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Biotechnol Healthc. 2007 October; 4(5): 29–35.
PMCID: PMC2651715

Where VC Fears To Tread

PATRICK MULLEN, Senior Contributing Editor


In recent years, venture capitalists have been less willing to place bets on pre-clinical technologies. Major drug manufacturers, flush with cash but increasingly bereft of blockbusters, are stepping into the breach. So are established biotech companies. Here’s a look at how the changing sources and timing of investments are helping to shape biotech’s future.

Venture capital has funded biotechnology since 1976. That’s when 29-year-old venture capitalist Robert A. Swanson famously parlayed a 10-minute appointment with biochemist and genetic engineer Herbert W. Boyer, PhD, into a 3-hour meeting over beers that led to the creation of Genentech. VC investors have pumped billions of dollars into biotech ever since, with wildly mixed results. For every success story like Genentech or Amgen — or more recently, Gilead, MedImmune, or Genzyme — there have been scores of failed companies with promising technologies that didn’t pan out.

Yet investors keep looking, as evidenced by the $1.1 billion invested in 86 biopharmaceutical companies in the second quarter of 2007, according to Ernst & Young and Dow Jones VentureOne. Since 2002, VCs, pooling money from public and private pension funds, universities, and wealthy individuals, have invested more than $29 billion in life sciences, mainly biotech, says the National Venture Capital Association. Investment on that scale is required, because a biotech typically spends a decade and $100 million to turn a promising idea into an actual product — or to find out that the idea’s not so promising after all.

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The VC industry has grown more cautious about biotech since the end of the genomics bubble at the turn of the millennium. Some VC firms are shying away from investment in early-stage preclinical companies. Large pharmaceutical companies are increasingly willing —or feel compelled, given shrinking pipelines — to fill that gap. Another related trend is that VC investments tend to be larger than in the past, which puts additional pressure on entrepreneurs to establish proof-of-concept, preferably through human trials. And while entrepreneurs once looked to an initial public offering as their preferred exit strategy, they’re more open to being bought by big pharma or an established biotech company.

One common theme in recent years has been a funding gap for preclinical and early-stage clinical development, which remains “a persistent roadblock for many emerging companies,” say Glen Giovannetti and Gautam Jaggi of Ernst & Young.1 They point out that while public and private equity investments increased 42 percent from 2005 to 2006, the greatest increase was in the “follow-on and other” category, and that “much of the year’s impressive capital formation was driven by large, established companies,” pointing out that debt offerings by Amgen and Gilead Sciences accounted for nearly a quarter of the year’s total.

“Over the last six years, venture capital’s business model, at least as it applies to biopharmaceuticals, has been broken,” says Thomas Higgins, president, CEO, and director of Prosetta, a private biotech startup in San Francisco. “They’ve almost taken the venture out of venture capital and started acting more like merchant bankers, a model that invariably produces improvements along the margins rather than disruptive technologies.” Prosetta has turned to angel investors to fund work with antiviral and bioconformatics platforms.

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“Companies with fundamentally new and very exciting platforms —and I believe Prosetta is one — offer the possibility of disruptive technologies in diagnostics and new drug development,” Higgins says, “but the last place you’ll find them is in peer-reviewed journals. The VC community has been late to the party.”

“For the last 5 to 7 years, the risk tolerance of the average healthcare investor for early-stage preclinical technology has decreased,” says James Topper, MD, PhD, “in part because investors recognized that a lot of early-stage technologies that were funded in the late ‘90s ended up being not as successful as expected.” Topper is a general partner in the Palo Alto, Calif., office of Frazier Healthcare Ventures, a dedicated healthcare venture capital firm.

Frazier continues to make early-stage investments, Topper notes, citing Trubion Pharmaceuticals and Amicus Therapeutics as recent examples. Both companies “are now well into the clinic, but we funded them when they were preclinical.”

Last October, Trubion raised $52 million in an initial public offering (IPO), though the company had hoped to raise as much as $86 million. The company, founded in 1999 by veterans of Immunex, is developing synthetic monoclonal antibodies using small modular immunopharmaceutical (SMIP) technology that could lead to treatments for inflammatory disease and some cancers. The company formed a strategic alliance with Wyeth in 2006 to collaborate on the discovery, development, and commercialization of SMIP drugs. Trubion received an initial payment of $40 million, and stands to earn up to $800 million if all milestones are met.

Amicus is developing small molecule, orally administered drugs, known as pharmacological chaperones, to treat a range of human genetic diseases. Amicus uses pharmacological chaperones that selectively bind to the target protein, increasing the stability of the protein and helping it fold into the correct three-dimensional shape. The company’s lead products in development are migalastat hydrochloride AT1001 (Amigal) for Fabry disease, isofagomine tartrate AT2101 (Plicera) for Gaucher disease, and AT2220 for Pompe disease. If successful, these drugs would compete with products that represent nearly 40 percent of Genzyme’s revenue, which was $3.2 billion last year.

Limited partners who invest with MPM Capital, a venture firm in San Francisco, “are quite willing to have us invest at whatever stage is going to get them a return on their capital,” says William Greene, MD, an internist by training and a general partner with MPM Capital, which invests solely in life sciences. One reason that later-stage investments have proven more attractive is that “traditionally with biotechnology and medical technology products, it’s only when you find out that something at least appears to work in humans that real value is generated.” While MPM invests in early-stage companies, the proportion of such investment always depends on the relative attractiveness of the available opportunities, Greene says.

“The biotech venture model is a little strained at the edges now because funding clinical trials requires big dollars,” says Topper. “That contributes to a tough funding environment for companies that have interesting science but are four or five years from the clinic and aren’t ready for late preclinical development. That worries me because that’s where a lot of innovation happens.” This, as federal funding of academic research is diminishing.

With more investments in, and alliances with, pre-clinical biotech companies, big pharma is boldly going where venture capitalists have been hesitant to tread. “Large pharmaceutical companies and larger biotech companies are reaching back earlier and earlier to acquire technology platforms and innovation in general,” from early-stage biotech companies, Greene says, “in their search for a blockbuster product or a platform that could help them discover one.”


Major drug companies as key players in biotech is not a new concept — after all, Roche has controlled Genentech for more than a decade — but there’s a greater sense of urgency these days. “Over the last 5 years, drug companies reached down into other companies during phase 2 clinical stages,” he adds, “and many of those companies have partnered with or been bought by someone, so big pharma is reaching in even earlier, with an almost insatiable appetite for innovation.”

In the last year, AstraZeneca spent $15.6 billion for MedImmune, maker of vaccines for seasonal flu and respiratory syncytial virus. Merck paid $1.1 billion for Sirna Therapeutics, which is developing a new class of medicines based on RNA interference technology, and $400 million for GlycoFi, which has shown promise in the field of yeast glycoengineering, which could lead to more efficient production of monoclonal antibodies.

Pfizer, which ended development of the cholesterol drug torcetrapib last December following deaths during a clinical trial, has been busy on several fronts trying to build its biotech business. Earlier this year, the company committed $50 million over 5 years to its research and development facility in La Jolla, Calif., to help biotech startups. Pfizer also is expanding its venture capital program, formerly Pfizer Strategic Investments Group, by expanding its focus and bringing in VC veteran Barbara Dalton, who ran SR One, GlaxoSmithKline’s venture operation, from 2001 to 2003.

“What has historically been a licensing deal arrangement between pharma and biotech has evolved into an acquisition strategy to fill their pipelines and address patent expirations,” says David Mack, PhD, a director with Alta Partners, a life sciences venture firm in San Francisco, where his first investment was Angiosyn, an example of another trend in venture funding, the “virtual company.” Angiosyn was founded in 2003 to develop treatments for macular degeneration based on research conducted at Scripps Research Institute by Paul Schimmel, PhD. At the time of its purchase by Pfizer two years later, Angiosyn had two employees and had yet to conduct human trials. Yet Pfizer saw enough promise to offer a deal that could be worth $527 million if — and it’s a huge if — Angiosyn’s treatment for blindness and a second product are successfully commercialized.

Quick facts about venture capital in biotech

Here are a few facts about venture-backed biotech and medical device companies that comprise the life sciences sector. They:

  • have attracted more than $29 billion in venture capital investments since 2002
  • employed 54 percent of the total life sciences workforce in 2006, accounting for 493,800 jobs
  • represented $132 billion in revenue last year, 60 percent of life sciences’ total
  • resulted in more than 100 venture-backed initial public offerings since 2002


Since buying Angiosyn in January 2005, Pfizer has placed several more biotech bets, buying Idun Pharmaceuticals (liver disease, cancer), Vicuron Pharmaceuticals (developing anti-infectives), Rinat Neuroscience (pain, Alzheimer’s disease, and other neurological conditions), and BioRexis Pharmaceutical (diabetes).

Established biotech companies also are getting into the act. Last year, Gilead Sciences bought Myogen, which is developing pulmonary drugs, for $2.5 billion, while Shire Pharmaceuticals bought New River for $2.6 billion to gain complete control of lisdexamfetamine dimesylate (Vyvanse), a treatment for attention deficit hyperactivity disorder on which the two companies had collaborated.

The wave of acquisitions has helped change some attitudes at biotech startups, Mack says. “Five years ago, biotech management teams saw a buyout from a pharmaceutical company as a bailout strategy if they couldn’t take their company public. Now, it’s one of the exit strategies of choice. There was a time when a $500 million buyout wasn’t as compelling as the potential upside of an IPO. In today’s environment, management recognizes the value of a solid acquisition versus taking their chances in the public markets.”


Looking ahead, how might venture money shape innovation in the next decade? “Whole areas of science are only now being plumbed for drug development,” says Greene. “Epigenomics [changes in the structure of DNA other than sequence; for example, patterns of DNA methylation] is just beginning to be mined for applications such as diagnostic testing. This will be very important in areas such as personalized or semipersonalized medicine. The number of people who benefit may be relatively small, but those individuals might achieve quite stunning benefits.”

“The bar is very high in oncology,” says Mack. “Though there are 350-plus cancer drugs in development, you need a target strategy that resonates with the oncology community because you need principal investigators to accrue trials and say, ‘I’m more excited about this potential drug than I am about the 30 other protocols that are at my cancer center right now.’”

Topper shares that view. “You’re not going to be able to develop marginally better oncology drugs. You need paradigm-shifting products that are less toxic with fewer side effects, or have a more profound impact on the disease progression.” He cites imatinib (Gleevec) by Novartis as a model of how a rationally developed drug therapy can transform treatment of a disease. “Gleevec absolutely revolutionized how we treat chronic myelogenous leukemia, a cancer of the bone marrow. It was developed through understanding the molecular pathways to that cancer, and it turned out that one pathway causes most, if not all, CML. Shut down that pathway and you shut down the cancer. Unfortunately, most cancers aren’t that simple, but it’s a model.”

Even cancer treatments that aren’t true breakthroughs may find a market. “Many products developed in recent years have shown marginal clinical benefits, but remember, we’re talking about someone living six months longer,” says Topper. “In the scheme of public health, six months for one patient isn’t that much, but it’s huge for a pancreatic cancer patient who lives to see his daughter graduate from high school.”

Diabetes is very much in play, says Greene. “Insulin will always be there, but peptides and biological therapies are pushing into new areas. This will especially help patients with type 2 diabetes keep their disease under control.” Biotech and traditional pharmaceutical companies are becoming creative and attacking metabolic syndromes: people with diabetes, heart disease, and lipid disorders, he adds. It’s becoming an intractable problem, yet there are so many ways to approach it; glucagon-like peptide-1 is one of many targets.

Two things make diabetes a ripe area for investment, Topper says. The first reason is an epidemic of diabetes due to obesity, which means there is a significant market. “The other is a growing understanding of the integrative nature of metabolism as it relates to diseases like diabetes and obesity.” There has been much skepticism about whether treatments for Alzheimer’s disease could work under the biotech model, Greene says. “But the need is so high that we’re seeing good and increasing levels of investment.” Mack also sees a huge unmet need in the area of Alzheimer’s and Parkinson’s diseases. “They’re extremely difficult to approach for lots of reasons: the diseases’ underlying biology isn’t well understood, clinical endpoints are soft, and the patient populations are difficult to stage.”

That some of these promising areas will lead to successful drugs and lift biotech startups into the major leagues seem certain. That’s when they’ll have to face what Ernst & Young’s Giovannetti and Jaggi call the “challenges of success”: partnering or remaining independent; training sales forces; managing inventory; identifying the right partners; and negotiating correct terms to protect intellectual property. If they go public, they can expect active shareholders expecting strong stock performance, not to mention navigating the shoals of regulation. These are the kinds of problems every biotech startup would love to have, and venture capital firms are scouring the landscape to find the most promising candidates.


1Success and Succession: Global Biotechnology Year in Review,” article in Acceleration: Ernst & Young Global Venture Capital Insights Report, 2007.

Articles from Biotechnology Healthcare are provided here courtesy of MediMedia, USA