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Bonanza for Biotechs?

Bonanza for Biotechs?

Money Is There , if Idea Has Merit

While venture capitalists continue to invest in biotech startups, they aren’t exactly willing to fund just any bright idea.

Venture investors pumped $1 billion into biotech startups across the country during the three final months of 2001, which marks a quarterly record for the industry.

But many VCs have also become more risk-averse and are focusing their attention on biotechs with products in human testing rather than research programs for the discovery of potential new drugs.

“It used to be that they would hand out $200 million for an idea , now it’s ‘show me a product, customers and traction in the marketplace’,” said Michael Oliver, director in the technology industry group at PricewaterhouseCoopers in San Diego.

According to a recent survey by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association, venture capital investments fell to $36.5 billion for all of 2001 from $99.6 billion in 2000.

Arthur Klausner, a general partner with the venture capital group Domain Associates, L.L.C. in Princeton, N.J., said venture firms currently have significant funds in their coffers earmarked for health care.

In 2001, health care-focused venture capital firms raised a record $5.3 billion, which compares to $4.3 billion in the previous year.

Investments in the fourth quarter of 2001 were up after declining for five successive quarters.

Biotech accounted for 14 percent of the total $7.1 billion invested during the fourth quarter.

The $867.6 million invested in biotech during the same period in 2000 accounted for just 4 percent of the total volume.

Klausner said, however, that despite the large amount of venture funding recently being directed into biotech, these firms are increasingly being divided into “haves” and “have-nots.”

– Assessing A Company’s Value

While some biotechs are benefiting from oversubscribed rounds of $50 million and more, other companies with similar technological approaches may find venture backing all but impossible to attract, he said.

Klausner said part of the reason for this feast-or-famine situation is that today’s initial public offerings must be done at valuations of $250 million or more in order to be able to sell enough shares to satisfy the appetites of increasingly large institutions.

By contrast, in the early 1990s, IPO valuations of $80 million to $100 million were sufficient.

Today, VCs need to create a lot more value in their companies before considering an IPO and that is why biotechs need to attract more venture funding, he said.

Klausner is bullish on San Diego, which he said will continue to be a hotbed for new biotechs.

According to the survey, venture capitalists invested $224 million in San Diego companies during the fourth quarter of 2001.

Life science firms attracted some $135.2 million, said PricewaterhouseCoopers’ Oliver. Beneficiaries included Syrrx, Inc. and GeneFormatics, Inc., both of which are considered leaders in the study of complex protein structures. Medical device makers Cryogen, Inc. and Acculaser also received funding.

Oliver said venture capital funding is cyclical.

“Part of it is timing,” he said. “Some of the medical device ideas three years ago weren’t getting any money, because they were running after the Internet. Now the Internet is not in favor, because their business model isn’t doing well.”

Biotech is inherently risky, since the route from discovery to product development is long and contains many uncertainties. Payoffs may never come, he added.

– Favoring Certain Aspects Of Industry

Klausner said he favors biotechs that are already testing experimental drugs or medical devices in humans over those providing services or technologies to larger companies which use them to speed up their own drug development.

One such investment is South San Francisco-based startup D-Novo Therapeutics.

Brad Goodwin, CEO of D-Novo Therapeutics, said Domain Associates and two other venture firms , Proquest Investments in Princeton, N.J., and Sofinnova Ventures in San Francisco , put a total of $12 million in the firm. Eckard Weber, a partner at Domain Associates, discovered the idea, investigated it and decided to build a company around it, Goodwin said.

Weber was surfing the Internet when his attention was drawn to a patent filed by the Oregon Health Sciences University in Portland, Ore.

Two oncologists, Drs. Tomasz Beer and David Henner showed that a very high dose of calcitriol, the biologically active form of vitamin D, could be administered safely to late-stage prostate cancer patients and enhance chemotherapy in combinatorial treatment.

Goodwin said calcitriol has been known to have anti-cancer benefits. But people have had limited success in trying to engineer molecules similar to calcitriol that wouldn’t cause potentially deadly side-effects.

Beer and Henner had some success in treating late-stage prostate cancer patients with a once-a-week dose of 70 pills to 100 pills combined with chemotherapy.

Goodwin hopes to test a new formula of a lower dose of highly concentrated pills in healthy individuals soon. He declined to give specifics on the funding. But the venture firms retain much control with one member on the board of directors, including Weber as chairman.

– Attracted To Startup Firms

Standish Fleming, a partner with San Diego-based health-care focused venture group Forward Ventures, said he too prefers to invest in advanced startups.

The firm manages total funds of $310 million.

“We prefer startups that are in their first phase of development (three to five years) and have a strategy to develop pharmaceutical products,” Fleming said.

Local biotechs getting funding include Arizeke Pharmaceuticals, Inc., Avalon Pharmaceuticals, Aventa Biosciences, CancerVax, Corixa Corp., Nereus Pharmaceuticals, and Conforma Therapeutics.

Dan Wood, a partner with Inglewood Ventures, a relatively new entrant in the San Diego venture industry, may be the exception.

The 2-year-old health-care focused company has invested some $8.25 million in about a dozen local biotechs, Wood said.

Wood, however, said he could care less about trends.

“It seems like every few years there is a cycle of product companies coming in favor over platform companies; I don’t pay too much attention to what’s in vogue, because we are more long-term-oriented,” he said.

Inglewood’s funded mix of biotech companies includes proteomics company GeneFormatics and medical device maker Digirad Corp., which has a camera to detect heart disease, and product-oriented Metaprobe, which is working on a contrast agent to detect metabolic problems.

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