BioWorld International Correspondent

CHICAGO - The long winter for venture capital investment in Russia has drawn to a close, and the first VC-funded biotech start-up will emerge in the next two years. That is the prediction of Demitri Kulish of Intel Capital, who has spent the past three years pioneering the development of a VC sector in the region.

Russian oligarchs who have made fortunes in oil and gas and other natural resources are beginning to take an interest in venture investments, meaning the time is ripe for the sector to take off.

"In the past two years, the value chain is starting to mature, whereas five years ago, it was a desert," Kulish told delegates at the Biotechnology Industry Organization's annual convention. "We now have three full-time investment professionals in Moscow, and have announced six investments."

The six spin-outs Intel Capital has invested in are all in information technology. "But we are now expanding out into all areas of IT that are related to health care. We are pursuing biochip investments, where Russia is very strong, but more importantly we are interested in biochip content." Despite this progress Kulish said the Jekyll-and-Hyde nature of Russian biotech persists. "There are many good things on the Dr. Jekyll side, in particular the R&D is excellent.

"But when you dive in, you see many Mr. Hydes: Scientists are not managers, Russian IP and tax laws are prohibitive for VCs, and the state's support of health care is still insufficient - meaning there is no domestic turf to grow nascent ventures," Kulish said.

"There are good reasons to do Russian biotech investments, but be aware you may have problems," he concluded.

Jason Rao, Director of the Bureau of Nonproliferation, Office of Cooperative Threat Reduction, U.S. State Department, agreed biotechnology in Russia has made progress in the past two years. "It is not emerging any more, it is established, and it is growing like wildfire."

One manifestation of this is the formation of BIOCAD, a company whose Medical Director Roman Ivanov described as the "new face" of Russian biotech. "The company is not a spin-off from old institutional giants with dilapidated infrastructure, it was created from scratch by private entrepreneurs."

The company has 12 products, which include some generics, and with support from the U.S. Department of State it is developing two biopharmaceutical products.

Another example is Bioprocess Group, formed in 2002, also by private investors, which has a U.S. subsidiary, Integrated Genomics Inc., based in Chicago.

The company specializes in developing low-cost manufacturing processes for existing biopharmaceuticals and in contract manufacturing, investing the proceeds in the development of novel protein drugs.

Arthur George, a lawyer at Baker and McKenzie in Chicago who specializes in drawing up legal agreements between U.S. and Russian companies, told delegates the Russian legal system "can be a challenge, but it can be negotiated."

While there are widespread infringement problems with the copying of consumer products, it is possible to draw up bilateral agreements between partners that will be respected.

One elephant trap though is the recently enacted Trade Secrets legislation. "You must ensure that you comply with this legislation, because if you don't, your IP won't be protected," George said. "And vice versa, if you license IP from Russia make sure your partner has the regime in place, or you may find someone else is developing the IP."

Speakers agreed that while the patent protection system in Russia is good, the enforcement system is not. Furthermore, it remains difficult to in-license technology from public research institutes. All IP belongs to the state, and permission is needed from the minister of state.

The advice given was to get the piece of paper, transfer the IP to the Cayman Islands and then forget about the Russian market.