A penny saved is a penny earned

The juxtaposition of two recent events - the annual Oxford Bioscience Partners/Ernst & Young presentation of young private companies, and the acquisition of Khepri Pharmaceuticals Inc. by Arris Pharmaceutical Corp. - makes a couple of things clear: there is no shortage of early-stage biotech companies, and not all of them will be able to raise the funds required to survive.

There still are some optimistic souls who would like to think that the industry is in a temporary financial slump. But more grounded entrepreneurs are working on the assumption that what they see is what they should plan for.

As a result, a few key themes have emerged among private companies: money is not an infinite resource, even for the well-heeled; fixed costs should be minimized and variable costs should be out-sourced; just about everything should be partnered; and long-term business plans that match resources with expenditures are a must.

Yet to wake up

This is the message companies are getting from the venture community, ranging from VCs such as Kleiner Perkins Caufield & Byers, known for providing substantial amounts of funding to their startups, to firms such as Columbine that are advocating virtual companies.

Columbine's Terry Winters still doesn't think the sector has fully grasped what needs to be done. "At the Hambrecht & Quist meeting this year, an analyst was lauding this company that had cut its burn rate," he said. "But their burn was still $3 million a month - and this was a company that had cut expenses. I don't think this whole industry has yet woken up to the new realities."

Key to those realities is the need for biotech companies to stop acting like researchers and start acting like businesses. For those lucky enough to have a good drug candidate, Winters argued that they should devote all of their resources to completing development of that compound. That, he said, means stopping work on everything that isn't relevant to that objective.

"Companies should get rid of all research," he said. "They shouldn't have their own research laboratories, and they should farm out any necessary research to universities and institutions that can do it for less." Simply by doing that, companies will erase a good percentage of their burn.

In addition, companies should offload product manufacturing to the greatest extent possible, though Winters recognizes that for certain specialized production requirements, that's not possible.

"The operative word here is 'clinical,'" he said. "We've got to start thinking like the people in the computer, software and semiconductor industries. They don't think research first - they think getting product to market. Companies should look at their financial resources and tailor those to get them through to a key milestone."

Winters sends his message with numbers that make CEOs gasp. "I've just come from a company whose burn rate is $25,000 a month.