West Coast Editor

In tightened financial times such as those that beset biotechnology entering 2002, finding cash became even more “a matter of life and death” than usual. It was especially true for genomics firms, as the glow conferred upon them by the mapping of the human genome had begun to fade.

Hello, venture capital.

Always a trusted source of money for fledgling biotechnology firms, VC may turn out, as the industry becomes more mature, to be a savior for genomics companies whose struggle has begun.

The sector has its unique problems. Firms that have stuck with the “biotechnology” label, not daring to tack “genomics” onto their names (as many did in the funding festival of 2000), may still approach would-be investors with their customary pitch and hope for the best. But those enterprises that have put their eggs wholly into the genomics basket may meet skepticism that goes almost as far beyond what’s warranted as the previous enthusiasm went.

“I actually counsel my companies not to bill themselves as genomics companies,” said Camille Pearson, managing director of Versant Ventures, an early stage health care venture capital firm that closed its $400 million fund in December 2001, thereby adding a second fund to the existing, $250 million one.

“Simply on semantics, I don’t see any reason to put yourself there,” she added. “The term has become way too trendy, like dot-coms.’” Even worse, like the investor enchantment with Internet-based outfits, the joy over genomics has lost steam. For dot-coms, the loss of faith was fatal, as many landlords of empty office buildings and apartments in the Bay Area can attest. For genomics, the picture may be brighter, especially with VC help.

Overall, VC investment and fund raising has slowed. The National Venture Capital Association said that, in the third quarter of 2001, venture capitalists invested $7.7 billion in 873 companies, and 46 venture capital funds raised $6.2 billion.

The $7.7 billion is down 31 percent from the quarter before, and down 73 percent from the year before. But, in the overall boom enjoyed by biotechnology (and other industries) in 2000, VC investments had reached higher-than-ever levels. By late 2001, levels had dropped only to amounts nearer those seen in the first quarter of 1999, the NVCA noted. About $7.2 billion was invested in that quarter, which was viewed as healthy at the time.

True, as NVCA notes, most venture capitalists are spending time and money on existing portfolio companies, with 81 percent of venture investment in the third quarter going to follow-on investments. But biotechnology is still getting VC attention (if only about 7 percent of the total for 2001’s third quarter) and genomics firms, whatever they might call themselves, are in line for some, Pearson said.

That’s true despite recent world events, she added, which can’t be said of all financing routes.

“People who are newer to biotech are more likely to be jarred by the pessimism in the economy, or events like those that took place September 11,” she said. “Those are the people who would have been ready to help those companies.”

It’s not free money, however.

“The majority [of firms we invest in] are those that have pulled together a business plan,” even if they haven’t altogether been able to execute it, she said which makes genomics firms especially ripe for funding. An example: Syrrx Inc., which since has been recognized as a proteomics leader.

“When we invested in Syrrx in early 2000, structural genomics was just at the beginning of a wave,” Pearson said. “It’s time for them to execute.”

Christoph Westphal, a principal with Polaris Venture Partners, said the firm “bets on genomics, glycomics and nanotechnology. We’ve been very happy with our genomics investments, and we’ve done very well with them.”

Polaris closed a $900 million fund in August 2001, and manages $2 billion altogether, with one-third targeting health care and two-thirds in information technology. That one-third is important, particularly to genomics firms.

“The good thing for us is, as venture investors, [genomics] was the kiss of success, and still is,” Westphal said, noting that Polaris was the lead investor in Paradigm Genetics Inc., which focuses on functional genomics, and DeCode genetics Inc., an Iceland-based pharmacogenomics company that said in late 2001 it had filed patents on 350 genes linked to about 40 common diseases.

Both firms have taken off. Paradigm Genetics raised $28 million in October 2001 to advance its metabolomics work, which measures the metabolic activity in small molecules. The company started with plants and fungi, and advanced during the past two years into humans.

DeCode entered a deal in July 2001 with Affymetrix Inc., using the latter’s GeneChip technology to help develop DNA-based tests for predicting how patients will respond to treatments for common ailments such as high cholesterol, depression, asthma, hypertension, breast cancer, schizophrenia and migraines.

“DeCode has hundreds of millions in contracts with large pharmaceutical companies like [F. Hoffmann-La Roche Ltd.],” Westphal said. The Roche deal alone, fully disclosed in July 2001, is worth up to $300 million for DeCode, as the companies work to develop DNA-based diagnostics and predisposition screening products.

Applied Biosystems Group is another among DeCode’s collaborators. Also in July 2001, DeCode said its three-year alliance with Applied Biosystems will combine DeCode’s bioinformatics tools for genotypic analysis with the other firm’s bioanalytical instruments, ultimately coming up with “customizable solutions for the generation, management and analysis of genotyping data.”

DeCode is included also in the portfolio of VC powerhouse Atlas Ventures, 11 of whose backed firms during 2000 raised more than $1.2 billion in initial public offerings. The IPO completed by DeCode in July raised $172.8 million.

Westphal said “there’s been no renaming of [Polaris-backed] companies, because the companies we’ve funded went public and did well. We think the closer you are to making a drug, the better you are as a company.”

Not that Polaris is indiscriminately favorable to all branches of genomics even the rather widely respected branch explored by Syrrx.

“If you look at the history of proteomics, it has not yet paid off the way genomics did,” Westphal said. “We couldn’t quite get comfortable with the model.”

Polaris also has put money on GlycoFi Inc., which makes recombinant proteins by expressing genes in a genetically altered strain of yeast cells, which the firm says is safer and more efficient than other methods.

“We think the study of sugars and sugar-based therapeutics [called glycomics] is the next big thing,” Westphal said, noting Polaris’ faith in Mimeon Inc.

David Schnell, managing partner of Prospect Venture Partners, a $600 million VC for health care and biomedical companies, said genomics companies’ specialties often are hard to distinguish from one other.

“It’s only after the fact that you know if they are platform’ or tool,’” he said. What many have in common, though, is that they are “cash rich and technology poor.” Such are not the kinds sought by Prospect, he added quickly.

“The historical metric is, a product that gets out of the clinic is sold,” Schnell said, pointing to the $1 billion purchase of GelTex Pharmaceuticals Inc. by Genzyme General, disclosed in September 2000, as an example of “what one product can do.” GelTex and Genzyme had a joint venture for the selling of Renagel, a dialysis drug.

Hardly at quite that stage, yet much admired by Schnell, is Signature Biosciences Inc., “a leader in structural genomics” that was founded in 1998. The firm’s WaveScreen technology uses microwave spectrometry, called multipole coupling, to determine “signatures” of proteins or of their interactions with small molecules.

In July 2001, Signature bought from Millennium Pharmaceuticals Inc. its company called Cambridge Discovery Chemistry Inc., in order to add medicinal chemistry for cranking up the microwave spectroscopy platform further development of which was the subject one month later of a potential $10 million Signature deal with MDS Inc.

With a nod to Syrrx’s position, Schnell said Signature CEO Mark McDade “has taken [the company’s] platform, which is fascinating, and integrated it with other assets. No one I can think of has that kind of platform strength.”

Versant’s Pearson readily allows that solid bets are favored over shaky ones, but noted that the right VC people can pick winners whatever the odds may seem to less experienced judges and took the opportunity to blow her firm’s horn.

“If you look at the background of [our] team, there’s not a single investment banker,” she said. “It’s all people who have been there, done that.’” For example, Brian Atwood, a managing director, was founder, president and CEO of Glycomed Inc., which entered deals with the likes of Eli Lilly and Co. and Genentech Inc., before the company was bought in a $57 million stock swap by Ligand Pharmaceuticals Inc., in May 1995.

Atwood also co-founded and served as director for Perkin-Elmer Cetus Instruments, a joint venture for robotics automation and genomics research, which was acquired by Perkin-Elmer in 1991 for $300 million. The joint venture is best known for launching the GeneAmp polymerase chain reaction system, a critical DNA amplification technology in genomics.

Said Pearson: “It’s extremely rare that we would invest in [a company] that has raised institutional money, although we still do that.”

Versant, and any smart VC, looks for other things, she said.

“I don’t even mean a company that has money I mean one that looks good according to the parameters VCs like, such as a good team and good technology,” Pearson said. “It’s much more fun to help build a company.”