Biotech firms compete for billions
By: Hilary Parker
PRINCETON Few people would contest the statement that the future of medicine and pharmaceuticals is in biotechnology.
The pharmaceutical giants have taken big hits from regulatory agencies, and consumer confidence is shaky, at best.
A new generation of smaller firms, focused on specialized technology and research that is barely out of the universities, are now working to take their place as the next phase in health care.
And with this proliferation of biotech companies comes the need for vast sums of money to fund research and help move products through the pipeline. Enter the health care and biotech venture capital firms.
Venture capital as an industry is around 50 years old, but has only exploded in the past 15 to 20 years. According to a March 28 survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association, the less than $3 billion that the venture capital industry invested in 1990 grew to $21 billion in investments in 2004. A 2003 study by the National Venture Capital Association, "Patient Capital: Improving the Lives of Millions," investigated venture capital in health care specifically, and found that 28 percent of the investments in the venture capital industry were in health care.
With the mind-boggling sums of money in play, the complexities of the regulatory processes and the life-or-death nature of the health-care business it’s no wonder that investors are relying on niche venture capital firms to manage their funds and choose the best investments.
"The reason that there is a specialized field of health-care investing is because you need a great deal of experience to do this well," says Jay Moorin, a founding partner of ProQuest Investments, a Princeton-based health-care venture capital firm that started in 1998 and manages more than $450 million. "You need to understand the science, how drugs work and the regulatory process."
With the growth in the health-care venture capital field, the firms have to deal with competition on two fronts: raising funds and making deals.
"I think that it would be naive to say that a group of health-care venture capital firms do not compete with each other for funds and deals," Mr. Moorin says. Despite that, the competition is not of the stiff and cutthroat variety that might be seen in other industries. "We may be competitors one day, but partners the next," he says.
Todd Brady is an associate with the Palmer Square-based Domain Associates, which was founded in 1985, is one of the oldest health care venture capital firms and manages $1.4 billion. He cites the fact that firms are going to have to work together given the vast amount of money necessary to get companies off the ground as one of the reasons that there is not the competition that might be expected. In addition, he explains that the tremendous demand to be invested in health-care venture capital is a driving force that lessens the extent to which firms must compete to raise funds.
But that doesn’t mean that anyone can launch a fund and expect the investors to be knocking at their door.
Morton Collins started his first venture capital firm, DSV Partners, in 1968 and is a former chairman of the National Venture Capital Association. In 2003, he retired to start up a new venture capital fund, Battelle Ventures LP. The fund focuses its investments on technology arising out of the five U.S. Department of Energy national laboratories and is actively pursuing deals in the biotechnology field.
"It used to be a very collegial group," he says of venture capital firms, "because there wasn’t enough money to go around." Now, with billions of dollars invested in health-care venture capital each year alone, he says he is seeing "competition for deals and for opportunities."
He describes the playing field in health-care venture capital as being something like the baggage claim at Newark Airport. The people at the front of the line get to see what’s coming out and make the first choices, and those farther back have to wait for things to come around. Then, each time you pick up a bag to check it out, you lose other opportunities as things keep going by.
In Mr. Collins’ mind, the newer venture capital funds are akin to the folks at the end of the line, waiting for the second go-round to see what’s available. "It’s very hard to raise the capital even if each partner has a track record," he says of start-up ventures, highlighting the importance of having experienced and well-connected partners.
With his background in venture capital, Mr. Collins understood the importance of having a strong and cohesive investing group, and called upon the experienced management team at Early Stage Enterprises, a venture capital firm he had played a role in founding in 1996. He explains that he "poached people" and ultimately absorbed Early Stage Enterprises into Battelle Ventures. He says this allowed him to capitalize on the experience and working relationship of Jim Millar and Ron Hahn, the founding partners of Early Stage Enterprises.
Other firms are quick to point out the necessity of having knowledgeable management teams in order to compete and to offer assurance and reliability to their investors.
"ProQuest is biased toward investment managers with operating backgrounds," says Mr. Moorin, himself the former chief executive officer of Magainin Pharmaceuticals, now Genaera Corp. ProQuest’s management team contains former CEO’s of biotech companies, Ph.D. scientists and medical doctors, as well as executives hailing from pharmaceutical giants, consulting agencies and investment banks.
"It’s not just about having money, but also having management teams that can get the early-stage companies off the ground," says Mr. Brady, the former CEO of Phenome Sciences who holds both a medical degree and doctorate in pathology from Duke University. Other members of Domain’s management team were previously involved in investment banking, large pharmaceuticals and teaching pharmacology at University of California at Irvine.
In addition to relying on their heavy-hitters to raise funds, the venture capital firms also use their managers’ connections and expertise to keep abreast of newest scientific research and developments that could ultimately lead to the next lucrative deal.
"For the last 30 years, we’ve been involved with this business," Mr. Moorin says. "We know what the products are, we’re very aware of what the major research centers are doing." In addition, the management team at ProQuest attends scientific meetings and keeps up to date reading the latest scientific journal articles to identify those therapeutic areas and products that could ultimately lead to a significant return on their investments.
Likewise, the team at Domain does not wait for opportunities to come around, but actively seeks out opportunities in a given sector.
"We have ‘big idea days’ where we identify as a firm several interesting therapeutic areas," says Mr. Brady, who adds that it is then up to Domain to figure out how to exploit therapeutic deficiencies to make investments. A recent "big idea day" at Domain focused on obesity, a "pressing health concern without good therapeutic options." Domain brought in experts in all areas, from physicians, to scientists researching the molecular underpinnings of appetite and fat storage, to business people familiar with marketing obesity drugs.
Battelle Ventures is in a slightly different position when making investment decisions given its affiliation with the Department of Energy national laboratories. This puts the firm in the position of learning about discoveries as they are happening, or what Mr. Collins dubs "pieces of science before they’re commercializable."
Mr. Collins thinks the model of venture capital firms being affiliated with laboratories, research institutions, and universities is the next direction in health-care venture capital. "University funds are more suitable to venture capital long term than are pension funds," he says, "True venture capital is a long-term investment."
Mr. Collins predicts that health- care venture capital will have to change in other ways as well. As the billions of dollars invested add up, it becomes more and more difficult to turn a profit or realize the returns that investors are hoping for, and expecting. "It’s very hard to turn $3 billion into $18 billion," he says.
With the current rates and projected growths in investment, Mr. Brady says that the health-care venture capital industry "looks to be unsustainable," but does not offer a prediction of the time frame or path of its demise. Mr. Moorin says that, for now, it is important to stay focused on the industry and the developments, and not worry about the future of the venture capital field.
"Last year we looked at hundreds of possible investments to do five, and so our standards for investing our capital are very high," he says of ProQuest’s investment strategies. With no shortage of capital, he firmly believes that good people and good ideas will succeed.
There is certainly no shortage of therapeutic areas to focus on. ProQuest has a history of focusing on the oncology field, and it is expanding out to include pain control, especially as it is often allied with cancer treatment.
Mr. Moorin explains that while most pain-control efforts have focused on the delivery of a handful of painkillers, scientists now are turning their attention to looking at pain receptors themselves in what will be "a more effective way to deal with debilitating pain." He also cites breakthroughs in diabetes treatment, including insulin inhalation therapy, which could dramatically change the treatment of the disease. ProQuest is also actively investigating deals that focus on central nervous system disorders, such as Alzheimer’s disease, as well as looking into new antibiotics that might be capable of combating drug-resistant bacteria.
Domain Associates is also targeting the central nervous system field, including novel treatments for Alzheimer’s and other neurodegenerative diseases, and is looking to expand its portfolio to include deals that focus on the field of geriatric medicine. Mr. Brady also cites asthma and reactive airway disease as another hotspot that will reap the benefits of biotechnology in upcoming years.
At Battelle Ventures, the managers are looking at therapeutic techniques that could be applicable to a wide range of health problems. Mr. Collins says they are looking at one company focused on inhalation therapy. He explains that many of the new drugs in the product pipeline are proteins, and they can’t be administered orally. So, a focus on inhalation therapy would eliminate the need to deliver all of these drugs intravenously. The Department of Energy laboratories are also actively researching nanotechnology, and Mr. Collins thinks that advances in this field could change the face of medicine forever. "The particle delivery of much smaller molecules could change the impact and efficacy of drug delivery," he says.
Domain, ProQuest and Battelle Ventures have lots of company not only in the health-care venture capital field, but also in the Princeton area.
Healthcare Ventures, one of the nation’s largest health-care venture capital firms, is based on Nassau Street and has raised over $1.5 billion since the time of its first fund in 1985. The firm describes itself as "a results oriented management team" with "an established network in science, medicine, and the pharmaceutical industry."
Care Capital recently moved from Princeton Overlook to Hulfish Street, and prides itself for its "unmatched global health care experience; world-class scientific, technical and clinical expertise; and significant relationships." The firm’s typical investment size is between $5 and $15 million.
Cardinal Partners is an early-stage venture capital fund that makes $4 million to $8 million investments across all aspects of health care. It has invested in over 100 companies and currently manages around $180 million.
The "Patient Capital" study by the National Venture Capital Association addressed the fact that, with the help of health-care venture capital, there have been great strides in the treatment of nearly all the leading causes of death, including cardiovascular disease and cancer. All of the Princeton area health-care venture capital firms, both young and old, are in the unique position to finance the companies of the future that will tackle the health challenges of the present and make them problems of the past.
There is no telling which discovery might ultimately lead to a cure for cancer, or a breakthrough treatment for AIDS. But, with the intellectual and financial capital dedicated to the pursuit, chances are that at least one of Princeton’s health-care venture capital firms will have been a key player in the breakthrough.

