West Coast Editor

SAN FRANCISCO - You might say biotechnology firms, especially start-ups, operate in a constant state of near emergency when it comes to raising funds. That was not the exact spirit of the first "Emerging Company Investor Forum," presented by the Biotechnology Industry Organization here and hosted by five banks, but the mood hovered in the room.

George Milstein, head of investment banking for one of the co-hosts, San Francisco-based Pacific Growth Equities, led a roundtable called "Why Should VCs Invest in Early Stage Companies?" and one audience member told the panel during questions that it sounded like, actually, they shouldn't.

"We think it's a pretty important thing to do," Milstein started by telling the packed Twin Peaks North meeting room in the Palace Hotel, allowing that there "have been a couple of dynamics emerging recently in the marketplace that have called this whole area into question - early vs. late stage."

He mentioned the $800 million cost of developing a drug, over about 16 years' time, and he said the trend does not seem to be reversing.

"At the same time that it's taking longer and becoming more expensive to develop drugs, the public markets have shifted a bit on you," Milstein noted. "If you look at pre-1995, earlier-stage companies - at least, depending on your definition of earlier stage, but let's just look at it by phase of development - were relatively routinely going public."

That has changed, he said, with a "pronounced preference toward later-stage companies."

He pointed to the spate of initial public offerings since September 2003. Of the 32 IPOs over the last 12 months, 84 percent had at least one Phase II trial under way, and those firms on average have priced better and performed better afterward.

"That's something that everybody sitting on this panel knows very well, and it's something that we all live and breathe every day," he said. Still, over the past couple of quarters, more money has been going to earlier-stage firms, which means some venture capitalists are finding the industry's fledgling companies attractive.

"Clearly the IPO cycle influences how this happens," he said. Sixty-nine life sciences companies filed for IPOs in the period, 44 had priced as of the third quarter of this year, and three of the top performers across the entire field of IPOs came from life sciences.

"When you compare the amount of dollars flowing back from the [IPO] business, you can see we've also had a relatively nice year," Milstein said. "It's nothing like it was in 2000, but I'm trying to convince people more and more not to look at 2000 as the benchmark of reported history."

A robust IPO market might help, but novelty is "really the key to big returns" for VC and everybody else, Milstein said - a subject taken up by panel member Ralph Christofferson, with Morganthaler Ventures, of Menlo Park, Calif., which is providing funds for "eight or so" biopharmaceutical funds.

"We aren't interested particularly in the next generation of product X,' where product X minus 1' is very similar," he said.

Casey McGlynn, attorney and chairman of the life sciences group of the biotech-busy Wilson Sonsini Goodrich & Rosati, of Palo Alto, Calif., noted that such novelty requires work to build upon.

"We start a lot of really early stage companies so we spend a lot of time at Stanford and [the University of California at San Francisco], working with scientists who are trying to start their businesses," he said. "A lot of times one of the first things we have to do is arrange for a marriage, if you will" - finding a CEO who can mentor the scientist.

"There's a lot of other things we try to get in place before we actually go out and see a venture capitalist," he added, with "job one" being to make sure a proprietary technology is secured. "That might involve getting a license out of the university or it might involve getting some patents filed."

Seed financing, McGlynn noted, "is a very different kind of first-round deal than you would have seen five years ago. It's much more likely to be molecule focused," where the company has done its Phase I trials already.

"There's definitely money out there," he said.

Among those supplying it is Alta Partners, of San Francisco, whose managing partner Dan Janney said his firm has been able to put deals together in a selective and somewhat relaxed way.

"[VC] has certainly been a buyer's market," he said, agreeing that the ideal situation is to have clinical data, ground-breaking research and strong founders - but that's not usually the case.

"In most cases what we have is important science, and we start there," he said.

The BIO meeting had 1,072 registrants as of mid-morning Wednesday, with 454 on site and verified. Other hosts include Banc of America Securities, with principal offices in San Francisco and New York, along with Lazard Freres & Co., CIBC World Markets and Citigroup, all of New York. The event continues through Friday.

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