The credit crunch is likely to slow development of the next round of innovative drugs and change the way the pharmaceutical industry is structured.

Venture-capital firms are reducing their biotech investments, and venture-backed IPOs have just about dried up, and opportunities for bank loans are shrinking. A diminished biotech sector is bad news for major pharmaceutical companies, who depend on start-ups to invent new drugs that the giants then acquire and market.

Bankruptcies will result in further consolidation of the industry. There also will be layoffs in those biotechnology companies that survive.

The Biotechnology Industry Organization, a trade group in Washington, says 38% of 370 small biotech companies in the US operate with less than year's cash on hand. About 100 publicly traded biotech companies have less than 6 months' cash.

The stock of major biotech companies, including Amgen (AMGN), Genentech (DNA) and Gilead Sciences (GILD), have taken a hit, but the companies have deep revenue streams and should be able to carry them through the downturn.

GlaxoSmithKline (GSK) says it may acquire selected small drug companies now that the market has clipped their stock, making the take-out price attractive. Novartis (NSRGY) is also keeping an eye on the situation, The Wall Street Journal reports.

To secure funding, some companies are selling a portion of what they hope will be a drug's future revenue stream to investment firms. This is an expensive way to raise money, and a desperate move in the cash-starved capital markets.

Other firms are narrowing the scope of research. Cytokinetics plans to dump its work on cancer and focus of a drug for heart failure. About 29% of its workforce will be cut.

Atherogenics filed earlier this month for Chapter-11 bankruptcy protection after the company couldn't make debt payments in September. The company planned to begin trials of a diabetes drug before the money ran out. Atherogenics may sell the drug to another company that will bring it to market if clinical tests are successful.

Transcept Pharmaceuticals plans to merge with publicly held Novacea (NOVC) whose late-stage cancer drug failed recent tests. Assuming the merger is completed, Transcept Pharmaceuticals will retain control of the combined company and approval and commercialization efforts for Intermezzo, the company's lead drug candidate for the treatment of middle-of-the night awakenings.

Biotech companies have the potential to change the way we live, and a slowdown in development of new drugs could have far-reaching consequences.
 

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