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Venture Capital Funding and M&A Quarterly

Biotechnology • Pharmaceuticals • Medical Devices

1st Quarter, 2008 – United States

Published by: VentureDeal

Sponsor: GVA Kidder Mathews

Writer: David Hamilton

Summary

The long boom in venture funding of life-science startups may have finally peaked. In the first quarter, biotechnology, pharmaceutical and medical-device startups raised a total of $2.4 billion in venture-capital funding, a 9 percent decline compared to the previous quarter (see Table 1). The number of companies receiving funding fell by 10 percent to 197.

M&A activity looked even more dismal, falling by 73 percent in value terms since the fourth quarter (see Table 2).

Medical-device companies proved the most resilient during the quarter, with 82 companies drawing $947 million in new funding – both figures up one percent compared to the previous quarter. New forms of glucose testing for diabetics, along with aneurysm-treatment devices and oxygenation therapies, drew substantial venture interest.

Biotechnology funding, by contrast, plunged to $598 million, a 35 percent decline from the fourth quarter. Backers showed no clear preference for any particular technology or disease orientation as they pulled in their horns, instead backing an array of largely established drug modalities – particularly antibodies – and common disease targets such as cancer and inflammation. There were, of course, a few exceptions, including investments in RNA interference and neural stem cells.

In sharp contrast to both devices and biotech, pharmaceutical deals grew larger during the quarter as VCs steered their funding toward later-stage companies, although the number of companies funded didn't change appreciably compared to the fourth quarter. Startups focused on infectious disease and a few unique approaches such as drug-mediated neuro-regeneration were among the quarter's big winners.


Funding Activity

Biotechnology

Notable biotechnology investments in the quarter included startups with new techniques for addressing inflammation, RNA interference and synthetic biology.

Taligen Therapeutics, for instance, is an Aurora, Colo., startup with a novel approach to tamping down runaway inflammatory reactions. The company, which raised $65 million in a Series B round – one of the largest such fundings for a drug startup not specifically focused on in-licensing activity – is taking aim at the “complement system,” an arm of the innate immune system that amplifies inflammatory response. The company hopes that its drugs, which remain in preclinical development, will eventually succeed as both systemic and local anti-inflammatories.

A slightly unconventional drug-delivery play involved PhaseRx, a Seattle biotech that raised $19 million in a Series A round. (That funding will be tranched, so PhaseRx has so far received only $4 million.) The company's work lies in the hot field of RNA interference, but unlike other startups such as Alnylam or Sirna Therapeutics (which was acquired by Merck in 2006 for more than $1 billion), PhaseRx doesn't aim to develop its own drugs. Instead, the startup appears focused on synthetic polymers designed to help RNAi molecules cross into cells, which has been a stumbling block for the technology.

Two other biotech startups represented interesting departures from run-of-the-mill investments in oncology and autoimmune disease. Q Therapeutics, a Salt Lake City biotech that raised $15 million in a Series B round, is developing a neural stem-cell treatment for a form of multiple sclerosis. The company hopes that the specially derived cells can encourage the formation of new glial cells in damaged neural tissue, shielding nerve fibers that have lost a protective myelin coating to disease.

By contrast, Codon Devices, a Cambridge, Mass., startup, isn't focused on treatments at all. Instead, the “synthetic biology” company, which raised an $11 million extension to its Series B funding, aims to design artificial genes that can “program” cells in a variety of ways, including the production of drugs, chemicals and biofuels.

Overall, Taligen drew the largest biotechnology funding in the quarter. Close behind was Alder Biopharmaceuticals, a Bothell, Wash., startup that raised $40 million for the production of new antibodies in yeast cells. Traditional antibody-based drugs are produced using an older process that can take a year or more. Alder, by contrast, claims to be able to make new antibodies in just a few months.

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