Jun. 6–Publicly traded biotech companies are experiencing a dramatic stock rally. Investors are betting that share prices will rebound as the economy recovers and as demand increases for scientificsolutions to diseases and terrorist threats.

But venture capital firms aren’t showing a similar confidence in Oregon’s private biotech companies.

The level of venture capital financing is important because Oregon has made attracting biotech firms a key part of its economic strategy. Portland is focusing particularly on developing a biotech community in the North Macadam area, on the edge of the Willamette River in Southwest Portland. The city plans an aerial tramway to Oregon Health & Science University.

The lack of new financing for private startups shows the advantage of having gone public before the stock market crashed in early 2000. Even though it was painful to watch stock prices sink, the public companies that had the financial resources to wait out the economic downturn are in a better position to raise money to develop and market products than private competitors.

The average share price of companies listed on the Nasdaq biotech index rose 27.2 percent from May 1 to the close of business Thursday, more than double the 11.8 percent increase during the same time for the overall Nasdaq index. The biotech percentage gain was nearly four times the 6.9 percent rise of the Dow Jones industrial average in the same period.

Fund managers and analysts, however, say the rate of venture capital financing of privately held biotech firms does not appear to be increasing. Venture capital financing of biotech firms nationally peaked in the third quarter of 2000 at $1.224 billion, according to PriceWaterhouseCoopers. It was down to $488 million in the first quarter of this year, the most recent data available.

“My impression is that venture capital funding of biotech firms hasn’t begun to turn around,” said Lynnor Stevenson of Alta Biomedical Group, a Portland-based consulting firm that specializes in the commercialization of technology. “You look around, and you don’t see any deals being done.”

Biotech executives say the climate seems to be changing. Some biotech companies — including Virogenomics, an OHSU spinoff developing drugs to treat autoimmune diseases — are poised to go to private investors to seek money for continued research and clinical trials.

“The feeling is different than it was just a few months ago,” said Al Ferro, Virogenomics’ chief executive officer. “It’s been a long drought.”

Although biotech firms often get federal financing, they need other sources of money to keep them going until they start making profits. Venture capital, sales of shares and the financial support of large pharmaceutical companies are the three most important ways biotech firms raise the money they need to support research and operations, said Joseph Cortright, an economist with Impresa Consulting of Portland.

Some short of cash “A lot of biotech companies have less than a year of cash on hand,” Cortright said. “When venture capital was booming, there was tons of money available. That’s not the case now.”

Venture capital appears to be holding back from biotech firms, analysts say, because initial public offerings have ground to a halt. When companies sell shares in an initial public offering, or IPO, early investors often earn many times what they put into the firm.

The number of successful IPOs of venture capital-financed biotech firms dropped from 33 in 2000, the peak, to two last year, according to Thomson Venture Economics, a New Jersey-based consulting firm. There have been no IPOs of biotech firms since the middle of last year, according to the firm.

Rising biotech company share prices probably will increase IPOs, which should attract venture capital to biotech firms, said Sandra Shotwell of Alta Biomedical Group.

“One thing that we know is that when companies go public, investors can cash out,” Shotwell said. “As public valuations climb back up, that exit strategy’s going to be to healthy one again.”

Virogenomics can wait until investor interest returns, Ferro said, because the company is allied with OHSU, the region’s leader in biotech research. Virogenomics is preparing to seek about $9 million in venture capital funding, which Ferro said will speed up research and clinical trials.

“What I’m perceiving now is the availability of money is increasing,” Ferro said. “That’s going to allow us to move foreword a lot quicker.”

For other companies, though, the situation is more urgent.

Hemonix, a Beaverton-based company developing ways to measure heart function without inserting a catheter near the heart, laid off six of eight employees when money ran out last year. Bob Schmieg, the company’ chief financial officer, is planning a money-raising trip to San Francisco next week.

“We’ve been pretty tapped out for a while,” Schmeig said. “We’re hoping that with the increase in the indexes lately, people have been making money on stocks again and will start to have some discretionary money available for startups such as ours.”

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(c) 2003, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News.