By Thomas Gryta, Dow Jones Newswires

Small biotechnology companies, facing a cash crunch amid a poor funding environment, are increasingly turning to nonprofit groups for alternative sources of cash.

Patient advocacy groups like the Muscular Dystrophy Association and National Multiple Sclerosis Society always have played a role in funding research but usually in earlier stages at the academic level. These days, the same groups are helping to finance later-stage development and are finding companies of all shapes and sizes lining up for help.

"We are starting to see a lot more movement from companies that are further along and needing cash," said Timothy Coetzee, executive director of Fast Forward, a new unit of the National Multiple Sclerosis Society that functions more like a venture-capital firm. "We are starting to see more interest from companies that are publicly traded."

A third of the 370 public U.S. biotech companies are operating with less than six months of their needed cash, and only 10% of the companies in the sector are profitable, according to the Biotechnology Industry Association. The difficulty in the credit markets and venture-capital environment has caused increased funding requests to nonprofit organizations in order to keep research going.

"All of these [industry pressures] are affecting programs of interest to nonprofits. To the extent possible, we are trying to pick up the slack," said Peter Lomedico, director of industrial partnerships for the Juvenile Diabetes Research Foundation. Lomedico warns that its efforts are counterbalanced by decreasing charitable contributions in the tough economy, a pressure felt by many nonprofit groups

A funding agreement generally includes a royalty share, warrants, and/or the rights to continue a project if the companies abandon the work. If the investment produces a return, the nonprofit group generally will use the money to cut more deals.

A recent example is a $1 million grant from the National Multiple Sclerosis Society to privately held Belgian biotech Apitope in exchange for warrants. The group believes that the decision to provide funding was validated when Apitope signed a development and commercialization agreement with Merck KGaA (MRK.XE) last week.

The funding came from the Fast Forward unit, which is run largely by people with venture-related experience. The organization plans to provide at least $30 million in funding over the next five years in similar deals to companies developing MS treatments.

Those investments may lead to profits if the programs are successful, but that isn’t their intention, said Coetzee.

The funding is intended to make it easier for companies to conduct research in a specific area, especially as larger companies narrow their research focus, and generally bridges the gap between early research and getting a drug into the clinic for testing. The goal is to get other investors, such as a larger company, to pay for expensive late-stage studies.

But as organizations increasingly provide funding to companies, the groups report that requests for financial help are drastically higher.For example, the Muscular Dystrophy Association currently has about 25 companies requesting funding, up from about 10 inquiries at this point last year.

Yet, as nonprofit groups attempt to preserve the research seen vital to their missions, they are forced to deal with a decline in their own resources as donations wane in the face of economic pressure.

"The economy has impacted us the same way it has impacted everybody," said John Walter, chief executive of the Leukemia and Lymphoma Society.

Getting Stuck

Nonprofit groups have always funded research, as well as provided information and kept patients informed of new clinical trials. But the research effort was generally more focused on early work in the lab to better understand the disease, recruit researchers, or help run clinical trials.

All those efforts usually didn’t translate into a new therapies reaching patients because companies weren’t interested in high-risk early-stage programs that didn’t address a lucrative market.

"We found our research programs were often times getting stuck in the academic environment," said Walter, whose organization has funded $600 million in blood cancer research over the past 60 years.

As an example of the increase in later-stage funding, the organization agreed on Thursday to give $3.7 million to privately held Celator Pharmaceuticals Inc. to support Phase II development treatment for acute myeloid leukemia.

Notably, the Leukemia and Lymphoma Society had a hand in developing a number of drugs including funding early research for Novartis AG’s (NVS) Gleevec, for the treatment of chronic myelogenous leukemia.

The effectiveness of Gleevec, which was sitting on the shelf at Novartis at the time, prompted the nonprofit group to begin examining other compounds and look for other "diamonds in the rough" to investigate and develop, said Walter.

Funding specific programs can be a more efficient use of money because they have results-oriented goals and timelines, as opposed to funding scientific findings that only end up in a published paper.

"Our mission is solely focused on developing new treatments," said Todd Sherer, vice president of research at The Michael J. Fox Foundation, which focuses on Parkinson’s disease. He said group has made a conscious effort to work and partner with biotechnology companies to find new drugs.

"It is really the biotech companies that are doing a lot of the innovation of converting discoveries into products for patients," he said.