Editor's note: This is the second of two articles on the flow of venture capital money into and through the biotechnology industry.

Of the $2.1 billion in venture capital invested in global biotechnology companies last quarter, the majority went into earlier-stage financings, according to data from BioWorld Financial Watch and BioWorld Snapshots.

Biotechs raised $672.7 million in Series A financings and $604.8 million in Series B financings during the first quarter of 2007, up from $279.6 million and $254.8 million, respectively, in the same period last year. The Series A and B totals for the first quarter this year also represent a sharp increase over the second, third and fourth quarters of 2006.

While these deals include a "fairly healthy amount of really early stage activity," they are not "square one" companies, said Christian Cortis, senior associate with Advanced Technology Ventures.

Instead, Cortis pointed to an increase in hybrid constructs of strong biology expertise, a patent estate and an early stage pipeline, as well as more mature, licensed products within the area of expertise. Examples include the recently funded Amira Pharmaceuticals Inc., which added two Phase I programs from Hoffmann-La Roche Inc. to its internal asthma programs, and Epiphany Biosciences, which supplemented its herpesvirus-8 diagnostic with a Phase IIa varicella zoster virus program from Medivir AB. (See BioWorld Today, March 16, 2007, and March 26, 2007.)

"The model that everyone thinks they are going to make money on is the licensing game," said James Thomas, partner and co-founder of Thomas, McNerney & Partners. Indeed several Series A and B rounds in the first quarter went to straight licensing plays, such as Calistoga Pharmaceuticals, which licensed a preclinical p110 delta program from ICOS Corp., and InteKrin Therapeutics Inc., which licensed a Phase II insulin sensitizer from Amgen Inc. (See BioWorld Today, Jan. 12, 2007, and March 6, 2007.)

In an offshoot of the licensing model, some of the larger early-stage rounds were raised by spinouts like Johnson & Johnson's Movetis NV and Sanofi-aventis Group's Novexel SA. And the largest round - a whopping $300 million Series A - went to Ikaria Holdings, a gas-based critical care therapeutics company formed through the merger of Ikaria Inc. and INO Therapeutics Inc. (See BioWorld Today, Feb. 23, 2007.)

Bryan Roberts, managing general partner with Venrock Associates, noted that a lot of the venture capital available is "looking for risk-reduced situations," which licensing deals and spinouts provide. Another risk-reduced option is specialty pharmaceutical companies like EUSA Pharma Inc., which pulled in the second-largest round of the first quarter with its $175 million Series B. (See BioWorld Today, March 2, 2007.)

The average size of Series A and B rounds grew in the first quarter to meet the needs of these not-quite-so-early-stage companies. The average size of Series A deals increased significantly from $14.7 million in the first quarter last year to $33.6 million in the first quarter this year. Series B rounds also increased from an average size of $17 million in the first quarter of 2006 to $33.6 million in the first quarter of 2007.

Bertrand Liang, vice chairman of Paramount BioSciences LLC, attributed the increasing deal size to the fact that "it takes Phase II companies more money to get to the next inflection point," since they have to conduct expensive clinical trials, and there are fewer Phase II than preclinical companies to invest money in, given the attrition inherent in the industry. He added that some venture funds are currently so large that they "have to put big chunks of money to work" to avoid becoming spread too thin.

Even though Series A and B companies are trending toward a later development stage, investors insist some technology companies still are getting funded. Successful exits by Sirna Therapeutics Inc. and GlycoFi Inc. provide incentive to invest in technology plays like Spaltudaq Corp., which garnered a $29 million Series B last quarter for its tumor-specific I-STAR (In-Situ Therapeutic Antibody Rescue) technology platform. (See BioWorld Today, March 20, 2007.)

"I think a lot of investors would prefer to be doing those types of deals," said Jason Brown, associate with Forward Ventures. Technology companies are "more scientifically interesting" and often provide "more of a breakthrough if they work," he said.

But for now, "biotechs with significant product opportunities remain the most attractive," Cortis said. He also pointed to an increase in "virtual or semi-virtual" business models, such as Toll-like receptor company VentiRx Pharmaceuticals Inc., which raised a $26.6 million Series A last quarter to start off its four employees. And he's seeing the occasional use of off-shoring to lower costs, as done by apoptosis company Ascenta Therapeutics Inc., which conducts preclinical work in Shanghai, China. (See BioWorld Today, March 6, 2007, and April 11, 2007.)

Biotechs based outside of the U.S. brought in 22 of the first quarter venture rounds for a total of $443 million, compared to the 49 rounds worth $1.6 billion raised by U.S. companies. In January, the $270.7 million raised by ex-U.S. companies - predominantly in Europe - edged out the $248 million raised in the U.S., but in February and March, the pace of international deals dropped off significantly.

Specific subsectors seeing heightened venture activity include late-stage medical devices, orthopedics, obesity and metabolic diseases and antibodies.

Roberts warned that "quarter by quarter changes are spurious to draw conclusions from," but predicted "more interesting, idiosyncratic financings as people innovate on the business and science side of biotech."

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