The global economic crisis has cut funding for biotechs to the lowest level in a decade, triggering bankruptcies and threatening development of drugs based on biomedical breakthroughs, Bloomberg News writes.

In the past month, at least five biotechs filed for bankruptcy. Those at highest risk have experimental compounds moving into costly human research. The amount raised this year by biotechs fell by $9.7 billion through September, or 54 percent, compared with the same period in 2007, according to Burrill & Company, a life sciences investment bank. That may mean work on dozens of potential treatments will stall or die as workers are fired and early research projects are shelves, Bloomberg writes.

“I’m looking down the barrel of a gun,” says Tom Mathers, ceo at Peptimmune, a privately held, six-year-old biotech in Cambridge, Massachusetts, that is struggling to pay for clinical trials of a multiple sclerosis drug. He cut staff by more than half to 22 people, moved to smaller offices to conserve $6.5 million on hand and is delaying research on new drugs for Alzheimer’s disease and Parkinson’s.

US biotechs are raising less cash than they have in a decade, according to Burrill. Financing fell to $8.2 billion through September, from $17.9 billion last year. Venture capital funding fell 16 percent, to $2.9 billion, Bloomberg writes.

“For the first time in the history of the biotech industry, you’re going to see unprecedented levels of bankruptcies and dissolutions,” David Strupp, managing director in the life sciences group at Canaccord Adams, a research and investment bank, tells Bloomberg. “This all will play out in the next six to nine months.”

Biotech bankruptcies have been rare because struggling companies often dodged trouble through mergers, licensing or development deals, or through investors willing to make cash infusions, he adds. Now, though, a large number are “not cycling out of this queue,” Strupp explains to Bloomberg. “Wall Street won’t finance them, and the pharmaceutical industry can’t buy all of them. They keep marching forward without the ability to get saved.”

Peptimmune’s most advanced drug, PI-2301, is a multiple sclerosis treatment designed to be taken weekly. It would compete with Teva Pharmaceutical’s daily treatment Copaxone, which generated $1.7 billion in sales last year. Peptimmune is counting on positive data from a study due in 2009 to show its drug is better than Copaxone. “If the multiple sclerosis program doesn’t do well, it will be very difficult for this company to raise money,” Mathers tells Bloomberg.

And Bloomberg makes an interesting point: Four of six MS treatments approved by the FDA were developed by biotechs.

Peptimmune, with no products on the market, has raised and spent about $85 million. Biotechs without products on the market, or those unable to access equity markets by selling shares, are the ones in most need of cash to fund clinical studies. Yet biotech initial public offerings have almost disappeared, with just one, for $5.8 million, so far in 2008. That’s down from 28 IPOs that raised $1.7 billion last year and from 66 in 2000 that garnered $6.5 billion, Bloomberg writes.

The most likely to seek bankruptcy are those with less than six months of cash on hand, just a few drugs in development and no definitive clinical data to attract a funding partner, Andrew Busser, principal at Symphony Capital, tells Bloomberg. Twenty-five percent of the 370 public US biotechs have less than six months of cash, according to data compiled by the BIO trade group.

A Darwinian pruning of the weakest is inevitable, and isn’t necessarily to be mourned, according to Peter Wysong, a health care investment banker for Natixis Bleichroeder. “Most people would probably say there have been too many biotechnology companies that have been like the walking dead,” he tells Bloomberg. “The deaths will be concentrated among companies that have little to offer.”

Earlier this month, MicroIslet, a San Diego developer of diabetes treatments, and Accentia Biopharmaceuticals, of Tampa, Florida, sought bankruptcy protection to reorganize, each citing an inability to raise money.

MicroIslet spent $50 million during the past decade developing an experimental treatment for Type 1 diabetes that would involve transplanting insulin-producing cells harvested from the pancreas of pigs into diabetics to allow them to forego insulin injections. The treatment, tested in animals but not in humans, came from technology developed at Duke University in Durham, North Carolina.

With the company $3 million in debt and needing millions more to begin clinical studies, private investors turned away, leaving MicroIslet without money for human tests, according to ceo Michael Andrews. “We’re at a stage that a lot of companies are in, where it’s time to raise money but there’s no clinical data and you’re not a brand new company coming out of academia,” he tells Bloomberg. “I suspect there will be a number of companies that will go down this path.”

In October, AtheroGenics, which was developing a diabetes drug, filed for bankruptcy after defaulting on $302 million in debt the previous month. Orchestra Therapeutics also filed last month. The long-struggling company was co-founded in 1986 by the late Jonas Salk, the polio-vaccine developer who sought to find a way to immunize patients against AIDS, Bloomberg points out.

Recently, Amylin Pharmaceuticals announced plans to cut 16 percent of its workforce, or about 340 employees, to try to save $80 million in 2009. And Cell Genesys halted work on a prostate cancer med after deaths were reported in a study, and will fire 230 workers, or 80 percent of its workers, by year-end, Bloomberg reminds us.

The lucky ones find buyers among bigger drugmakers to keep research programs alive. That’s what happened to Genelabs Technologies, which develops of hepatitis C treatments and last month agreed to be bought by Glaxo for $57 million. Genelabs’ market value had plunged to $10 million and its stock had lost 82 percent of its value this year before the deal was announced, Bloomberg notes.

“The sign over Wall Street for small biotechs is ‘closed for the season,’” Genelabs ceo Fred Driscoll tells Bloomberg.

Other biotech that are unable or unwilling to find a partner will go into “hibernation, just doing enough to keep the technology alive and waiting for a better day,” Glen Giovannetti, who heads Ernst & Young’s Biotechnology Center, tells Bloomberg.

Investors will likely return to biotech once the economy stabilizes because the industry still promises attractive returns, according to Brent Milner, managing director of health care investing at Stanford Financial Group, an investment bank. “Stock-picking will come back in vogue and people will ask, ‘Where are the 30 percent growers?” Milner tells Bloomberg. “When that happens, everyone will again look to biotech because everyone loves a lottery ticket. I think there is a long-term silver lining.”

Source: Bloomberg News