The document discusses challenges in raising capital for biotech companies due to a tight venture capital market as a result of the global financial crisis. Experts note that while venture funding is still available, investors prefer lower risk, shorter term projects. As a result, biotech companies are increasingly looking to alternative sources of funding such as alliance deals, grants, and strategic partnerships. While the venture capital environment remains difficult, some experts believe conditions are slowly improving and funding will continue to be available for innovative life science projects.

1. Raising
Capital
Denise Myshko
in a Tight
MARKET
“ Our focus on orphan capital
has helped with venture
diseases
and philanthropic funding.
”
WILLIAM BAIRD III / PTC Therapeutics
The venture capital environment is in a transition period,
slowly recovering from the conditions that have plagued the entire economy.
The global financial crisis has game in town for many companies and a life- and harder for venture capitalists to raise
T made it challenging for the
biotechnology industry to
raise capital to fund innova-
tion. Experts say venture capi-
tal money is still available, but often the VC
community is looking for lower-risk, short-
line for biotech companies looking to fund
new innovation and new technologies in the
cancer field.”
(Editor’s Note: Please see the digital edi-
tion to read more about how some companies
pursued alternative funding options.)
meaningful funds,” he says. “The whole ven-
ture capital industry is in a phase of contrac-
tion right now.”
Dr. Fetzer says this creates an environment
in which the venture capitalists who do have
money have strong pricing power.
term projects. The funding markets continue to be very “It’s a very aggressive and highly competi-
As a result, biotech companies are increas- tough, which is not a big surprise given the tive environment; they expect to get into deals
ingly looking to alternative sources of capital. macro environment, says Oliver Fetzer, Ph.D., at a very low price point,” he says.
Experts say this is a natural reaction to normal president and CEO of Cerulean Pharma. Glen Giovannetti, global biotechnology
business cycles, and when venture funding “There continues to be a fair amount of un- leader at Ernst & Young, says since there is
dries up companies embark on other strategies certainty in terms of the direction both biotech less capital available, investors are raising the
to survive. and venture capital are going to go,” he says. bar in terms of which companies they’ll fund.
For example, in 2008 and 2009 industry “Society is expecting more innovative products “This market condition is affecting the
leaders say alliance deal making and applica- at potentially lower prices rather than higher venture capital side and new listings; it’s a
tions for grants increased. prices. This creates a pricing environment that challenging environment in which to get the
At The National Cancer Institute, applica- makes it tougher for biotech companies to find deal done,” he says.
tions for the SBIR grant program increased by a clear path to profitability.” Gil Bashe, executive VP at Makovsky &
almost 70% between 2008 and 2009. At the same time, Dr. Fetzer says, the ven- Company, says the amount of money pouring
“This increase was a direct reflection of ture capital firms are finding themselves in an into innovation is the same, but the big dif-
funding drying up in the venture capital mar- environment devoid of many big success sto- ference is that the bar for valuation is now
ket,” says Michael Weingarten, director of the ries. higher.
NCI’s SBIR program. “We became the only “As a consequence, it is becoming harder “There are more companies seeking fund-
44 January 2011 G PharmaVOICE

2. Biotech
“ Companies have to It’s a true
c
ompetitive research.
invest in
failure not to do so.
”
GIL BASHE / Makovsky
Upcoming Conferences
ing and, therefore, funders have their pick of
companies to chose from,” he says. “Five years
ago, the preferred exit for many of these com- nage &
New Paradigms to Fund, Ma
panies was a public offer, which allowed in- Outsource Produc t Development
“ Venture capital to help their
capitalists are
vestors to liquidate their shareholdings and for Biotech & Small Pharma
preserving
pull capital out of their investments. This has January 13 - 14, 2011
changed.” Westin Market Street Hotel,
David Millard, chair of the business de- San F cisco
ran
existing c
ompanies sustain
themselves in this period of
partment at Barnes & Thornburg, says the
downturn.
rld
tightening of the venture capital industry is The 10th Annual Bio-IT Wo
& Expo
temporary.
“The venture capital industry has been
C erence
onf
April 12, 2011 ”
shrinking and has less money available for Boston DAVID PERALTA / NanoBio
new investments,” he says. “In 2009, venture
capital companies focused on their portfolio
companies to make sure they had enough ping 5% in dollars and 3% in number of
“ Venture capitalists
money to survive. This has started to ease up, deals.
and we are beginning to see some new invest- Despite the declines, PwC executives say
ments.” funding for the life-sciences sector remains on are s
hifting their
focus to more mature
course to pass investment levels of 2009.
investments.
Compared with the first three quarters of
The VC Outlook
The impact of the recession on the biotech
2009, biotechnology funding remained on
track for a better 2010, already showing a
”
industry has been tremendous. In a recent sur- 25% year-on-year rise. MATTHEW HUDES
vey by Deloitte, 44% of those surveyed be- During the third-quarter of 2010, biotech- Deloitte Consulting
lieve 20% to 40% of existing biotech compa- nology funding increased slightly to $944
nies won’t exist in five years as a result of the million from $942 million for the same quar-
global recession. ter in 2009. The number of deals decreased
On the bright side, industry experts say 4% from 113 during the third quarter of
looking forward, the life-sciences sector will 2009 to 108 during the same quarter in 2010.
continue to attract the largest share of U.S. Forty-five U.S. venture capital funds raised
venture capital investment given that the de- almost $3 billion during the third quarter of
mand for innovative pharmaceuticals, diag- 2010, according to Thomson Reuters and An active M&A market and a level of
nostics, and devices is expected to increase. NVCA. This level marks a 40% increase by IPOs consistent with a slow but steady eco-
While the third-quarter 2010 venture cap- dollar, compared with the second quarter of nomic recovery drove the venture-backed
ital funding for the life-sciences sector de- 2010, during which 51 funds raised $2.1 bil- company exit activity during the third quar-
clined from a strong second quarter, the sector lion. ter of 2010, according to Thomson Reuters
remained on pace to outperform 2009, ac- Matthew Hudes, national managing prin- and NVCA.
cording to findings from the MoneyTree Re- cipal, biotechnology, Deloitte Consulting’s The acquisitions volume marked a 7% in-
port by PricewaterhouseCoopers and the Na- Life Sciences & Health Care group, also be- crease from the second quarter of 2010, and
tional Venture Capital Association (NVCA), lieves there is cause for optimism. M&A in the first three quarters of 2010 has al-
based on data from Thomson Reuters. “Recent IPOs are a direct indicator of an ready almost doubled full-year 2009 transac-
Investment in the sector fell 25% from the improving market,” he says. “It does appear tions.
second quarter in number of deals and 30% in there is an IPO window opening up in biotech Life-sciences M&A deals had a higher dis-
dollars. Compared with the third quarter of and other industries as well. This is a direct closed value at $2.3 billion compared with $1
2009, the sector also showed a decline, drop- correlation with venture funding.” billion for information technology.
PharmaVOICE G January 2011 45

3. Biotech
The venture capital industry
“in a phase of contraction
is
right now.
”
DR. OLIVER FETZER / Cerulean Pharma
“ We try to find areas that
our customers — big
pharma, biotech, and device
companies — are excited
about.
”
KEVIN STARR / Third Rock Ventures
Tips for Attracting Funding
» Focus on innovation: me-too and fast
There will be a bigger investment
followers are not going to be rewarded;
uptick in biotech when the gene ralist
“ companies need a differentiated product
investors and mutual funds feel
with strong data.
comfortable.
» Develop clarity around the vision and
” strategy as these relate to creating value.
This should be separate from the
GLEN GIOVANNETTI / Ernst & Young
scientific strategy.
» Study the market: what companies are
the current market leaders; what are the
“We like areas such as rare genetic disor- clinical guidelines; what would it take to
ders, and new approaches to tackling tough
displace current market leaders; what
disease areas like oncology and CNS,” he says.
Mr. Starr says another determining factor would be the market reaction to a new
is the strength of the management team. product; how does a new product impact
“We’ve been building companies for long a market need; and what is the
enough to know that a well-varied team with comparative effectiveness of the product.
complementary skills that can translate the » Make sure key people/management are
What VCs Look For science is going to be very important,” he
Mr. Giovannetti says investors are looking says. “We try to find areas that our customers in place; make sure a well-rounded board
for unique and differentiated opportunities, — big pharma, biotech, and device compa- is in place.
and companies that have made progress in a nies — are excited about. We’ve facilitated » Have a good patent strategy.
very capital-efficient way are favored. partnerships even before the companies were » Partner with disease foundations and
“Venture capitalists are increasingly look- launched.” academic groups.
ing at project financing opportunities for sin-
gle product candidates,” he says. “They will
» Be relentless in the pursuit of alternative
still seek to build freestanding companies, but Seeking Other Opportunities sources of funding, including foundation
that funding will go to broad platform tech- Mr. Bashe says in the past investors and grants, government grants such as those
nologies that have the opportunity to produce founders of the enterprise didn’t need to put at the NIH, and corporate venture capital
multiple product candidates.” as much of their own capital into an offering; programs.
Kevin Starr, managing partner at Third today this has shifted. » Study the models and portfolios of
Rock Ventures, says his company looks to “Once upon a time, company founders put
fund companies developing products that 15% or 20% of their own capital into an of- different venture capital companies.
have more than a marginal impact on patients fering, and the rest was funded by outside
Source: PharmaVOICE
and avoid those destined for an already sources,” he says. “The ratio used to be based
crowded space. on a 20/80 rule; today it’s more like 40/60.
46 January 2011 G PharmaVOICE

4. Biotech
“ The VC industry is shrinking
globally, but the death of the
industry is greatly exaggerated.
”
DAVID MILLARD / Barnes & Thornburg
awards in 2010 alone, and we have about $50
million in pending grants,” he says. “Our
focus on orphan diseases and diseases of high
medical need has helped us secure venture
capital, philanthropic funding, as well as cor-
The founding partners, the innovators, friends vocacy groups that sponsor research,” Mr. porate collaborations.” PV
and family, and the angel funders have to Baird says. “Through this multipronged strat-
come up with a lot more of the initial cash to egy, we’ve raised more $100 million. On the
support a private offer.” corporate side, we’ve now done six major col-
When private funding isn’t an option, laborations, and we’ve brought in about $20.5 USE YOUR SMART
PHONE'S QR CODE
companies are pursing the grant path. Like million in cash funding from those deals.” READER TO ACCESS
Cerulean, NanoBio and PTC Therapeutics are Mr. Baird says the company remains re- MORE ON THIS TOPIC.
two companies that have been aggressive in lentless in the pursuit of grant opportunities.
pursuing strategic grants and partnerships, “We’ve received $10 million in grant
including grants through the IRS’s Therapeu-
tic Discovery Project program. Part of the EXPERTS
healthcare reform law included a provision to
provide tax credits and grants to small firms WILLIAM BAIRD III. Chief MATTHEW HUDES. National Managing
for projects that show potential to produce Financial Officer, PTC Principal, Biotechnology, Deloitte
new therapies, reduce long-term healthcare Therapeutics Inc., a Consulting LLP’s Life Sciences & Health
costs, or significantly advance the goal of cur- biopharmaceutical company fo- Care Group, a management consulting
ing cancer within the next 30 years. firm. For more information, visit deloitte.com.
cused on the discovery, development, and
The credit or grant covers up to 50% of the
commercialization of orally DAVID MILLARD. Chair, Business
cost of qualifying biomedical research, up to a
maximum credit of $5 million per firm, and administered small-molecule drugs. For Department, Barnes & Thornburg, a law
$1 billion overall, and is only available to more information, visit ptcbio.com. firm. For more information, visit
firms with fewer than 250 employees for in- GIL BASHE. Executive VP, btlaw.com.
vestments made in 2009 and 2010. Compa- DAVID PERALTA. VP, Chief Operating
Makovsky & Company, a global
nies can opt to receive a grant instead of a tax
public relations, investor relations, Officer, and Chief Financial Officer, NanoBio
credit, so start-ups that are not yet profitable
can benefit as well. and branding consultancy. For Corp., a privately held biopharmaceutical
NanoBio received five grants from the IRS more information, visit makovsky.com. company focused on developing and
program, each for $244,479, says David Per- OLIVER FETZER, PH.D. commercializing dermatological products, anti-
alta, VP, chief operating and chief financial of- President and CEO, Cerulean infective treatments, and intranasal vaccines. For more
ficer at NanoBio. To date, more than $115 information, visit nanobio.com.
Pharma Inc., a clinical-stage
million has been invested in the company’s
biopharmaceutical company KEVIN STARR. Managing Partner, Third
NanoStat technology platform through re-
search grants, partnerships, and equity invest- specializing in the design and Rock Ventures, a venture capital firm fo-
ments, including $45 million in private eq- development of nanopharmaceuticals. For cused on the life sciences. For more
uity financing from Perseus. more information, visit ceruleanrx.com. information, visit thirdrockventures.com.
PTC received 12 grants for a total award of MICHAEL WEINGARTEN. Director, The Na-
GLEN GIOVANNETTI. Global
$2.5 million, says William Baird III, chief fi-
Biotechnology Leader, Ernst & tional Cancer Institute’s SBIR program,
nancial officer, PTC Therapeutics.
“This is just one piece of a much broader Young, a global provider of as- which provides grants and contract
strategy that we’ve embarked on over the last surance, tax, transaction, and funding opportunities to promising small
five or six years; we are also pursuing nondilu- advisory services. For more information, businesses developing treatments for cancer. For
tive grant funding from both government visit ey.com. more information, visit sbir.cancer.gov.
agencies as well as philanthropy or disease ad-
PharmaVOICE G January 2011 47

5. Alternative
DI GI TAL E DI TIO N — B ON US CON TEN T
Denise Myshko
Funding Options
Despite a tough funding environment, money is available to companies
that have a compelling story to tell.
lthough experts characterize ernment agencies, such at the National Insti- dation and the University of Pennsylvania,”
A the funding environment as
difficult, companies have
been successful by aggres-
sively pursuing — and secur-
ing — venture capital funding.
For example, in the last year and half,
tutes of Health, as well as through disease
foundations.
Grants a Funding Source
NanoBio is one such company pursuing
says William Baird III, chief financial officer,
PTC Therapeutics. “Parent Project Muscular
Dystrophy is focused on Duchenne muscular
dystrophy, one of the disease areas in which
we’re working. We have a drug, ataluren, that
could help about 13% of the patients with
Cerulean has participated in two rounds of fi- this strategy. Recently, the company has re- Duchenne muscular dystrophy, patients who
nancing. In November 2010, the company ceived several grants: a $6 million grant from have a genetic mutation known as a nonsense
closed a $24 million Series C financing led by the Bill & Melinda Gates Foundation to sup- mutation.”
Lilly Ventures to advance its nanopharmaceu- port the development of an intranasal vaccine Through early funding from the Parent
tical clinical development candidate, for respiratory syncytial virus (RSV); and a Project Muscular Dystrophy, PTC was able to
CRLX101, into a Phase II trial in non-small $1.5 million grant from the Department of identify several promising therapeutics targets
cell lung cancer. And in July 2009, Cerulean Defense to study, with the University of that might treat Duchenne by either increas-
closed a $10 million Series B-1 financing to Michigan Medical School and NanoBio as a ing or decreasing target proteins.
advance the clinical development of subcontractor, the use of nanoemulsion-based This early-stage research was compelling
CRLX101 (formerly IT-101). therapies for protection against burn and enough that the NIH made a five-year, $13
“There is no substitute for really strong wound infections. million grant commitment to PTC in 2007.
data,” says Oliver Fetzer, Ph.D., president and “We have been pretty aggressive in our ef- “This grant award would not have hap-
CEO of Cerulean. “In our case, the data for our forts to secure strategic grants,” says David pened had it not been for the early-stage sup-
CRLX101 program have been getting better Peralta, VP, chief operating and chief financial port from PPMD,” Mr. Baird says.
and better. Without the really strong data, it’s officer at NanoBio. “We’ll continue to pursue PTC has pursued a tiered grant approach.
very tough to get people motivated to put this strategy, and we have a number of oppor- “A great example of this strategy is our col-
their money to work.” tunities that are pending; this has been a laboration with the Spinal Muscular Atrophy
Companies have to be able to articulate No.1 opportunity for us. A second opportu- Foundation,” he says. “In 2006, the founda-
their story very well, he says. nity is nondilutive funding in the form of tion gave us a grant of $1.6 million, which
“Executives have to have conversations that partnerships related to a number of our appli- covered a year’s worth of research. We had
go beyond the technology itself,” Dr. Fetzer cations that we know we can’t take forward on very specific research goals that we established
says. “The more they can paint a picture be- our own. We have a handful of opportunities with them. Upon hitting those goals, they
yond the exciting technology and address how pending with these partnerships as well.” made another commitment of $1.6 million.
it meets a market need or how it addresses a The company has a licensing agreement At that point, we moved to the chemistry op-
more severe payer environment, the more at- with GlaxoSmithKline for its lead program, timization stage and the SMA Foundation
tractive the opportunity will be to potential the over-the-counter use of NB-001, an ad- made a very big commitment to us with $8.6
investors.” vance in the treatment of cold sores. Devel- million.”
Even still, Dr. Fetzer says companies oped by NanoBio, NB-001 provides signifi- More recently, in September 2010, PTC
should seek out collaborations with larger cant antimicrobial activity against the virus Therapeutics was awarded a grant of about
pharma companies and look for funding from that causes cold sores, herpes labialis. $1.6 million from the FDA’s Office of Orphan
other opportunities as a way to build value PTC Therapeutics is another company Products Development to support an ongoing
into the company before seeking venture cap- that is pursuing this model as well. Phase III study of ataluren in patients with
ital funding. “A good example is our partnership with nonsense mutation cystic fibrosis (nmCF).
One avenue is through grants from gov- the Parent Project Muscular Dystrophy foun- In June 2010, PTC received a $5.4 million
January 2011 G PharmaVOICE

6. D IG ITAL EDI TI ON — B O NUS CON TEN T
Biotech
Recession’s Impact on Biotech
Seeding Drug Discovery (SDD) Award that can succeed and be brought to mar-
Which areas of biotech financing do you believe have
from The Wellcome Trust to support the ket.”
development of drugs that target Bmi-1, a been hit hardest? Mr. Weingarten says the NCI also has
protein that has been linked to drug re- (Respondents selected up to three) started to hold annual investor forums.
sistant cancers. The Wellcome Trust “On an ongoing basis we have about
Venture capital 51%
launched the SDD funding initiative in 400 active projects,” he says. “We show-
2005 to facilitate early-stage small-mole- Debt financing 40% case our strongest companies to the in-
cule drug discovery in areas of unmet Private or angel investment 34% vestment community and to big pharma-
medical need. Equity financing 33% ceutical companies. The goal is to help
In December 2009, PTC received a $1 Private endowments 23% these companies raise additional funding
million Challenge Grant award from the 16%
as their SBIRs are being completed. We
Government grants
National Heart, Lung, and Blood Insti- want to help them make the right con-
R&D limited partnerships 12%
tute. The Challenge Grants, a program nections with investors who can provide
under the American Recovery and Rein- Contractual joint venture 6% the next stage of funding after us and ul-
vestment Act, that is designed to stimu- Government tax concessions 6% timately help develop promising products
late new areas of research. The two-year Other 1% and technologies to benefit cancer pa-
grant will support an ongoing Phase IIa Don’t Know 12% tients.”
clinical trial of ataluren in hemophilia A The SBIR is a set-aside program,
and B because of a nonsense mutation. Source: Deloitte. For more information, visit deloitte.com. meaning that 2.8% of the agency’s budget
is put aside to fund small businesses in a
range of topic areas. For the NCI, that
New Programs at the NCI gram because NCI is sharing the risk for de- comes to $110 million annually; across the
The National Cancer Institute, the U.S. gov- veloping these technologies into products. NIH as a whole it’s a $650 million program.
ernment’s principal agency for cancer research “Every company we fund has to go through Phase I SBIR grants are typically a six-to-
and training, has also expanded its grant pro- peer review at the NIH; review panels made 12 month project with funding averaging
gram. A new initiative at the NCI is the up of both academic and industry leaders vet about $150,000.
Bridge Award, which is designed to support projects before we will provide any funding,” According to the agency, if the company is
the next stage of development for previously he says. “By the time a company receives a successful and can show feasibility of its tech-
funded SBIR projects in the areas of cancer Bridge Award, it has actually gone through nology, it can then apply for a Phase II SBIR
therapies, diagnostics, and cancer imaging the peer review process several times. We want award of about $1 million for a two-to-three
technologies. SBIR companies can apply for to make sure we are funding strong projects year project. PV
up to $3 million in additional funds following
the completion of their Phase II projects.
NCI has awarded $9.9 million in Phase II EXPERTS
Bridge Awards to help small businesses de- WILLIAM BAIRD III. Chief DAVID PERALTA. VP, Chief
velop and commercialize innovative cancer Financial Officer, PTC Operating and Chief Financial
technologies. The four companies to receive
Therapeutics Inc., a Officer, NanoBio Corp., a privately
the FY 2010 Bridge Awards are 20/20
GeneSystems, Advanced Cell Diagnostics, biopharmaceutical company held biopharmaceutical
AmberGen, and Praevium Research. focused on the discovery, development, company focused on developing and
“We’re incentivizing investors — venture and commercialization of orally commercializing dermatological products,
capitalists, big pharma, and other investors — administered small-molecule drugs that anti-infective treatments, and intranasal
to invest with us,” says Michael Weingarten,
target post-transcriptional control vaccines. For more information, visit
director of The National Cancer Institute’s
SBIR program. “We are doing this by giving processes. For more information, visit nanobio.com.
competitive preference to companies that are ptcbio.com. MICHAEL WEINGARTEN.
able to raise matching funds from third-party OLIVER FETZER, PH.D. Director,The National Cancer
investors. We’ve funded 10 projects over the President and CEO, Cerulean Institute’s SBIR program, which
last two years using this bridge award, and Pharma Inc., a clinical-stage provides grants and contract
we’re finding that this approach is helping
biopharmaceutical company funding opportunities to promising small
companies raise outside capital from the VC
community. For every dollar the NCI invests, specializing in the design and businesses developing technologies for the
our Bridge awardees have been able to raise development of nanopharmaceuticals. For diagnosis and treatment of cancer. For
2.3 dollars in third-party funds.” more information, visit ceruleanrx.com. more information, visit sbir.cancer.gov.
Mr. Weingarten says investors like the pro-
PharmaVOICE G January 2011