Small biotechnology companies fail to attact new capital, BIO conveyes support for Investment Act of 2009

Small biotechnology companies developing new medical therapies and advanced biofuels need help attracting new capital, as investors have become especially risk averse. The Biotechnology Industry Organization (BIO) today conveyed support for the Small Business Early-Stage Investment Act of 2009, which would create a funding program at the Small Business Administration to stimulate growth in early-stage technology-based companies.

In testimony before the House Small Business Committee, Martin Sabarsky, chief financial officer and chief operating officer of HR BioPetroleum, Inc., said on behalf of BIO:

“Private equity and capital markets are increasingly failing to fund promising, early-stage scientific research, primarily because it is viewed as too high-risk relative to other investment opportunities. This critical phase of commercial development is often referred to as the ‘Valley of Death’ within the biotechnology industry, given the potential for companies and technologies at this stage of their existence literally to die for lack of sufficient funding. The risk for biotechnology companies has been exacerbated greatly since the onset of the current financial crisis in the fall of 2008. Advancing science through the Valley of Death has never been more important than it is right now as we strive to create a 21^st century economy, create new businesses and jobs, become more energy independent, transition to a low-carbon economy, and develop promising biotech treatments and therapies.

“Small, early-stage biotechnology companies have enormous potential to benefit the economy, improve public health, and increase our nation’s energy independence and security, among other significant benefits. To ensure that the United States remains the world leader in biotechnology research and development, investment in these biotechnology companies needs to be fostered. BIO believes that providing incentives for additional investment in small biotechnology companies is the most effective approach for SBA to support these high-risk, high-reward companies.”

In a July 2009 investor perception survey by Thomson Reuters, over 80 percent of participants acknowledged that the credit crisis has forced them to change their investment approach, emphasizing that a company’s cash position is now more important than before. More than half of the surveyed analysts, who represented firms with $2.3 trillion in assets under management, including $266 billion in healthcare and $76 billion in biotech, indicated that their assessment process in valuing stocks includes calculating price-to-earnings or price-to-sales ratios. The increase in market volatility and uncertainty has lowered investors’ tolerance for risk and has raised the thresholds companies must clear for each risk measure. The report can be accessed at http://www.bio.org/edocs/BIO_ThomsonReuters09_study.pdf.

Additionally, investments in clean technology companies were down 48 percent during the first quarter of 2009 and saw another 9 percent decrease from the second to the third quarter. A report released this week by the National Venture Capital Association and Thompson Reuters shows that venture capital funds raised during the third quarter of 2009 are at a 15-year low.

Source: Biotechnology Industry Organization