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Early-Stage Biopharma Investors Opt for Safer Bets in 2002

This article was originally published in Start Up

Executive Summary

Discovery risk is for VCs like yesterday's newspaper. With the Big Pharma market for discovery tools abysmally quiet, early-stage funding for such firms saw a steep decline.

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RNAi Revs Up

Scientists have recently recognized an apparently fundamental cellular mechanism that may be a sort of ancient immune system. Called RNAi, for RNA interference, the process utilizes pieces of double-stranded RNA to prevent gene expression. RNAi has quickly become a powerful research tool, but its real promise lies in its potential to generate a brand-new class of highly specific medicines. Researchers have only just begun to explore how RNAi works in mammalian cells, so there's no telling if it actually will give rise to therapeutics. A growing number of companies are betting they'll be able to turn the fad into fortunes. Already, some of the challenges to commercialization are obvious: how to deliver the RNA, and who if anyone will control intellectual property rights. Some firms aim to directly deliver short sequences of RNA, and those who travel this route may confront challenges similar to those faced by antisense companies. Others are trying gene therapy approaches and will inherit all the problems of that field. As in any new field, bluster and blather are mixed with secrecy about who has what in terms of technology, money, and patents. The winner is likely to be the first company that can reduce concept to practice, and come up with a drug that works.

Investing in Hard Times

VCs worried about depressed financial markets and demanding Big Pharma customers are being tough on almost all start-ups seeking funding-but no tougher than on their existing portfolio companies. For some, hard times are creating opportunities. The circumstances of companies that raised money in the past few years are impacting newer firms now. Even organizations that met their milestones have seen valuations plummet, and are struggling to get financing. The down market is making it more desirable and easier for VCs to invest in late-stage start-ups. In-licensing has been popular, but investors are increasingly seeking value-priced components to fill out existing firms or launch new ones. Investors haven't stopped doing early-stage deals, but they're looking for firms with advantages that can reduce risk or cost, or speed a company to market. Drugmakers that used to sign big-money deals are now demanding that start-ups prove their technologies' merits through short-term, inexpensive pilot programs. Some firms aren't so pressed by hard times. VCs are promising stellar founders lots of support and time to take big risks they bet will pay off handsomely.

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