As biotech startups sing the blues over 2012 VC deals, others hum a new tune

Venture capital investment in US biotechnology companies ended 2012 on a low note with just $4.1 billion invested in the industry versus the $4.9 billion in 2011. The decline was even more dramatic for startups, since first-time investments in early-stage firms were cut by more than half from $922.3 million to $438.3 million last year.

As a result of the decline in traditional venture capital noted in the MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) with data from Thomson Reuters, pharma-backed corporate venture firms, angel investors and other alternative sources of funding have emerged as new voices in the chorus of financiers needed to bring innovative therapies and products that meet unmet medical needs to market.

Health care-focused venture firms welcome the whispers of new interest in biotech with open arms, because the industry could use some backup singers to keep the music flowing. It seemed that 2012 venture investing in biotech was poised for growth when third quarter totals hit $1.25 billion versus $1.17 billion for the same period in 2011 (scripintelligence.com, 30 November 2012).

But fourth quarter numbers reached only $1.29 billion compared with $1.38 billion during the last three months of 2011, so after a poor showing in the second quarter the year-end 2012 total was 15% lower than at the end of 2011, according to PwC and NVCA.Biotech and medical device companies claimed only 25% of all US venture capital investment in 2012 versus 26% in 2011, and the number of first-time financings for life science startups last year fell to the lowest level since 1995, despite a small uptick in early- to mid-stage investments in December (scripintelligence.com, 18 December 2012).

Savara Pharmaceuticals announced in June that it raised $8.6 million in a first closing for its Series B round and the Austin, Texas-based company will have raised $16.4 million when it announces the funding round's final closing early this year.

Savara co-founder and CEO Rob Neville told Scrip that the company now has 200 investors, because its Series B financing came largely from angel investors - including Tech Coast Angels in Southern California - and networks of doctors. Some early-stage, health care-focused venture funds also have joined the round.

"I think there's a growing active space of angel investors that are becoming more organized and getting more sophisticated in their due diligence," Mr Neville said.

With two Phase I clinical trials for its lead drug candidate complete, Savara will use its new capital to begin a Phase II trial within the next few months for AeroVanc (vancomycin hydrochloride inhalation powder) - the first inhaled antibiotic developed to treat pulmonary methicillin-resistant Staphylococcus aureus (MRSA) infection in cystic fibrosis (CF) patients.

Having hundreds of investors adds to Savara's costs for communicating its activities to shareholders, but Mr Neville said the company benefits from having access to advice from dozens of transactional and patent lawyers, CF doctors and other experts with a vested interest in the company's success.

Combined with previous private investments as well as grants from the National Institutes of Health (NIH) and Cystic Fibrosis Foundation, Savara has raised about $20 million to fund AeroVanc. The drug qualifies for US FDA review under the regulator's 505(b)(2) pathway for products based on previously approved medicines - the antibiotic vancomycin in Savara's case.

Labrys Biologics

Another relatively low-risk company attracted its first-ever venture capital in a $31 million Series A round that closed its first $14.6 million tranche at the end of 2012, but recent startup Labrys Biologics' lead product candidate is a Phase II-ready drug that the San Francisco firm acquired from Pfizer.

Known as RN-307, the calcitonin gene-related peptide (CGRP) inhibitor will be developed as a prophylactic treatment for chronic migraine headaches (scripintelligence.com, 3 January 2013).

Wende Hutton of Canaan Partners, a general partner in the venture capital firm's Menlo Park, California office, joined the Labrys board of directors based on Canaan's involvement in the biotech startup co-ordinated by the VC firm venBio.

"It was a Phase II opportunity that we could see [as] a great opportunity to bring into the clinic. At the end of that Phase II, we think that we'll have a Phase III candidate that will be very attractive to a pharma company," Ms Hutton told Scrip.

The Labrys opportunity ticked a lot of boxes on Canaan's list of criteria for venture capital investment, because RN-307 has strong early safety data from Pfizer's Phase I studies, it will require a relatively short Phase II study, and a small-yet-experienced team was assembled to advance the drug candidate toward value creation for its investors.

"We're not shy about getting our hands dirty in company formation where either there's a lot of risk taken off the table or the biology is understood. Alternatively, we will go early with a small investment where can retire the technical risk," Ms Hutton said.

For instance, Canaan is willing to participate in a $5-6 million early funding round for a drug development startup that can validate the safety of its lead candidate and quickly prepare the asset for an investigational new drug (IND) application to the FDA.

"We look at each opportunity on a case-by-case basis first. And if it passes through our screen, as the portfolio starts to develop, we look at portfolio-balancing," Ms Hutton said.

Canaan announced the closing of its ninth venture capital fund in January 2012 with $600 million for health care investments (scripintelligence.com, 10 January 2012). So with the fund's first year of investing completed, the firm will look at whether it needs to put more or less capital into early-stage companies to balance the fund's portfolio going forward.

"We still see high-quality opportunities at our doorstep. We haven't seen [a] gap in great companies coming our way," Ms Hutton said.

eye on innovation

Pharma companies have indicated an interest recently in buying or collaborating with companies at earlier stages of drug development, which could boost VC interest in backing new startups. But venture capital investors - even venture funds spun out of Big Pharma - haven't noticed a discernible rise in acquisitions or partnerships with preclinical firms in their portfolios.

"If you look at where acquirers are looking now, they're looking for true innovation," Novo Ventures partner Heath Lukatch told Scrip. "We're looking at [investing in] early-stage companies, because that's where you see innovation."

Novo Ventures is a separate US corporate entity affiliated with the Novo Nordisk Foundation and Novo A/S, the majority shareholder in the international pharma company Novo Nordisk, which is headquartered in Denmark.

Dr Lukatch and Novo Ventures partner Scott Beardsley source investment deals from their base in San Francisco. They met with several business development executives from pharma companies during the 31st Annual JP Morgan Healthcare Conference in early January in the same city who indicated a desire to buy or license early-stage technology.

"We'll wait and see if that is truly what happens. From our perspective, we need to make sure we get [our portfolio companies] through a significant value inflection point - at least through a Phase II trial," Dr Lukatch said.

The law firm Morrison & Foerster (or "MoFo") in its first ever quarterly "BioMeter" report in December tracked a trend toward a higher proportion of collaborations for preclinical life science technology during the first three quarters of 2012.

The report, which tracked upfront payments under new partnership agreements starting in 2006, relied on data gathered by an unnamed third party as well as articles from industry publications and internal analysis by MoFo.

The average BioMeter value for all life science collaborations across every stage of development was $35.5 million between 2006 and 2011. However, the average upfront payment fell to $20.1 million in the first quarter of 2012, $17.3 million in the second quarter, and $10.3 million in the third quarter, because the percentage of preclinical collaborations doubled from roughly 30% to 60% of transactions between the second and third quarters.

MoFo partner Stephen Thau in the firm's Palo Alto, California office said a continued increase for early-stage partnerships and acquisitions in 2013 would boost venture capital interest in funding biotech startups.

"What I hope will happen is that we will start seeing an increase in the amount and value of [merger and acquisition] transactions and collaboration agreements. The pharmaceutical industry really needs the biotech industry to succeed in terms of filling their pipelines and there needs to be some success stories that give investors the confidence to continue to invest in therapeutics," Mr Thau said.

Government and disease foundation grants, corporate venture capital and the occasional angel investment in biotech companies helps early-stage companies that are competing for a finite amount of money, but those alternative sources of cash do not completely fill the gap in traditional venture capital funding.

"We just closed a deal with an earlier stage company that's a few years from the clinic, but we were able to put together a syndicate [of investors]. It is getting a little more difficult with the traditional venture players, but the corporate VCs have stepped up their investing in the last couple of years, and so far we've been able to put together syndicates we're happy with," said Dr Lukatch of Novo Ventures.

The availability of corporate venture capital has been encouraging, but there are signs of positive fundraising among traditional health care and life science venture capital firms.

Certain venture players that have been on the sidelines struggling to raise fresh cash will either close new funds or give up in 2013, Ms Hutton of Canaan Partners predicted.

"We hear that some funds that have been raising are going to be closing. We applaud their efforts. We need our industry to be successful and part of that success will depend on our [investment] collaborators," she said.