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Biotech sector adapting to times

An industry, now out of its infancy, has gained firm footing

Friday, Dec. 8, 2006

Click here to enlarge this photo J. Adam Fenster⁄The Gazette ‘‘I was the example of someone who came out of a lab and didn’t have a business background,” says Wayne T. Hockmeyer, who in 1988 founded MedImmune Inc. of Gaithersburg, Maryland’s biggest biotech company. Click here to enlarge this photo Gazette File Photo Researchers work at Cambrex Corp., whose Walkersville facility supplies stem cells and other biological products to biotech companies worldwide.

In 2006, the industry showed significant signs of maturing, say experts, as more companies weaned themselves off federal dollars while others attracted big venture money for the first time.

‘‘A private sector that once stood in the shadows of the region’s academic and federal laboratories has emerged to take its place in the upper echelons of commercial bioscience, producing revolutionary products while continuing to push back the frontiers of knowledge in the life sciences,” says a new report, ‘‘Bioscience in Maryland ... Taking Care of Business,” by the trade association MdBio Inc. of Frederick.

Another encouraging sign is that a full one-third of the state’s biotech-related companies are now profitable, according to the MdBio report, which is scheduled for release Tuesday.

Most of those profits are still generated by Maryland’s preponderance of service companies that do not develop their own products but serve those that intend to market products, such as companies developing human therapeutics.

Despite great expectations for better drugs by the completed sequencing of the human genome more than six years ago, few of Maryland’s 180-plus biopharma companies have marketed a drug. Biotech drugs are the most expensive on the market, reflecting an average cost of $1.2 billion to develop and commercialize them, according to a new study by Tufts University’s Center for the Study of Drug Development.

At the same time, there are growing concerns that federal research and development dollars for biotech will level off or even decrease because of competing costs for war, homeland security and other programs in the next two years. Yet another concern is that contract bio-service companies could lose technical jobs via outsourcing overseas in the next few years.

In particular, Maryland biotechs developing drugs for so-called ‘‘orphan diseases” — rare disorders for which treatments have been under-funded — may have a tougher time landing federal grants and contracts in the next two years, said Christopher C. Foster, deputy secretary of the Maryland Department of Business and Economic Development.

‘‘We are very dependent upon [the National Institutes of Health] and others and [Small Business Innovations Research] funding is very important,” Foster said.

An April 2006 study by the Battelle Memorial Institute, ‘‘Growing the Nation’s Bioscience Sector,” agrees with Foster that ‘‘a challenge for states and regions in the coming years will be the leveling off of federal bioscience R&D dollars.” But the report defines the bioscience, or biotech-related industries, sector nationally as growing, with 7.1 million jobs.

The study lists Maryland as one of the top states in job gains and job concentrations since 2001 in research, testing and medical laboratories.

The new MdBio report concurs. Maryland’s biotech sector continues to grow and is inching closer to marketing drugs. The report lists 35 treatments, experimental drugs or vaccines that are in the final phase 2 or phase 3 of clinical trials. Employment in Maryland’s 365 biotech companies is 23,200, up from 17,400 in 292 companies in 2002.

Venture rising

The number of companies raising significant venture capital for developing human therapeutics is also up dramatically this year. Leading the way were Macrogenics Inc. of Rockville, which raised $45 million; CoGenesys Inc. of Rockville, which raised $55 million; and Alba Therapeutics of Baltimore, which raised $11 million following a late 2005 venture funding of $30 million.

‘‘This is a major trend. We are seeing companies, rather than getting $3 [million] and $5 million, we are now seeing companies raising $40 [million] and $50 million,” said Robert Eaton, president of MdBio. ‘‘Because their products are getting into their clinical trials and they are catching the attention of the investment community. ... And they are willing to put the big bucks in.”

The trend may also reflect a national tendency of investors backing companies with existing drugs instead of new drug discovery companies.

Meanwhile since late last year, a ‘‘liquidity desert” has parched efforts in funding early-stage biotechs, according to James Barrett, general partner with New Enterprise Associates, a venture capital firm in Baltimore that invests 60 percent of its funds in seed and startup companies.

‘‘You could go public up to a year ago OK,” Barrett said of early-stage companies. ‘‘Now markets are accepting nothing but pretty strong data or pivotal data from phase 3. Public markets are not open to anything less than that.”

Investors are ‘‘much more savvy now,” aware that it takes a significant amount of regulatory activity to market a biotech drug, said Patrick M. Kelly, vice president for state relations at the Biotechnology Industry Organization in Washington, D.C. ‘‘There is not going to be a dotcom bubble now in biotech.”

Despite limited support for seed companies and rising expenses, the industry in Maryland is strong, Kelly said. Both Maryland and Virginia biotech sectors ‘‘have come back nicely” from a funding drought in late 2001 and 2002.

‘‘The biotechnology industry as a whole survived well and Maryland rode out a bad economy partly because of its two natural biotech resources,” he said, referring to the National Institutes of Health in Bethesda and the Food and Drug Administration in Rockville.

Relying less on government

Alex Euler, spokesman for MdBio, acknowledged that nearby federal laboratories originally spawned much of Maryland‘s biotech sector 25 years ago, but the association’s 2007 report indicates that half of the state’s biotechs now receive no revenues from government clients.

‘‘This demonstrates a substantial shift,” Euler said. ‘‘Three-fourths of the companies get less than 10 percent from the government, showing they are less dependent on resources from within the region.”

That shift is significant, Eaton said.

‘‘The important thing for our industry is that it is not just dollars shuffling around Maryland anymore,” he said. ‘‘It is actually new dollars from clients around the world.”

Partnering, other trends

Nationally, biotech companies are partnering more with pharma companies that are fighting growing research and development costs and a decrease in new drugs produced, according to Charles G. Beever, vice president of consulting firm Booz Allen Hamilton of McLean, Va.

With cash tight, more drug companies are farming out research work, including animal studies and human clinical trials, to China, India and other nations where scientists work for less than in the United States, Beever said in a new study. About 75 percent of new research sites planned for 2007 by nearly 200 global companies will be in China and India, according to the study.

The nature of bioscience and investing has changed, says John P. Hollerbach, founder and CEO of HarVest Bank of Maryland in Rockville.

Investments in biotechs are being replaced by investments ‘‘in homeland security-support businesses, the whole medical delivery nature, anything that is of the medical delivery as opposed to bioengineering technologies, such as diagnostics etc.,” Hollerbach said earlier this year.

State’s helping hand

While private investors focused this year more on startups that are buoyed by late-stage technologies and proven leaders, the state continued to find ways to help early-stage startups.

Maryland is a leading state in providing incentives, such as seed-money grants, research and development credits, and low-cost incubator space to startup technology companies, according to the Battelle study.

A 2001 study by the Milken Institute ranked Maryland high in support for technology research and development, giving the Maryland Technology Development Corp. confidence to offer incentives despite an economic turndown at the time.

‘‘I think some years ago, we might have been slipping a bit with incentives,” said Lawrence C. Mahan, director of the bioscience division of the Maryland Department of Business and Economic Development. ‘‘Now the biotech tax credit, stem cell money and more, we are now moving up. The big change has been programs through the current administration, but support has come from all groups. We are viewed as a state that is proactive.”