a large pharmaceutical company.

For Deerfield, Ill.-based Baxter Healthcare Corp., partnering with Acambis enabled the pharmaceutical company to participate in a smallpox vaccine contract.

"If we did well, they would do well, both with their equity investment and the contractual maintenance," said Gordon Cameron, president and chief financial officer of Acambis Inc., which is based in Cambridge, Mass., and is a subsidiary of Cambridge, UK-based Acambis plc.

The deal was structured to include no cash covenants and no capital repayment until the third year. Acambis received $40M in new equity, giving it working capital for research and development. It also gained the right to repurchase its manufacturing facility, which was recently completed in Canton, Mass.

"A con of this is it ties us closer to this one third party," Cameron said, adding that Baxter is Acambis' largest shareholder and lender.

San Diego-based Ligand partnered with the Netherlands-based NV Organon for Avinza, a sustained-release opioid for pain that originally was licensed from Ireland's Elan Corp. plc in 1998. The drug gained FDA approval in 2002 when Elan began selling off its interest in such deals. Ligand raised $155M in a convertible subordinated notes offering in November 2002, despite the poor market conditions, in order to buy down Elan's interest.

When Ligand launched Avinza it had a few dozen representatives marketing it to physicians. Once it partnered with Organon, more than 800 sales representatives began marketing the product.

"There is no way, as a small company, we would have the expertise or the resources to go after these markets," said Paul Maier, Ligand's senior vice president and chief financial officer.

One of Ligand's strategies, Maier said, is to diversify its products and partners, knowing that some drugs and some deals will fail. "As we move forward," he said, "we won't be dependent on any one of those partners or products for our success."

While Neurochem Inc., of Montreal, is a company that eventually plans to conduct late partnerships or joint ventures, for now it gains most of its resources through strategic investors. For Fibrillex, its lead drug for secondary amyloidosis, which is in Phase II/III studies, the company has decided to go it alone in North America. It may consider a distribution deal in Europe, but would prefer to keep all rights in-house there as well. In Japan, the company plans to license out the product and for the rest of the world, it will consider the different opportunities.

Neurochem's goal: global pricing.

"We want to set a precedent for global pricing based on U.S. and European pricing," said Philippe Calais, president of Neurochem, "and we want to defend it for the rest of the world."

Neurochem does plan to partner its drug Alzhemed for Alzheimer's disease once it is well into a Phase III trial, but it hopes to retain selected market segments. Neurochem released news Monday that the drug met all of its primary endpoints in a Phase II trial.

Financing through a bank is one option for Neurochem or other companies with similar plans until they partner their products. Michael Hanewich, senior vice president and national life sciences coordinator at California-based Silicon Valley Bank, suggested using equipment term loans to gather much-needed capital. Equipment financing is less expensive than other forms of capital, he said. Typically, his bank will look at a viable business model, an experienced management team, intellectual property and whether the company has a collaborator. The financing typically has a six-to-12-month draw period with a three-to-four-year term, a general lien or specific lien on the equipment financing and a negative pledge on intellectual property. "It poses no threat to your intellectual property," Hanewich said.

He also offered a positive outlook for the financing environment. "We have pretty much hit bottom in valuations," he said, "but we expect a lot more financings in the third quarter. There is a glimmer of optimism, very guarded, but there's optimism that things are going to get better."

Maier said the trend, however, is toward quality and fundamentals, meaning the early stage companies will still struggle for awhile.

Braun stressed that biotech companies should consider partnering to keep the product moving forward. Often, he said, the founders of a company have a proprietary interest in the product and resist partnering.

"It's difficult for a company to give up its baby, but that's what they feel they're doing when they partner," Braun said. "They may have a smaller piece of the pie, but the pie is going to get bigger."