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Emerging life-science companies desperate for investment dollars

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Business is booming for Celgene Inc., a Summit-based biotech that makes drugs treating cancer and other disorders.

The company's stock has more than doubled in the last 12 months and now boasts market capitalization beyond $56 billion.

Such success is not surprising for developed life-science companies. The biotech index on Nasdaq is up 36.5 percent since January and IPOs, which already have raised $1.1 billion, are on pace to have their strongest year since 2004.

But if Celgene had formed today, instead of in 1986, it would find itself among plenty of other startup life sciences companies that are struggling to obtain enough financing to move past the early stages.

"It's a tale of two cities," said Panna Sharma, longtime observer of the industry and CEO of Cancer Genetics Inc., a Rutherford company that recently completed an IPO. "For companies who have a critical mass, in terms of revenue or commercial traction, they're finding it incredibly easy to get funded. For everyone else, it's very challenging."

The capital market — especially venture capital funds — has been tough for years, according to Scott Siegel, chief operating officer for Ezose Sciences Inc., a glycomics R&D company in the Pine Brook section of Shrewsbury. Ezose was founded in 2009.

"The way it's been explained to me is, 'Why are you going to put your money into this high-risk, most heavily regulated industry on the planet, with a long lead time, when you can invest in software and IT, and be in and out in six months?,' " Siegel said.

Therein is arguably the biggest issue facing the life-science industry in New Jersey: Will investors have the patience required to see a profit?

A POOR MATCH

Rob Freedman, CEO of North Brunswick biotech tools company Hurel Corp., said the priorities of institutional investors are not a good match for life science companies.

Institutional venture capital investors typically serve university endowments, pension funds, insurance companies and foundations. Freedman said those generally conservative entities demand reliable returns without excessive risk.

"Look at it from the venture capitalist's point of view. They need to satisfy their investors," Freedman said. "Investors have immediate, time-sensitive rate-of-return expectations that do not match well with the nature of biotech and bioanalytical tool companies."

It also doesn't help that life science is a complex industry, making it a harder sell to investors. Freedman said persuading a single customer can take a year or longer.

"This is an unbelievably complex arena to work because of how it blends science, technology and business," said Freedman, whose company recently benefited from $9.2 million in financing from Spring Mountain Capital, a private equity firm that focuses on alternative assets.

"It's hard to know where technologies are going to transfer into a usable product that customers are going to want to buy," Freedman said. "It's very hard for investors to discern that. Even ones with Ph.D's."

David Sorin, an East Brunswick attorney who has advised startups and early-stage life science and technology companies, said the risk profile for life science companies is greater than other industries because it often takes more than 10 years to go from drug discovery to commercialization — if the company gets to the finish line at all.

"You're looking at serious capital intensity over a long-time period," said Sorin, who has counseled companies as Signum Biosciences, in the Monmouth Junction section of South Brunswick.

Sorin said many investors pursue simpler alternatives. Information technology, social networks and mobile apps are less costly for investors — and are easier to explain, he said.

'IN THE VALLEY OF DEATH'

Debbie Hart, CEO of BioNJ, a trade group representing New Jersey's biotech industry, fears what could happen to the industry.

"There is a welcome opening in the IPO window for some at the later stages," Hart said. "But there are still companies who are lingering in the valley of death with no foreseeable way out. To a certain extent, it is a numbers game, in that there is only so much opportunity and money to go around, and the later-stage companies are attracting it more readily than those at the earlier stages."

Fluimetrics founder Lawrence Sasso, who runs the New Brunswick-based early-stage diagnostics company from his garage, knows the hardship well.

Fluimetrics is developing patent-based technology intended to make possible an array of rapid diagnostic tests for hospitals. Its product is geared toward diagnosing cardiac problems, but Sasso envisions broader use including testing for fertility or oncology matters.

"We need to raise money," he said. "It's not something I can do myself. We need to hire outside people, we need more equipment."

So far Sasso hasn't had much luck, nothing that investors often prefer lower-cost IT companies.

The business has received what describes as "friends and family money" of about $50,000 but needs to raise at least $500,000 to $750,000 to develop a full-product prototype. The prototype in turn can be tested and generate data about the product's effectiveness, hopefully persuading more investors.

"There is a lack of supply of capital," said Sasso, adding that most investment benefits companies at later stages. "That leaves companies at the early stages hanging."

A WORTHY EXAMPLE

Celgene has profited from lead product Revlimid, which treats blood related cancers like multiple myeloma, in the United States, Europe and other markets. The company has other big sellers, including cancer drug Vidaza, plus more in development that have made its stock a hit on Wall Street. Revenue rose 14 percent, to $5.5 billion, in 2012, while profits jumped 11 percent. Celgene's stock went public in 1987.

Successes like Celgene's, to Sharma, mean the current climate won't become a long-term trend.

"I think the recent success of biotechs is forcing venture capital investors to take a second look at lot of emerging companies, because investors are not going to keep getting the same return" from larger companies," said Sharma, previously a managing partner and founder of TSG Partners, a life sciences consultancy and advisory company.

Obstacles and all, Sorin expects life science companies to endure simply because of the strong desire for breakthrough therapies, a trend that benefits from the rapid pace of new technologies and discoveries. Not that finding the next Celgene will be easy.

"There is very high risk," Sorin said, "but there is also very high reward — if it works."

E-mail to: tomz@njbiz.com
On Twitter: @biztzanki

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