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by George Miller
originally printed in BIO News -- Oct/Nov 2003
Gone are the days of easy funding for companies using novel science to capitalize on the mapping of the human genome.
Success in the clinic now outweighs almost all other investment factors among venture capitalists. They are focused more keenly than ever on companies that have strong data supporting a therapeutic product or pipeline and the wherewithal to bring products to market. Such companies, necessarily, tend to be seeking the later stages of funding: series B, C and D.
Also gone are the days of thinking new technologies would solve all the problems in drug development. Even at the current state of genomics knowledge, discovery and development remain toilsome work, albeit in a very exciting environment.
All this is not to say that early-stage biotechs can't secure funding. They just need to exhibit a lot more business savvy than their counterparts of a few years ago.
"Naïve assumptions about genomics simplifying the drug development process are gone," says Deepa Pakianathan, general partner at Delphi Ventures in Menlo Park, Calif. "The [biotech] sector is maturing nicely, but this has nothing to do with genomics. People are beginning to understand what drug development means and what's involved in getting drugs to clinic. Biology is very complex."
She says that in the current environment, the investment focus is on companies that have products close to the clinic. "We will invest in preclinical companies (those within 12 to 18 months of starting clinical trials) with the idea of funding the trials."
The current affinity for products among venture capitalists-or at least for companies having data in hand that may suggest the clinical success of products-is also a guise for risk aversion.
"Investors feel burned by the discovery and tool companies that they invested in earlier in this cycle. They now want to see companies that have products and an engine behind them," says Chris Ehrlich, life-sciences venture partner at InterWest Partners in Menlo Park, Calif.
Camille Samuels Pearson, managing director at Versant Ventures, echoes the point: "Technology platform and tool companies-genomics, high-throughout screening-are not as hot now. . . . Companies went public [in 2000], then struggled. Some investors got burned."
Biotech runs in a consistent four- to five-year cycle with a one-year peak, explains Rodney A. Ferguson, co-head of the Life Sciences and Healthcare Infrastructure Group at JPMorgan Partners in San Francisco. "We're just coming out of the drought (the last two to three years following the peak in 2000) and heading for the next peak. As a result, people are feeling good about 2004. Investment bankers have a big buzz going for 2004."
Most attractive to venture capitalists now are specialty pharmaceutical companies-"those that in-license drugs from academia or the pharmaceutical industry," says Samuels Pearson. "Another area getting hot again: companies with new biological insight," she adds.
Indeed, no type of company is ruled out categorically by venture capitalists, she notes. Versant will continue to invest in all business models. Its most recent investments have been in specialty pharma. It will also continue to invest in its four key areas (specialty pharma, tools, technology platforms and biological insight). For next year, Samuels Pearson expects to do some seed and series A investing.
Ferguson of JPMorgan Partners likewise is open to considering platform technologies, but cautiously: "We look at platform technology deals but set a very high bar for them and will do very few of them in the next couple of years," he says. Among them might be deals on proteomics, microfluidics, molecular-level detection, sensors and personalized medicine.
Like JPMorgan Partners and Versant, InterWest Partners will continue to invest in platform companies, even though the category has cooled. The difference now is that those companies have to be well on their way to clinical trials. In fact, according to Ehrlich, "Platform companies going into trials are a new focus for many venture capitalists." Where a company is in the discovery and development cycle, and the trial data it has already acquired, outweigh specific technologies or therapeutic targets.
Pakianathan of Delphi Ventures sums it up: "We are target agnostic as long as the underlying biology is good."
Ehrlich underscores the stakes for fund-seeking companies. "The rounds are big, but they take time to complete," he says. "[Venture capitalists] pay a great deal of attention these days to making sure that companies have enough cash to last them well past the achievement of key value-creating milestones with a cushion on the other end. Financings often take six or more months to complete in this environment."
The caution has extended all the way into the late stages of development. According to Bryan Roberts of Venrock Associates, "Late-stage companies needing funding have had to go back to venture capitalists [rather than mezzanine investors or IPO, both of which were not available]. Early-stage companies were competing for those same dollars and were at a disadvantage due to higher risk profiles. But the later-stage companies also had a hard time because prices were lower than they wanted; lower than they had experienced in prior rounds."
George Miller is a freelance writer based in Massachusetts.
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