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VCs Warming Up to Area Biotechs

San Diego continues to stake a claim as a leading biotech center, finishing as No. 3 in venture capital investments in the nation in the fourth quarter of 2007 and No. 2 for the year, according to a recent report.

On the quarter, the 15 venture capital investments in San Diego biotechnology companies rolled up $249 million, an increase from $216 million in the fourth quarter of 2006, according to a 2007 MoneyTree Report prepared by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial of Connecticut.

San Diego ranked closely behind New England, which boasted $251 million in biotechnology deals in the quarter, and follows Silicon Valley, which led all regions with $1.28 billion in deals, the report said.

On the year, San Diego was the No. 2 region, receiving $972 million from VCs, beating out New England’s $938 million. Silicon Valley received $1.15 billion in biotech-related deals, according to the report.

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“San Diego has a huge biotech industry with 700 companies,” said Larry Stambaugh, a consultant and former chief executive officer, co-founder of Maxim Pharmaceuticals Inc. in San Diego.

As the youngest of the big three clusters, including software and medical devices/equipment, biotech relies heavily on early stage innovation and discovery , research talent San Diego has in spades.

But going further up the food chain, San Diego lacks the professional talent to commercialize drugs once approved by the FDA, said Joe Panetta, president and CEO of Biocom, a trade association for local life sciences companies.

“We create new companies more rapidly than any other cluster. What we haven’t done is to create a large commercial sector in the biotech industry,” said Panetta. “There’s no shortage of molecular biologists and biochemists and folks that do licensing, but all you have to do is talk to a CEO of a company that receives commercial approval of a product to ramp up, and they’re faced with a challenge.”

Donna Janson, CEO of a San Diego boutique dental company, Novalar Pharmaceuticals Inc., has experienced this phenomenon firsthand.

Novalar is preparing to commercialize a local anesthetic reversal product in the third quarter of 2008 and Janson said she is recruiting outside of San Diego for product managers.

“We’re a little unique in this area, where we’re closer to commercialization than most companies,” said Janson, whose company employs 16-18 people, up from seven last year. “It’s harder to find commercial types , managers, product managers , than development people that you can find readily.”

The dearth of professional talent will likely continue here, because fewer biotechnology startups need to commercialize their drugs. Pharmaceutical companies are buying up promising biotechs to replenish their own pipelines.


VC Bulls

“It used to be that pharmaceutical companies wouldn’t look at anything unless it was in late-stage II or III,” Panetta said. “Now, they’re dipping further down because the late-stage opportunities are not there.”

Earlier interest by Big Pharma is also helping to fuel record investments in biotech startups.

Last year, VC investments nationwide totaled $29.4 billion in 3,813 deals, an 11 percent increase over 2006. Last quarter, investments totaled $7 billion, marking the fourth straight quarter with investments reaching more than $7 billion, according to PricewaterhouseCoopers.

Local venture investor Kevin Kinsella predicted another strong year for startups despite the economy.

“Biotech investments are on a time scale outside of the business cycle,” said Kinsella, who founded Avalon Ventures of La Jolla in 1983. “If you’re investing today in biotech, chances are that unless you’re very fortunate you wouldn’t get a liquidity event in five years or longer. Who knows what happens in that period of time?”

In February, Avalon Ventures closed on a $150 million investment fund, the firm’s eighth. It was also the largest since Kinsella founded the firm 25 years ago.

Kinsella said he expects to invest in about 20-24 companies in the next three years and keep a certain portion of the money he raised in reserves.

“You want to be prepared to back your winners, and if you have a downturn in the fortunes of a company that you still believe in, you want to have capital to continue to support,” he said. “Because, if not, you’ll get skewered by other investors coming in at that point.”


Payoffs

Local CEO Scott Salka of Ambit Biosciences credits Kinsella’s early support for his current success.

“He pulled the company together with the first $100,000 out of his own pocket,” said Salka, whose company closed on a $49 million Series D funding round in November, the largest last year in San Diego.

In addition to Kinsella’s personal stake, Avalon Ventures has also participated in every funding round by Ambit. Kinsella himself stayed on the company’s board for seven years until last fall, Salka said.

“Without Kevin Kinsella’s vision and capital, the company would never have been where it is today,” Salka said.

Ambit is developing cancer-fighting kinase inhibitor drugs and licenses out a technology that identifies kinase proteins in the body.

Since 2004, Ambit’s revenues have doubled every year to more than $15 million last year, said Salka, whose company employs 100 people.

Both Salka and Kinsella were living in San Diego, which is why the company was founded here, even though the initial technology came out of Yale University.

“San Diego has a tremendous amount of talent,” said Salka, describing the pool of initial scientists as hard-charging, really hungry molecular biologists. “We were able to pull some talent from around the academic institutions around town.”

Other top recipients of venture capital money in San Diego last quarter were Reva Medical Inc., which raised $42 million in its 12th round of funding, and Anaptys Biosciences Inc. of La Jolla, which raised $34 million last quarter in its Series B funding round.

Reva develops biodegradable stents to treat heart and arterial diseases that are reabsorbed by the body. Brookside International Inc. of Connecticut led the round.

Anaptys develops therapeutic antibody products. The funding round was led by Alloy Ventures Inc. of Palo Alto.

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