BIOTECH FIRM'S PROMISE STYMIED BY LACK OF FUNDS

BIOTECH FIRM'S PROMISE STYMIED BY LACK OF FUNDS

Seragen Inc., best known for the messy controversy over its relationship with Boston University and John Silber, the school's president, has a problem that can be reduced to one simple four-letter word: cash.

Armed with promising early tests on a "magic bullet" drug that potentially could send some cancers into remission, Seragen is eagerly seeking a big drug company that would provide both capital and marketing expertise.With less than $20 million in the bank and monthly spending of about $1.3 million, Seragen could run out of cash by late next year.

Without those funds Seragen's proposed drugs - which are meant to attack and destroy diseased cells without harming their healthy neighbors - could remain in the laboratory.

"They're in dire straits in terms of cash," said Mary Ann Gray, vice president and biotechnology analyst at Kidder, Peabody & Co.

Indeed, beyond the sideshow of the John Silber controversy is a story about the collision of science and dollars that illustrates some of the high- stakes dilemmas facing many biotech companies, especially as investors have become wary of biotechnology stocks.

Founded in 1979 by a group of Boston University scientists to develop various laboratory research and medical diagnostic tests, Seragen in the early 1980s also began funding laboratory research at Harvard University and other schools.

One of those researchers was John R. Murphy. His work on using the diphtheria toxin to kill cancer cells showed so much promise that Seragen began to attract corporate investors, including a Norwegian pharmaceutical company, Hafslund Nycomed AS.

Mr. Murphy had spent almost 15 years working with diphtheria toxin and genetically engineered proteins, first at Harvard University and later at Harvard Medical School.

His theory was that, if the diphtheria poison could be hitched to proteins that seek out the diseased cells of cancer, AIDS and rheumatoid arthritis, the combination could specifically target and kill such cells.

And Mr. Murphy's work looked promising. Harvard obtained a patent on it and Seragen licensed the patent from Harvard in 1983.

In the next few years, in quick succession, Mr. Murphy was denied tenure at Harvard, hired by BU and came to the attention of Mr. Silber.

By 1985 Seragen realized its future was in Mr. Murphy's work, and sold its diagnostic test business to BU.

Mr. Silber committed BU to Seragen in a big way. The university acquired Hafslund Nycomed's major interest in the company in 1987 for $25 million then and later pumped in about $45 million more.

That investment stirred controversy. During the 1990 gubernatorial campaign, William Weld, the Republican candidate, pointed to the Seragen financing in his criticism of Democrat Mr. Silber's management abilities. Mr. Silber, who owns 105,000 Seragen shares, is still a director.

Last year, under pressure from Scott Harshbarger, Massachusetts' attorney general, BU agreed to limit its financial exposure in Seragen and to seek other investors.

But in the meantime, Seragen was growing. In the past seven years its work force has increased from fewer than 50 employees to 110 and it has constructed a new $5 million manufacturing facility in Hopkinton.

Mr. Murphy's so-called fusion toxin technology has been likened to a molecular guided missile that homes in on diseased cells, penetrates them and then uses the cells' poison to destroy their ability to manufacture proteins. That eliminates the spread of the disease to other cells.

More than a few missiles are already flying. For example, Seragen is testing fusion toxins in patients with early stages of Hodgkin's disease and B-cell and T-cell lymphomas, cancers of the white blood cells.

Seragen hopes to launch major testing of its fusion toxins to treat lymphomas later this year; testing in the treatment of rheumatoid arthritis could follow early next year.

If those results are as good or better than the just-concluded smaller clinical trials, Wall Street analysts expect Seragen to seek U.S. Food and

Drug Administration approval to market the drug by 1996.

But for that to happen, Seragen needs more money to carry out the extensive testing. It also needs a strategic alliance with a major pharmaceutical company that has marketing and distribution expertise.

And, so far, Seragen has been more successful making drugs than making money. When it was cut off from BU's funding under pressure from Mr. Harshbarger, it turned to Wall Street in April 1992, raising $36 million. Five months ago it raised $17 million more.

Both sales missed the 1991 boom in biotech financing, and today the market is downright sour on biotech.

"We've talked to about 20 different companies in the last three months, all of the top tier, and they see opportunities to working with us," said Richard Sverluga, Seragen's president.

Having taken drugs from laboratory to the edge of advanced stages of clinical testing, Seragen hopes to command a high price from a pharmaceutical company partner to participate in the completion of its drug development strategy.

Making the deal is George Masters' job. The 53-year-old Mr. Masters was brought on as vice chairman by Seragen in late March primarily to find a corporate partner.

Mr. Masters has sold two biotechnology companies and taken three public, and has worked for large pharmaceutical companies. He recently helped manage the sale of Verax Corp. in New Hampshire to Creative Biomolecules Inc. in Hopkinton.