The biotechnology sector looks likely to be hit by a wave of bankruptcies and failures as small companies find themselves out of funding and out of options.

On Thursday, Cell Genesys Inc (CEGE.O: Quote, Profile, Research), which was formed 20 years ago to focus on gene and cell therapies, said it is considering its alternatives, including liquidation of the company, after its experimental prostate cancer drug failed a late stage trial.

Last week, 15-year-old Atherogenics Inc filed for Chapter 11 bankruptcy protection due to an intolerable debt burden that hampered development of its experimental diabetes drug. This week the company's shares were delisted from Nasdaq.

"These are old-school biotech names," said Christopher Raymond, an analyst at Robert W. Baird. "Usually such names can get funding at some level, or someone will buy them before that, so it is very unusual and represents another data point showing that things are not peaches and cream."

The pain being felt by biotech companies who find themselves shut out of the capital markets, or who suffer the blow of a failed product, represents an opportunity for pharmaceuticals companies, which need new drugs to fill their pipelines as major products lose patent protection.

John Lechleiter, the chief executive of drugmaker Eli Lilly and Co (LLY.N: Quote, Profile, Research), said in an interview that his company plans to take advantage of the desperation in the sector to make further acquisitions, even as it executes its recent $6.5 billion acquisition of ImClone Systems Inc (IMCL.O: Quote, Profile, Research), which makes the cancer drug Erbitux.

"Certainly traditional sources of funding and the traditional capital markets that biotech companies have accessed are withering right now," he said. "I think you can expect us to be opportunistic."

Over the past two years, shares of small cap biotech stocks, defined as those with a market value of less than $500 million, have fallen an average of 30 percent. Shares of the large-cap biotechs have risen 25 to 30 percent over the same period.


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