Biotechnology funding is changing and young, discovery firms are feeling the pinch more than anyone. The industry might take a few notes from Hollywood.

There has been an extended slide at the box office - movie receipts are down, audiences are staying away and Tinsel Town is staggering about, looking for answers. Industry experts suggest several reasons for the slump, but one is that recent films, such as "The Dukes of Hazzard" and "Herbie: Fully Loaded," have had all the originality of a tired knock-knock joke.

The problem is money. Every studio wants a big blockbuster and every dollar spent must return a fistful. When that happens, innovation is sucked out of moviemaking. Original, risky screenplays are best left to someone else.

Blockbuster. Return. Risk. Sound familiar?

Biotech is facing a similar slump. Investor interest in discovery is waning, the public markets are demanding products, and the fastest way to win the heart of a venture capital fund is to outline a short path to exit. That's smart investing, but it also is sucking innovation out of biotechnology - the very thing it made its name on.

BioWorld's private funding numbers highlight this trend.

In the first half of 2005, $127.4 million was invested in 12 Series A rounds, for an average of $10.6 million per financing. Series B rounds garnered $295.5 million through 13 deals, for an average of $22.7 million. There have been 28 higher rounds, which have brought biotech firms nearly $1 billion, for an average of $35.6 million per financing.

Last year, the disparity between round sizes was not as large. There were 42 Series A rounds done in 2004, bringing in $422 million for an average of $10 million per deal. Series B rounds totaled $1.3 billion, raised in 46 financings, for an average of $29 million per round. There were 59 higher rounds done, bringing in nearly $1.6 billion, for an average take of $26 million.

Crunching the numbers shows that on average, nearly $7 million less per round is being raised in Series B funds this year, but more than $9 million has been added per higher round. That precious VC money is sliding further away from the earlier rounds, in which the science has historically been the attracting factor.

Another problem for biotech: competition from specialty pharma, which is raking in funding due to its relative lack of risk and short path to revenues. The average take of six specialty pharma firms raising Series A rounds last year was $31 million, including a whopping $62 million raised by JDS Pharmaceuticals LLC. Its lead product? Lithobid, a controlled-release drug containing 300 mg of lithium carbonate, approved for manic episodes of manic-depressive illness.

Of the $1.3 billion raised in Series B funding in 2004, Jazz Pharmaceuticals Inc. raised an impressive $250 million of it. Its business model calls for "improving and expanding the uses of known compounds" as well as in-licensing and acquiring other compounds.

The biggest VC rounds of June in this year show more of the same. Jazz Pharmaceuticals raised another $80 million in its third round, bringing its total to $345 million. Verus Pharmaceuticals - which last month revealed its first product to be Twinject, an epinephrine auto-injector indicated for emergency treatment of severe allergic reactions - raised $98 million in its first round. Somaxon Pharmaceuticals Inc. pulled in a $65 million third round on the strength of its lead compound, Silenor (doxepin), a tricyclic antidepressant, made originally by Pfizer Inc. and now in Phase III with Somaxon for insomnia.

Frustrated Panacea Goes Abroad

For more innovative firms, the funding trail is growing steeper and longer. Panacea Pharmaceuticals Inc. raised $7 million in its third round in early July, but that Series C is heavy with Japanese investors - Mitsubishi Corp. Life Sciences Venture, Olympus, JSR, Shin-Etsu Chemical, Fuji Photo Film, Dai Nippon Printing, and Tokio Marine & Nichido Fire Insurance, for example. There's a reason for that.

"We had a much better reception there," said Hossein Ghanbari, the company's co-founder, CEO, chief scientific officer and chairman. "We started our financing at a time that many VCs had closed the door to anyone that is early stage. They wanted us to be in Phase I/II clinical trials."

Panacea isn't there yet. It markets itself as being focused on "novel targets and new methods that offer real opportunities for significant improvement in the effectiveness of disease management" instead of "products that promise only small, incremental gains." It is investigating drugs for cancer, Parkinson's disease, Alzheimer's disease and hypoxia-induced cognitive impairment.

It has a deal with Rhode Island Hospital/Brown University for exclusive, worldwide license to a platform based on a highly conserved enzyme Human Aspartyl (Asparaginyl) B-Hydroxylase, or HAAH, which hydroxylates epidermal growth factor-like domains in cancer transformation-associated proteins. Over-expression of the enzyme is associated with multiple cancers.

Panacea is in an arrangement with Massachusetts General Hospital/Harvard University for exclusive, worldwide rights to develop and commercialize diagnostic and therapeutic products based on a protein expressed on the surface of cancer cells, including those of the colon, liver and pancreas. It has a monoclonal antibody, SF-25, developed against that protein.

With that scientific core, Panacea has fought and raised $12 million to date. Is specialty pharma pulling in the funds that used to be earmarked for biotech?

"Absolutely," Ghanbari said. "That's why we don't even give it a try."

Ghanbari has had a hand in starting five companies, including Nymox Pharmaceutical Corp., of Maywood, N.J. Risk aversion has shifted the VC milieu, he told BioWorld Today.

"The pendulum has gone one way too far," he said, adding that they're all "playing it safe, better safe than sorry." Those early stage firms that do get VC meetings are told they are "worth nothing."

Panacea has not yet reached the clinic and was "a discovery company until this year," Ghanbari said, so it isn't as if he expected to raise a $50 million Series C and he is setting his sights on a $14 million Series D. But while he understands the importance of product development, he said "the discovery company cannot fade away" from the biotech landscape.

"A discovery company can die under the current formula for the VCs," he said. "VCs are getting in at the second phase of the slow growth, and they used to get in at the first phase of the slow growth. That is where they are losing the opportunity."

More importantly, he said, as VC money continues to trickle away from discovery and early stage, what is transpiring is "a loss of a phenomenon that gave the U.S. the biggest edge in technology in the world. And it's dead or dying, as far as I'm concerned."

There's no argument that many drugs could be bettered by less toxicity and greater efficacy. And that's not to say that specialty pharma firms aren't a great investment or that they aren't chasing efficacious, beneficial products. Any improvement in health care should be lauded.

But somebody has to fund the true innovation that sets biotechnology apart. Otherwise patients and health care observers, similar to this summer's moviegoers, are going to stare apathetically as re-run after re-make come down the once-vaunted biotech pipeline.

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