Venture capitalists predict possible year-end recovery for biotech funding

By Joe Tash

A sense of cautious optimism, along with a dose of cold reality, emerged from a recent discussion on investment in the biotech industry hosted by the San Diego Venture Group. “The Future of Successful Investment in Biotech” July 22 panel was moderated by William Rastetter, CEO of Receptos Inc., a drug discovery and development company, and the former executive chairman of Biogen IDEC Inc.
“Certainly the rules are changing very much given the economic climate,” said Rastetter. He suggested, however, that the worst of the crisis may be over. “I anticipate we will see a recovery perhaps as early as the fourth quarter of this year.”
He cautioned that the recovery will be slow and gradual and that in the rapidly changing economic landscape, “me, too” companies and “me, too” drugs are going to have a hard time.
The panel included three veteran investors: Robert More, a partner at Frazier Healthcare; Ed Torres, co-founder and managing director of Lilly Ventures, a subsidiary of Eli Lilly and Co.; and Ken Widder, a partner at Latterell Venture Partners.
The first six months of 2009 have been tough for biotech investors, said More. “A whole bunch of venture capital firms are going out of business,” he said, and fewer deals are being completed.
But the hardy investors are finding opportunities, panelists said. Torres, of Lilly Ventures, said he is working with a $200 million fund bankrolled by the venture group’s parent company.
Outsourcing rising dramatically
Under questioning from Rastetter, the panelists also discussed changes in the ways that biotechnology companies work today, such as the prevalence of the outsourcing of key functions that in the past would have been conducted in-house.
Some of the start-up companies the investors are working with have as few as two employees, with the bulk of the research and development work being carried out by oautside companies, the panelists said. “The capacity and capability to do things outside has increased dramatically over the last five to seven years,” Torres said. “So you can do things like doing protein engineering in Beijing (for a product being developed in the U.S.)”
While investing in products undergoing late-stage testing is cheap and therefore attractive to investors, companies in the earlier stages of product development are having a tougher time, More said.
“Getting things funded at the early stages is a big issue,” More said, referring to the research process called “white space” development. And if investment dollars dry up for new, untested ideas, the pool of emerging new drugs will shrink as a consequence, ultimately giving investors fewer options.
“The question for me these days is how you get rewarded for early stage financing,” More said.
The panelists also talked about whether a start-up should focus on a single, promising drug, or diversify by pursuing multiple drugs. Widder, of Latterell Venture Partners, said he doesn’t believe a company can be successful with multiple products. “The guillotine is out there and you’ve got to sink or swim with your lead product,” Widder said.
Health care reform: What’s the dollar value of human life?
When the topic of health care reform came up, Rastetter said one of the key questions for the public and elected officials is the dollar value assigned to human life.  He noted that in the United States, the current cost of health care equals 17 to 18 percent of gross domestic product, while in England, which has universal health care, the figure is 8 to 9 percent.
According to Torres, other countries have grappled with similar issues and determined where to set limits, such as, “It’s okay not to do a bypass at 65,” he said.
The growth of the generic drug industry will also have an impact on the development of future drugs, said More. In 1980, he said, some 30 percent of prescriptions were written for generic drugs, versus a projected 88 percent generic to non-generic ratio in 2012. “Research and development is funded on the non-generic spend,” he said, referring to patients who buy non-generic drugs.
The event wrapped up with a discussion of how the U.S. biotech industry will fare over the next 10 to 20 years. Experienced CEOs will play an important part, said Widder. “If you have a really good jockey who’s ridden before, it goes a long way.”
More also stressed the importance of creativity by investors and entrepreneurs. “If I were Barack Obama, I’d want to see us continue to foster the big ideas and big thinking that have gone into companies like Apple,” he said. z
The San Diego Venture Group is a 23-year-old nonprofit organization that provides a networking forum for entrepreneurs, venture capitalists and advisers in an informal atmosphere where human expertise can foster new ventures. For more information, log on to www.sdvg.org.