nature biotechnology volume 27 number 2 february 2009 103

in this sectionGenzyme snaps up front-runner Osiris in adult stem cell deal p106

Combination therapies fail in lung cancer—is the approach doomed? p108

FDA rejects companies’ request for retrospective drug-KRAS analyses p110

lished portfolio through clinical trials at the expense of neglecting seed financing. On the other hand, the top three third-quarter deals were later-stage fundings (Nat. Biotechnol. 26, 1212, 2008).

Only a few VC firms are still regularly investing in seed or early-stage companies. Post-Lehman, in fact, VCs have begun to re-examine the very ground they are standing on. “In the past six months the pace of VC investing in biotech has decreased as people stand back and reassess fundamental business models,” says Jamie Topper, general partner at Frazier. The firm is one of the top five US bio-tech VCs, with half of its biotech investing pre-viously going into early-stage (seed or series A) financing. But now the firm is rethinking that strategy—at least in the short term—until it sees just how deep and dark the crisis is going to be. “Every dedicated healthcare VC is ques-tioning the desirability of funding early-stage biotechs,” says Topper.

While total US healthcare VC investment dropped 25–50% in the final quarter of 2008, Topper estimates, early-stage biotech funding plummeted about 50–75%. He expects that trend to continue for the first half of 2009. “Our current fund will probably place 5–10% at most in early-stage biotech, compared to the usual 25%,” he says. Biotech deals in 2009 are likely to be later stage, possibly even private investments

Pacific Biosciences of Menlo Park, California, raised $100 million to fund development of its single-molecule real-time DNA sequen- cing platform. Proteolix in South San Francisco obtained $79 million to underwrite phase 2 trials of a drug aimed at protein degradation pathways in cancer and autoimmune diseases. Portola Pharmaceuticals, also in South San Francisco, raised $60 million to pay for clinical trials of therapeutics for vascular disease. And the device firm CVRx, based in Minneapolis, restocked its cash reserves with $83 million for trials of its hypertension therapy—not strictly biotech, but the event attracted many of the VCs most active in biotech, such as NEA and Frazier Healthcare Ventures in Menlo Park, which also co-invested in the Portola finan-cing. Another leader, Advanced Technology Ventures, participated in both the Proteolix and Portola financings. Nomura Phase4 Ventures in London also co-invested in the Proteolix deal but otherwise kept a low profile in the second half of 2008—as did NEA.

Other leading biotech VCs active in the quarter were Intel Capital, which co-led the Pacific financing, and Kleiner Perkins Caufield & Byers, which also backed the Pacific deal. Virtually all the Pacific VC investors were already deeply committed to the company—a feature of recent VC financings, where inves-tors are being very careful to see their estab-

Even before Lehman Brothers’ collapse trig-gered the global banking crisis at the end of last September, venture capital (VC) firms were finding it harder to raise new funds. In the nine months from January to September 2008, US VC firms raised only $19.7 billion from their limited partners compared with $32 billion for the entire previous year and $30 billion in 2006 (Dow Jones Venture fig-ures). About 25–30% of this money typically goes into the healthcare sector.

The shortfall did not, however, discourage VCs in the US from deploying their funds (Table 1). Overall, investment this side of the Atlantic in the first three quarters of 2008 was on par with the same period of 2007, standing at $22.3 billion from just under 2,000 deals. And for US healthcare in the third quarter alone, VC investment held steady at $2.2 bil-lion, with over half of that going to biophar-maceuticals (Fig. 1).

However, the crisis has changed the struc-ture of VC investing, as firms shift more cash into their existing portfolios at the expense of startups. “Not only is it taking longer for these firms to get an exit,” says Jonathan McQuitty of VC firm Abingworth, based in London and Boston, “but also there are fewer potential co-investors than [there were] previously...That means we have to have some pretty hefty reserves.”

Moreover, the crisis has hit some VC firms’ resources far worse than others—not through bad management, but by unfortunate timing, says McQuitty. Several VC firms had not yet begun raising new funds when disaster struck in mid-2008, and now they cannot do so, he says. “Smaller or less experienced VC firms are going from a situation where fund-raising was merely a bumpy ride to where it simply doesn’t happen,” he says. “Several funds have missed the wave and are now heading for a wipeout, possibly taking them out of the seed financ-ing game for months or even years.” Even top-notch healthcare VCs like New Enterprise Associates (NEA) in Chevy Chase, Maryland, and Abingworth itself have had trouble meet-ing their fund-raising targets, he admits.

There were four major medical technology financing events in the third quarter of 2008.

Venture capital shifts strategies, startups suffer

3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08

Amount invested ($ billions) Number of deals

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Figure 1 Venture capital investment into US healthcare companies by quarter over the past three years (adapted from Dow Jones Venture presentation).

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104 volume 27 number 2 february 2009 nature biotechnology

Another trend inspired by the credit drought is stronger interest in co-investing and pre-syndication. “We are aware that later funding rounds may not be easy, so there is a move to pre-syndicating either the whole funding process or a big chunk, say 80%, right at the start,” says Abingworth’s McQuitty. “The company directors don’t then have to be out pounding the pavement looking for their next rounds.”

Jens Eckstein, partner at TVM Capital in Boston, points to more subtle shifts in the structure of seed financing. “The trend is for incubating rather than ‘official’ seed fund-ing—a stealth mode with tight control on spending,” he says. This has coincided with larger first rounds combining series A and B, funded by syndicates strong enough to advance the biotech companies enough money to keep going longer, without having to look for fur-ther financing. The result has been some series A fundings worth as much as $30 million.

Eckstein believes European biotech has been hit significantly harder than the US, with very few big VCs still active. Besides Sofinnova in Paris, Abingworth and TVM itself, several firms have dropped out of the sector entirely. Dow Jones Venture numbers back this up: VC investing into European healthcare companies flopped from €468 million in 61 deals in the first quarter to €164 million in 32 deals in the second quarter. Significantly, Germany has now taken the lead in European VC investing, as UK activity fell off a cliff in 2008.

But all is not lost, insists Eckstein. “A num-ber of VC firms have kept their powder dry, with money in hand still to invest, having only recently closed their latest funds.” He also notes the merger and acquisition environment remains strong, with cash-rich pharma in buying mode by necessity as they face pipeline issues. “There has been no real slowdown in deal flow,” he says. “But the pressure is on startups to think through their plans more critically.”

Peter Mitchell London

in public equities (PIPEs). “Some of the later-stage public market biotech and medical device companies have taken big hits on valuations, making them very attractive investments for us,” he says. Moreover, Frazier is planning to shift its investment away from the biotech sec-tor to growth equity, funding companies that are already profitable but need more capital to expand, often in the pharma or healthcare ser-vices sector. This naturally delivers lower mul-tiples on exit, but it mitigates development risk, which is the top priority right now.

Abingworth’s McQuitty agrees. “Several larger funds have even gone to a PIPE-only strategy; they feel they want to take time out from investing in private companies at all.” Abingworth is, he assures, still willing to do early-stage investing, though possibly less so than before.

Figures from Dow Jones Venture confirm that funding has indeed shifted away from seed financing toward the later-stage companies, falling from 23% in the first quarter of 2008 to 18% in the third quarter (in all VC sectors, not just healthcare). This trend, however, was already apparent before 2008.

VC funds associated with pharmaceutical companies (e.g., GlaxoSmithKline’s SR One or MedImmune Ventures) are bucking this trend and are still actively interested in funding early technology ventures. “They have not just invest-ment focus but also strategic focus; they want to access an innovation,” says Topper. “That’s good for the industry, because for other VCs [like Frazier] it is very hard to make a rational argument for taking a chance on an early startup when you are not sure just how they are going to finance themselves later.” An example of this ‘strategic financing’ is the backing of CVRx by J&J Development in New Brunswick, New Jersey, owned by Johnson & Johnson (J&J), also in New Brunswick. J&J led the $83.9 mil-lion financing, in cooperation with NEA and several other top-ranking healthcare VC inves-tors, including Frazier and InterWest Partners in Menlo Park and Houston.

Table 1 Top ten biggest rounds for private biotech firms in 2008.Company Amount invested ($ millions) Round number Date closed

OncoMed Pharmaceuticals 169 2 12 December

Portola 130 3 9 July

Pacific Biosciences 100 5 14 July

Radius Health 82.5 3 20 November

Ganymed Pharmaceuticals 82.2 4 18 November

Proteolix 79 3 8 September

ESBATech 62.5 2 7 August

Merrimack Pharmaceuticals 60 6 10 June

Biolex Therapeutics 60 4 6 October

Intrexon 55 3 7 May

Source: BCIQ: BioCentury Online Intelligence

in briefMerck joins the biotech game

Merck’s CEO Richard Clark has unveiled plans to enter the biotech drug market by creating Merck BioVentures (MBV), a global division focused on developing biotech drugs, in particular copycat versions of existing biologics. The initiative represents Merck’s shot at replenishing

a dwindling pipeline and an attempt to position itself as a major competitor in the biotech field. The unit is expected to burn $1.5 billion over the next seven years, with a manufacturing capacity fully operational by 2012. The news comes at a time when the Whitehouse Station, New Jersey–based pharma faces dwindling sales of cholesterol-lowering blockbusters Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin) and the expiration of some key patents. Merck’s new biotech division will take advantage of its GlycoFi technology, purchased in 2006. This glyco-engineering platform—a faster, less expensive production method than mammalian-based culture—will enable the company to circumvent generic manufacturing restrictions and be competitive in its pricing approach. MBV already has a candidate drug in phase 1, MK2578 (pegylated erythropoietin), designed to compete with Thousand Oaks, California–based Amgen’s Aranesp (darbepoetin alfa), and at least five other products projected to be in late-stage development by 2012. “It was important to make a decision around manufacturing and leverage our internal capabilities,” says Frank Clyburn, MBV general manager. Biogenerics represent an important market opportunity as $10 billion worth of biologic drugs are expected to come off patent by 2010, with an additional $10 billion by 2015. Given that the new Democratic administration is expected to push biogenerics legislation through Congress, the timing is propitious, although a generic-drug-style abbreviated pathway looks increasingly unlikely. As clinical trial costs will, mostly likely, be added to the cost of developing a follow-on biologics environment, the investment and expertise needed for success could be considerable. But considering the large number of leading biologics, such as Epogen (epoetin alfa), Enbrel (etanercept) and Avastin (bevacizumab), facing patent expirations through 2017, and the diminished late-stage risk involved in producing follow-on biologics, Merck’s strategy is timely. Basel-based Novartis and Petach Tikva, Israel–based Teva already market follow-on biologics in Europe and India, and several other companies also have the cash and the technology to enter the race. “Over the longer term, we will also apply our unique humanized GlycoFi yeast technology platform to the development of novel biologics,” says Caroline Lappetito, Merck’s director of global communications. –Victor Bethencourt

Merck’s CEO Richard Clark introduces a new strategy for biogenerics.

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nature biotechnology volume 27 number 7 july 2009 671

Corrigendum: Transfection of small RNAs globally perturbs gene regulation by endogenous microRNAsAly A Khan, Doron Betel, Martin L Miller, Chris Sander, Christina S Leslie & Debora S MarksNat. Biotechnol. 6, 549–555 (2009); published online 24 May 2009; corrected after print 8 July 2009

In the version of this article initially published, Figure 2f is not referenced in the figure legend and is referenced as Figure 2e in the main text. Also, on p.5, right col., para. 1, line 8, miR-21 should be miR-122. The errors have been corrected in the HTML and PDF versions of the article.

Erratum: Venture capital shifts strategies, startups sufferPeter MitchellNat. Biotechnol. 27, 103–104 (2009); published online 9 February 2009; corrected after print 8 July 2009

In the version of this article initially published, “GSK Ventures” should have read “GlaxoSmithKline’s SR One.” The error has been corrected in the HTML and PDF versions of the article.

Erratum: New relief for goutJill U AdamsNat. Biotechnol. 27, 309–311 (2009); published online 7 April 2009; corrected after print 8 July 2009

In the version of this article initially published, the incidence of gout was incorrectly stated to be in the hundreds of millions worldwide and 300 million in the US (p. 309, para. 2). The incidence is known for industrialized countries, not worldwide. In the US, the number is 3 million. The last five lines of the paragraph should have read, “including about 1 in 100 adult men in industrialized countries (an estimated 3 million in the US according to the Centers for Disease Control).” The errors have been corrected in the HTML and PDF versions of the article.

Erratum: Biotech hirings and firingsMichael FranciscoNat. Biotechnol. 27, 395, 2009; published online 7 April 2009; corrected after print 8 July 2009

In the version of this article initially published, a company name was omitted from Table 2. GlaxoSmithKline should be listed in third place. The error has been corrected in the HTML and PDF versions of the article.

Erratum: Wyeth preemption case ruling sparks labeling confusionMalorye AllisonNat. Biotechnol. 27, 399–400 (2009); published online 8 May 2009; corrected after print 8 July 2009

In the version of this article initially published, Phenergan is incorrectly mentioned in paragraph 2 as Merck’s antinausea drug. Phenergan is made by Wyeth. The original version also states in paragraph 3 that Wyeth is located in Whitehouse Station, New Jersey. The company’s correct location is Madison. The errors have been corrected in the HTML and PDF versions of the article.

Erratum: Academia and the company coinJim KlingNat. Biotechnol. 27, 411–414 (2009); published online 8 May 2009; corrected after print 8 July 2009

In the version of this article initially published, on p. 411, left column, last paragraph, one of the researchers’ names was incorrectly given as “Martin Feller.” It should have read Martin Keller. The error has been corrected in the HTML and PDF versions of the article.

corr igenda & errata©

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