The San Francisco Examiner from San Francisco, California • 63

I SAN FRANCISCO EXAMINER Mn.ly, Aa 24, 1995 D-23 tut mm Bay Area inn OP ps firms have is that many are closely held and don't face the kind of short-term earnings pressure American rivals do. The chance to cherry-pick promising but cash-poor biotech firms lures even some biotech companies the big ones. Cenentech Inc. (Top 100 No. 57) is pouring money into Scios Nova Inc.

of Mountain View for a shot at half the profits from a kidney-failure treatment, and Amgen Inc. snapped up a bunch of drug leads by buying Synergcn Inc. Any big drug company can offer some of the things most biotechs lack, such as the ability to shepherd drugs through clinical trials, devise large-scale production processes and market worldwide. $4 billion a year on basic research, 20 percent of it for external projects in either the biotech sector or academia. That portion will double in five years, predicts Viren Mehta, an analyst with Mehta Isaly in New York.

With all this drug-company money flowing into the biotechs and occasionally a takeover popping at a fat premium why shouldn't stock investors go along for the ride? Unfortunately, the drug firms' interest hasn't really made it easier to decide what a speculative, development-stage biotech should sell for. Denise Gilbert, Affymax's chief financial officer, says she tried in vain to value technology-based companies during her previous career as a biotech analyst. The $539 million price Glaxo paid was based not on any earnings projection but on the estimated cost of duplicating Affymax's skills. before. Bayer is a good example.

The German aspirin maker's research chief flew in to meet with a group of start-up company scientists in February at a Lake Tahoe retreat attended by seven of his counterparts at other drug firmB. Bayer has its biotechnology center in Berkeley, where it is building a $100 million manufacturing plant and has 20 specialists devoted to scouting out potential partners. Last year it signed up two, and this year it expects to recruit up to half a dozen others. Its $70 million deal with Arris Pharmaceutical Corp. of South San Francisco involves a technique for attacking inflammation such as asthma, allowing Bayer to drop similar work internally.

Five drug giants besides Bayer, all European, have taken front-row seats in the San Francisco area, the largest concentration of biotech firms. One advantage European Inc. of Richmond, having found targets along cancer's metabolic pathway, penned a $75 million collaboration with Bayer AG in May 1094. The deal is similar to most such pharmaceutical-biotech alliances, in which the biotech partner contributes a proprietary technology or drug candidate in exchange for upfront or equity payments and research funding, plus milestone payments based on key results in the clinic. Royalties or profit sharing loom on the back end.

Drug company Interest rum deep The depth of drug-company interest in technology purveyors is evident at biotech gatherings, which invariably swarm with pharmaceutical executives or representatives. In January, Hambrecht Quist's annual health care conference in San Francisco drew 165 of them, up 30 percent from the year Affymax is an example of a biotech offering an "arrow" technology often contrasted with those that have "target" technologies. An arrow technology might offer ways to guide drugs to a given site within the body, or ways to concoct and test a vast number of drug recipes. What Glaxo got by buying Affymax was access to a disposable microchip, crammed with a million fragments of DNA, that acts like a computerized te8t tube. When partial DNA extracted from blood is squirted on the chip, it attaches to the one spot in a million that is its chemical complement; there it emits a light, which is scanned by laser and processed by computer.

The chip can reveal in minutes how an experimental drug might interact with, say, the gene that causes cystic fibrosis, or tell whether a patient is a carrier of that gene. The so-called target companies go after body sites involved in disease, providing methods to pinpoint molecular locations at which a drug could intervene. Human Genome Sciences compiles inventories of new sites and clues to their functions. Onyx Pharmaceuticals UlOTECllfromD-9 Drug giants grab Bay Area biotech mote mergers In the group. But in a way, Wall Street and the drug industry may both be right Some analyst suggest that issuing public equity may be a poor way to finance ventures as speculative as biotech companies; of the 240 that are public, at least half have only enough cash to continue for 18 months, according to Recombinant Capital, a San Francisco consulting firm.

These classic biotech shops that bet everything on a few molecules make drug giants wary, too. It is the biotechs with broadly enabling technology, rather than a few intriguing compounds, that are the hot tickets. And some don't even chafe at the idea of losing their independence. Alejandro Zaffaroni, founder of Affymax, says, "My goal from the very beginning was to transform our company into a lead discovery center for big pharma." The ultimate bait Of course, money is the ultimate bait Drug companies spend about At Neltcor, our high standards of excellence have created technology capable of taking healthcare wherever it needs to go. From alternate site care to emergency services to home care, the people ofNellcor touch more lives in a vital, positive way year after year.

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