Assistant Managing Editor

ATLANTA - As the 2009 Biotechnology Industry Organization convention drew to a close, weary attendees made their final treks through the halls of the Georgia World Congress Center, catching those last few meetings and stopping in to the final breakout sessions.

An "intrepid few," to quote Charles Hsu, venture partner at Bay City Capital LLC, even found their way into a morning finance session, "Specialty Pharma Play - Are We Near the End?," which, contrary to the title, focused more on how specialty pharma - the so-called "no research; development only" (NRDO) model - can move forward in a cash-strapped financial environment and a sector that is putting increasing pressure on firms to deliver innovative products.

Specialty pharma firms became popular among investors in the late 1990s, often seen as a de-risked investment strategy. But in today's economy, those investments have become almost prohibitively expensive, as the costs for acquiring clinical- and commercial-stage assets and conducting clinical development are rising, said Hsu, who moderated the panel.

Doug Fisher, principal at InterWest Partners, said his firm has "a number of specialty pharma companies in our portfolio, and they go through millions of dollars a month."

A few have managed to land lucrative deals in the past year, namely Transcept Pharmaceuticals Inc., of Point Richmond, Calif., and ARCA BioPharma Inc., of Broomfield, Colo., both of which managed to secure nice chunks of cash through reverse merger deals, though shareholders of the public shell firms have been losing patience for the reverse merger options. (See BioWorld Today, Sept. 3, 2008, and Sept. 29, 2008.)

"We're still interested" in funding specialty pharma firms, Fisher said. Others are as well, evidenced by the fact that Clovis Oncology Inc., a Boulder, Colo.-based start-up aimed at acquiring, developing and commercializing cancer drugs, just raised an impressive $145 million in initial venture financing. (See story.)

But, Fisher said, "the bar has definitely gone up."

After all, there are downsides, particularly for firms with only one or two assets, like San Diego-based Neurocrine Biosciences Inc., which ran into regulatory troubles, receiving its second approvable letter for insomnia drug indiplon in 2007. And New York-based Eyetech Pharmaceuticals Inc. (later acquired by OSI Pharmaceuticals Inc.) hit marketing snags, as sales of its only product, Macugen (pegaptanib sodium) for wet age-related macular degeneration, got trampled by Lucentis (ranibizumab), a superior VEGF inhibitor from South San Francisco-based Genentech Inc.

Within the area of specialty pharma, there's also the question as to whether investors prefer a single-product firm or a company with plans to build out a multiproduct development pipeline,

There's an ongoing debate among VCs at Pappas Ventures, of Research Triangle Park, N.C., about that very topic, said Sean McCarthy, principal at Pappas.

"I think we're going to gravitate to [wanting] multiple shots on goal," he said. That's a strategy that clearly offers greater "corporate flexibility," though he conceded that, in the current financing environment, "the lead program will end up sucking up most of your capital."

It's hard to argue in favor of building an integrated firm when other firms are "putting earlier projects on the back burner to focus on the lead product," McCarthy added.

All the panelists, however, agreed that capital efficiency is the biggest challenge for specialty pharma.

"It's about reacting to those challenges," said Jonathan Wang, managing director of OrbiMed Asia, who said firms are outsourcing more and more work, with much of it going to emerging markets such as China and India.

McCarthy agreed, adding that one of Pappas' portfolio firms, CoLucid Pharmaceuticals Inc., runs a "lean and mean" operation with only four employees.

The Indianapolis-based company, which formed in 2006 around a migraine drug in-licensed from neighboring Eli Lilly and Co., is contracting out clinical development for that program, which is gearing up for Phase III testing.

Troy Wilson, president and CEO of Intellikine Inc., said his firm, a recent La Jolla, Calif.-based start-up, is not a specialty pharma in the traditional sense but has employed several strategies that could be effective for specialty firms, such as operating as a semi-virtual entity with all of its chemistry work based in Shanghai, China.