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With 18 Months of Market Squeeze to Go, Genomics Shops Should Weather the Doldrums (Hint: Don t Consolidate)

SAN FRANCISCO, June 21 - Biotech companies will likely wait out a sour market climate by hunkering down and hibernating rather than consolidating either as a target or as an acquirer, according to a panel of biotech finance experts.


"Every time we go through a trough people predict consolidation," said Brian Atwood, managing director of Menlo Park, Calif.-based Versant Ventures and a member of the panel that spoke at an MIT/Stanford Venture Laboratory discussion at Stanford Business School this week. "It doesn't occur. Consolidation will happen at the margins, but it will not take 5,000 companies down to 1,000.

"There's so much cash in the system. [And] that's all you need," Atwood continued. "If you can stay financed in this industry, you will be successful."


But biotech companies, especially the smaller genomics shops, should gird for a long, cold frost: According to Atwood, the depressed biotech market will last another 18 months. Instead of trying to stay afloat inorganically, this industry should try instead to burn its fat stores and shed costs until the spring of better market conditions arrives.


"Most entrepreneurs hate to be merged with another company," agreed Lester Lien, vice president of Palo Alto, Calif.-based PRM Ventures, who sat in the audience. "They would rather [survive] on their own."


To be sure, survival is a relative challenge, and not without irony: Many companies that went public during the heady past few years, and are now in disfavor with institutional investors who demand products rather than tools, had raised enough cash to weather the doldrums for at least three more years, Lien said.


"The pendulum swings back and forth," he noted.


The good news is that the current environment might actually be helpful to private companies, according to Lien, who said there is more venture capital now than ever before.


"Old-line VCs are coming back to biotech," he said. "There's a ton of money out there." In fact, he said, the economic downturn is "really affecting [just] public companies. Solid private companies are raising a ton of money--$40 million and $50 million."


George Scangos, CEO of Exelixis and a panel member, said he too could not see consolidation in biotech's future and used his company's acquisition of Genomica solely for its cash to prove the rule.


"One of the advantages of the market [is that] there are a lot of companies' market cap below their cash," said Scangos. "So it's possible once in a while to acquire a company for its cash. [But] acquiring a company for cash only happens under special conditions. Employees come on board, and even if [there are] lay offs it costs money."


A lone dissenting voice was heard from panel member and Deltagen CEO William Matthews who said he sees consolidation loud and large. "Biotech to biotech M&A will be much more common over the next 24 months," he predicted.


I will "buy [another company] before someone buys me," he vowed.

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