Biotech Has a Magic Pill for Growth in ’02 By SHELLY GARCIA Senior Reporter While cutbacks and caution mark most sectors, the biotech industry in the San Fernando Valley and its environs is enjoying double-digit revenue increases and planning aggressively for the year ahead. The local optimism mirrors the national outlook for the industry, which has seen an average annual growth rate of about 11 percent continue unabated despite the slowdown in nearly every other part of the economy. The sales growth in turn is prompting additional spending on research and development and, in some cases, capital improvements, pumping up the local economy at a time when many other industries are cutting back on such expenditures. “Most companies I saw (at a recent biotechnology conference) are looking for better top-line growth than they’ve had in the last couple of years,” said Charles C. Best, CFO for BioSource International Inc., a Camarillo-based maker of tools used for research, testing and manufacturing. “Most are committed to more R & D; spending.” Biotech firms nationwide last year generated revenues of $25 billion, up from $22 billion in 2000 and double the size of the industry in 1996, according to data compiled by Ernst & Young LLP. With more than 300 new drugs currently in late-stage clinical trials and dozens of those likely to launch in the market this year, the sector is expected to exceed those annual growth averages in 2002. Statistics are not available for the band of biotech companies that stretches from the San Fernando Valley to the eastern end of Ventura County, a much smaller cluster than the communities in San Diego to the south or San Francisco to the north. But many local firms offer similarly optimistic projections. “This will be the most dramatic year in our history,” said Mark Stene, vice president and general manager of Esoterix Inc.’s endocrinology division, a Calabasas Hills company dedicated to highly complex diagnostic testing that detects genetic mutations and other research technology for medical care providers and drug companies. “Our growth rate is in the high teens.” The aging of the baby boom population has provided a ready and largely untapped market for new diagnostic procedures, treatments and therapies that promise to ward off disease, reduce its effects and even postpone the inevitable, driving the success of these companies and interest from investors. And progress in cataloging the human genome has transformed many of these endeavors from the realm of academia to real business pursuits. “We have a lot more answers now about how the human body works,” said R. Steven Davidson, CEO of Zengen Inc., the Woodland Hills-based company that developed the over-the-counter cold remedy Zicam and is currently working on a number of ethical pharmaceuticals (prescription drugs). “It helps the scientist or researcher to answer those questions that you would have to research out or, quite frankly, guess at before.” With a map of human physiology, scientists are able to speed the time it takes for a product to go from the research to the clinical trial stage and, eventually, to market. “A DNA test that took hours to do five years ago can now take a couple of hours,” said Ricardo Ordonez, spokesman for One Lambda Inc., a Canoga Park-based company that provides testing services for implant compatibility. The quickened pace of research has, in turn, stepped up R & D; spending. Last year, R & D; expenditures increased 30 percent to $13.8 billion industrywide, according to data compiled by Ernst & Young. Budgets, typically in the range of 10 percent of sales, are slated to rise to 15 percent to 20 percent of revenues this year. As many of these companies’ initial products reach critical mass, they are able to generate sufficient revenues to pump more funds into research and development, expanding further still the products that come to market. Advanced Bionics Corp. is a case in point. The Valencia-based company was founded by Alfred Mann to manufacture a device able to treat certain types of deafness through neurostimulation, changing the way sound is delivered to the auditory nerve in the brain instead of merely amplifying the sound, which is what hearing aids do. The technology behind Advanced Bionics’ cochlear implant, recently brought into the limelight when it was used to treat radio talk show personality Rush Limbaugh, is now being applied to other conditions, generating more R & D; needs and pumping more dollars into the economy. “As you move toward clinical trials, expenses increase exponentially,” said Bob Paulson, senior vice president and general manager of the auditory products division of Advanced Bionics. “In the natural maturation, you start adding people and infrastructure to support a product.” Younger firms more typically seek alliances and partnerships at different stages of development to reduce the costs of what can be a long clinical trial process and decrease the risk. BitTech Inc., a six-year-old company in Westlake Village, was formed with a $2.26 million grant to research cancer. Last year, with a patent on a technology that can help to destroy cancer cells without affecting healthy cells, the company established BitTech OncolLogic Corp. to pursue commercial areas for its technology. The company is looking for a strategic partner to help. “Business-wise, for that particular technology, we can’t discover and develop therapeutics on our own,” said Grant A. Bitter, BitTech’s founder. “For a strategic alliance, we would want to look for a larger biotech and pharmaceutical company interested in developing cancer therapeutics.” Zengen, which just sold its Zicam business for $17 million, has been able to pump some of that profit back to its ethical pharmaceutical research, but as the company proceeds with its other projects, including therapies for inflammatory bowel disease and work with antimicrobials, it plans to seek out licensing and other types of alliances. “What it does allow us to do is bifurcate our pathways and hit multiple applications at the same time,” said Davidson. “That helps because working on one indication is a big risk. There are companies putting all their money into one indication and, if it doesn’t go, that’s the end of their company.” For the most part, it appears there is no dearth of companies seeking alliances or investors willing to plow money into many of these projects. So exacting is the research required, that a single company, no matter how large, often lacks the expertise to take a product through the development process alone. And in the aftermath of the dot-com debacle, many investors are actively seeking out biotech ventures. The jackpot potential if a company were to find a cure for cancer or some other life-changing breakthrough is immeasurable. But even the promise of smaller victories that improve quality of life have drawn attention. The work at AlleCure Corp., a small Valencia company seeking therapies for autoimmune disorders that give rise to allergies, asthma and other conditions, has attracted considerable investment interest, including that of Mann who heads the private conglomerate of which AlleCure is a part. “A lot of these markets are under-served,” said Michelle Lozada, an AlleCure spokeswoman. “There are some options out there that treat symptoms, but they’re not addressing the underlying causes of the disease.” And as the baby boom generation grays, nearly every segment of the industry from arthritis treatment to pain management appears a ripe business opportunity. “The demographics in the health care industry are compelling,” said Paulson. “Two of the things that are certain in life is we all are going to age and we all are going to get sick. Those two things will never go away.”
