By Cynthia Robbins-Roth

BioWorld Today Columnist

As the kids scurry back to school, biotech entrepreneurs' thoughts turn to strategy. Specifically, how to get those financings and partnerships done before the dreaded black hole of the Thanksgiving-to-New Year's Eve season.

As many have learned, to their distress, getting the undivided attention of VCs, bankers and partners post-Nov. 22 can be near impossible.

So let's take a look at how the private side of the financial community is behaving and see what might help you get your financing deal done before turkey time.

Where Did The Money Go?

Let's start with the numbers. For the year to date (January - August 2006), private U.S. biotech companies raised a total of more than $2 billion in venture financings. (See Table 1.)

That sounds pretty good, right? Let's take a closer look at where the money went and what that tells us about how the private investors might behave for the rest of the year.

2006 is following in the footsteps of 2005, with risk reduction and focus on fund return still the key goals of the venture community. Even at the very early financing rounds, investors are demanding on-going clinical trials before signing over those large checks. An amazing 73 percent of the cash went into clinical-stage companies even at the earliest rounds of investing, along with 83 percent of the later-round capital.

Early Deals Look Suspiciously Aged

In the seed/series A deals year to date, we find Midway Pharmaceuticals being created around technology from the University of Chicago, with a goal of discovering GI therapeutics. With its early stage science (a preclinical lead compound) and $500,000 financing from a state economic development fund, it looks like the type of start-up deal we used to see in the "good ol' days."

At the other end of the spectrum, you have Zogenix Inc. A $60 million series A round is helping this specialty pharma spin out of Aradigm Corp., complete with a needleless drug delivery technology, a Phase I migraine trial incorporating an already marketed migraine therapeutic and a management team including the former Aradigm vice president, corporate planning; vice president, business development; and senior vice president and chief scientific officer and the former executive vice president, commercial operations from Intermune. Clarus (the group that spun out of MPM to focus on specialty pharma and "value inflection points") and Domain Associates led the round.

Closely following Zogenix was Cogenesys, which spun out of Human Genome Sciences Inc. with a $55 million hope chest from New Enterprise Associates and colleagues, a portfolio of therapeutic programs based on modification of known and marketed biologics (one about to enter the clinic), and six former HGS executives.

Of the 25 deals sitting between those two extremes, 14 more were specialty pharma companies and another four had ongoing clinical trials.

The insisting on downstream development even for early investment rounds is a clear signal that previous years' focus on technical risk reduction is still in full force.

Management, Products

Things stay pretty consistent through the rest of the private company rounds. Half of the 30 Series B deals involved companies in the clinic, even though only four of those were specialty pharma firms.

That group did include some companies that got hefty investments in spite of still being at the preclinical stage.

Tengion Inc. ($50 million) is working on creating replacement organs and tissues from patient stem cells. Tetralogic Pharmaceuticals got $36 million to continue work on preclinical drug candidates based on science from Princeton. Kythera Biopharmaceuticals' biotech-based skin care plan drew in $30 million, and Catalyst Biosciences Inc. convinced investors to bet another $30 million on engineered proteases as therapeutics.

What really stands out is the deep experienced management teams in all those companies. Investors might be placing a technology bet, but they clearly have great faith in the industry experience of the executives in order to supply those double-digit cash infusions.

The later-stage pre-IPO rounds stayed the course. Of the 29 deals in that category (Series C and up), 19 included programs either in the clinic or on the market.

Two reverse mergers showed up in that group: specialty pharma Cougar Biotech ($47.5 million) and Hawaii Biotech ($7.8 million leading into a merger with Australian exchange firm Avantogen). As the public markets remain price-pinching, reverse mergers look like a simpler way to reach new groups of investors without suffering the slings and arrows of the roadshow and banker fees.

The IPO Market

And what is happening with the U.S. IPO market these days?

Here's an indicator that it's still finicky: BioWorld's figures show that 16 U.S. companies are waiting in the IPO cue, more than the 14 from The States that have made it through as of Aug. 31. Five companies pulled their filings, waiting for better market conditions. (See Table 2.)

That brave band of 14 biotech firms that made it through the IPO process this year raised $599 million total with a median deal size of $57.5 million. Only one, Cleveland Biolabs, was not yet in the clinic or the marketplace, though it had filed an IND in the same month as its IPO. Cleveland Biolabs also raised the smallest amount of capital - $10 million.

The largest IPO to date this year was done by Altus Pharmaceuticals, which raised $105 million on the basis of its two Phase II trials, its technology platform for modifying protein therapeutics for improved in vivo delivery, and an experienced management team. Altus spun out of Vertex back in 1993 with "crystallomics" in its mission statement, nonetheless raising a hefty $50 million in 2001 and another $51 million in 2004.

Looking back, investors paid a median of $70 million at IPO in 2005 (a total of $628 million in 13 deals) and a median of $93 million at IPO in 2004 (a total of $1.64 billion in 28 deals).

This gives the unpleasant appearance of companies getting less for more. Even as investors demand more product progress in IPO candidates, they are paying less for the privilege of reduced risk. ARGH!

All this says that entrepreneurs need to ask themselves, How can I pull together a quality team, a pipeline with a proprietary twist that includes at least one product candidate aimed at an important market opportunity, and the resources to move that candidate into real clinical trials (not just physician IND trials), all before I can raise significant financing from this investing community?

Remember all our discussions about the need to be as innovative in our business strategies as we are in our science? The marketplace is confirming that need.

Robbins-Roth, Ph.D., founding partner of BioVenture Consultants, can be reached at info@bioventureconsultants.com. Her opinions do not necessarily reflect those of BioWorld Today.



BioWorld Today  September 25, 2006