Geert R. Kersten, chief executive of Cel-Sci Corp., has cut the Vienna biotechnology firm's 40-member staff by half, reduced spending by nearly 70 percent and slowed testing of experimental drugs. With about $2 million in cash, Kersten figures the company can stay in business for another year. Like most biotech firms, Cel-Sci generates little revenue, so he needs to make the money last until the investment climate improves. He can raise more money if necessary, he said, but that would mean selling into a market that now values Cel-Sci's stock, which two years ago sold for $10 a share, at only about 30 cents a share. "I've been through periods like this before, and they're ugly," said Kersten, 43, who joined the company 15 years ago. "There's always sunshine after the storm. You just have to make sure you're around at the end of the storm." For much of the past two years, as other technology sectors collapsed, biotech stocks remained buoyant and investment money flowed because investors believed that biotechnology was different. While telecom firms suffered from a glut of bandwidth and dot-coms struggled to find profitable business models, the market for new medicines appeared limitless. But a string of high-profile product failures is raising doubts about the industry's ability to bring new drugs to market. Investors are worried that the increasingly conservative Food and Drug Administration is less willing to approve experimental medicines. The arrest of Samuel Waksal, former chief executive of New York-based ImClone Systems Inc., on charges of securities fraud is undermining the sector's credibility. "Most biotech stocks sell based on future promise," said Victor Li, who manages a biotech fund at Arlington investment bank Friedman, Billings, Ramsey & Co. "But there are so many broken promises out there that people are just throwing in the towel." The Nasdaq biotechnology index has fallen nearly 50 percent this year. The price of stock in former highfliers such as Human Genome Sciences Inc., Celera Genomics Corp. and InforMax Inc. has fallen as much as 95 percent. Some companies are valued at less than what they hold in cash. The sharp stock drop is making it difficult for both public and private biotech companies to raise money. Perhaps more than any other business, biotech companies depend on healthy capital markets because few generate enough revenue to fund their own research. It's also a capital-intensive industry that relies on long-term investment. Many companies are scaling back expectations and changing their business plans. Some are slowing research and cutting costs, while others are moving faster to reach research milestones that could reignite investor interest. Companies that had wanted to develop products themselves are looking for help from partners with deeper pockets. The big question remains: When will the slump end? Local executives worry that the biotech industry may be entering a prolonged period when stocks stay flat and investment slows to a trickle. "I don't think we've hit bottom yet," said Stefan D. Loren, managing director of Legg Mason in Baltimore. "I think we still have some pain to go." Since the late 1970s, when the biotech industry was launched with a new generation of gene-splicing techniques, the sector has gone through cycles of boom and bust. After the last biotech investment window closed in 1994, the industry entered what one investor called the "Valley of Death," a five-year financing drought during which biotech stock prices slumped, few companies went public and many were on the verge of bankruptcy. The latest boom began in 1999 as excitement built over the mapping the human genome. Investors bid up shares of biotech stocks to record highs, believing that the landmark scientific feat heralded a new era in medicine. Local companies such as Celera Genomics Corp. and Human Genome Sciences cashed in on the genome investment craze, each raising more than $1 billion in secondary stock offerings. After the technology bubble popped in March 2000, biotech stocks began to slide from their peaks, but they remained robust compared with other tech sectors. Many fund managers shifted money into biotech stocks because they believed that health care and medical technology were recession-proof. In late 2000, InforMax Inc. of Bethesda, which makes software for biological research, and GenVec Inc., a Gaithersburg firm that develops gene-based medicines, still managed to raise capital in initial public offerings. But biotech stocks that continued to trade at relatively good prices in 2001 began falling late last year. When the FDA rejected ImClone's application to approve its highly touted cancer drug Erbitux in late December, biotech stocks began a precipitous descent. Expectations and valuations, built up during the genome investment boom, fell fast as investors realized that genetic breakthroughs wouldn't lead to products and profits quickly. "We had extreme overvaluation. Now we're having the exact opposite: extreme undervaluation," said John McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif. He said investors "are not looking at the long-term. They're very pessimistic right now." In 2001, biotech financing in the United States fell 76 percent to $7.9 billion, compared with $32.7 billion raised in 2000, by far the biggest year for biotech funding ever, according a report released by Ernst & Young this month. The biotech decline is exacerbating the gulf between rich and poor biotech companies. Companies that raised hefty sums during the boom are expanding staff, building facilities and moving products forward during the downturn. But less-fortunate companies face tough choices. They're running low on cash and don't know when the financing environment will improve. Raising money at current valuations could severely dilute company ownership and hurt current shareholders. According to the Ernst & Young report, 34 percent of public companies have less than two years' supply of cash and may be compelled to raise money at unfavorable terms. Weak public markets also affect private investment. With few companies going public, venture capitalists are less willing to invest in private companies because they don't know when they will get a return on their investments. Venture capitalists who put money into early-stage companies must also worry about whether client companies can raise more money later. Companies are adapting to the less-forgiving environment. NeuralStem Inc., a Gaithersburg company that develops stem cell technology, is downgrading its expectations. Last year, the company hoped to raise as much as $50 million from private investors, double its staff of 40 and move ahead with development of its neural stem cells, primordial cells that can grow into nervous system tissue. The company hoped to start patient trials of its stem-cell treatment in Parkinson's disease patients this year. Those plans are on hold. The company doesn't expect to start the trials for at least two years. It's also looking for partners to help develop the treatment rather than developing it alone. It's cut back to about 32 employees. Now it's spending most of its resources licensing its stem cells as research tools, a less-glamorous business that's expected to generate about $4 million this year. "It's not what we want to be when we grow up," said Richard Garr, NeuralStem's president and chief executive. "You have to accept the reality of the marketplace." Panacea Pharmaceuticals Inc., a Rockville start-up that develops treatments for cancer, Alzheimer's and other diseases, is also shifting its business strategy. Last year, company executives hoped to raise $7 million in private financing. After Sept. 11, they reduced their request to $3 million. But with little success, they began looking for partners to help move their research forward. In April, Panacea struck a partnership worth up to $80 million with MedImmune Inc. of Gaithersburg to help develop its cancer treatment. "The environment for early-stage companies is extremely harsh," said Kasra Ghanbari, Panacea's chief operating officer. "Raising money as an early-stage venture is extraordinarily difficult." Despite the gloom, some industry watchers believe there's reason to be optimistic about the biotech sector's long-term future. Large pharmaceutical companies, with drug pipelines drying up and patents on blockbuster products nearing expiration, are becoming increasingly dependent on more innovative biotech firms. More biotech drugs are reaching late stages of development and more biotech companies are becoming profitable. Some venture-capital firms raised large funds last year and are looking for investments. For instance, New Enterprise Associates, the Baltimore venture firm, has a $2.3 billion fund, one third of which will be invested in health-care ventures, said James Barrett, a general partner. Toucan Capital of Bethesda, with a $120 million fund it raised last year, is also scouring the industry for investment opportunities. Linda Powers, the fund's managing director, thinks this is a great time to invest because a lot of promising technology is reaching later stages of development and there is less competition for investments. "The shortage of capital translates into better terms and better market positions from an investor's perspective," Powers said. "But at the same time we have to be cautious about what companies we invest in." Analysts say more biotech success stories are needed to reinvigorate the market. A new technological breakthrough could also generate some excitement, but investors are likely to be more skeptical after losing money during the genome boom and bust. "The bubble days are gone," FBR's Victor Li said. "Once people get burned, they become much more cold-blooded." At Cel-Sci, the short-term outlook appears poor. Kersten said the company reported progress with development of its lead product, Multikine, but the market doesn't seem to care. Two weeks ago, Cel-Sci's stock price jumped briefly after a news release said the company made a deal with a Japanese company worth as much as $520 million, but the stock fell back when investors learned that the release was a hoax. Nonetheless, Kersten is confident that the market will eventually turn around. In recent months, Cel-Sci managers purchased 700,000 shares of the company, hoping to cash in on a possible rebound and restore investor confidence. "We've been on the edge so many times, and we have always somehow muddled through," Kersten said. "I'm very optimistic things will change, and when it changes, it will change with a vengeance.":
