News

Biotech Tries to Shrug Off Setbacks

James Flanigan, The New York Times

September 17, 2009


From one perspective, the life sciences industry β€” the biotechnology companies that develop drugs and treatments to combat disease and the biomedical firms that create medical devices β€” is a picture of expanding horizons and confidence.

Young companies are taking advantage of advances in medical and computing sciences to develop new ways of dealing with intractable health problems.

One new company has developed a disposable device with software that would help surgeons to perform knee replacements with greater accuracy. Another has a microscopic device implantable in the eye that would continuously release medicines to alleviate glaucoma or macular degeneration.

Other companies have developed potential vaccines against staphylococcus infections and drugs to preserve cardiac function after a heart attack. Indeed, the biotech industry is spreading globally to India and China, where capital is abundant and research is increasing.

But even as the industry seems to be making progress, its biggest benefactors are pulling back. The traditional providers of venture capital in the United States are university endowments and pension funds, whose assets have been reduced sharply over the last year in the collapse of financial markets.

Even a successful investor in the life sciences industry sees danger now. Domain Associates, a company based in Princeton, N.J., and San Diego, raised $500 million for a new venture fund in August. It is the eighth such fund Domain has started in 24 years, and in that time, it has backed more than 200 life sciences companies. But few other venture funds were able to raise money, said James C. Blair, a Domain partner.

"The people investing in our area are hurting, and this will have long-term implications for venture capital in general," he said. " Without new communities of capital," he said, "we worry about where we will find other investors to participate in our best opportunities in two to three years."

He is not alone in worrying. The PricewaterhouseCoopers MoneyTree survey of venture capital recently reported a surge in financing for life sciences in the second quarter of this year. Yet the firm also reported that venture fund assets were down to levels of the mid-1990s, before the last decade's financial expansion.

The Southern California Biomedical Council, an organization of 240 companies in life sciences in the Los Angeles area, has set "ways to cope with the current drought of capital" as the agenda for its annual investors conference starting Thursday. So is the outlook bright or gloomy? Most companies, even those that have had difficulties, say it is still bright. "We're seeing the coming together of information technology and medical science," said Sharon Stevenson, a co-founder of Okapi Venture Capital, a three-year-old company in Laguna Beach, Calif.

Okapi this year backed OrthAlign Inc., a company founded in 2008 that is awaiting approval from the Food and Drug Administration for a palm-size disposable device that attaches to instruments used in knee replacements to help surgeons do more precise cutting of the bone to improve the fit with the joint replacement.

"There are about 550,000 knee replacements every year in the United States, and that is expected to grow to 3.5 million by 2025," said Pieter Wolters, president of OrthAlign. More people, he said, want an active lifestyle into late age and "technology allows longer lasting function of knee replacements." OrthAlign has received $7.2 million in venture financing from Research Corporation Technologies of Tucson and Okapi Venture Capital.

Replenish Inc. of Pasadena, Calif., was founded in 2007 on technology developed at the Keck School of Medicine and Viterbi School of Engineering at the University of Southern California as well as the California Institute of Technology. Replenish plans to enter trials for F.D.A. approval next year for a refillable and programmable pump that would be implanted in the eye to feed medicine for glaucoma or for age-related macular degeneration.

The Replenish device can last more than five years before replacement, much longer than current treatments, said Dr. Sean Caffey, chief executive of the company. Replenish is backed by a $10 million investment from a large pharmaceutical company, Dr. Caffey said, and the Stevens Institute for Innovation at the University of Southern California and Caltech have acquired small equity ownerships for their licenses.

In 2005, six scientists from the University of California, Los Angeles, who were working at LA BioMed, a nonprofit research institute, founded NovaDigm Therapeutics. There, they have developed a vaccine that could prevent infections acquired in hospitals, including candida and staph infections, said Fred Haney, a venture capital investor and chairman of NovaDigm.

The company will begin its initial clinical trials for F.D.A. approval next year. It is backed by $18 million in venture investments from Domain Associates and has received grants from the National Institutes of Health and the United States Army to support its research.

Clinical trials extend over three phases and can take years, making investments in life science companies prohibitively long term. "But, in reality it is not so long," Mr. Haney said. "If we can demonstrate safety and strong immune responses in phase one or two, we could then enter a partnership or merger with a large pharmaceutical company and obtain long-term financing."

In a possible sign of major things to come, the Zensun Science & Technology Company, based in Shanghai, has raised $30 million to perfect a treatment to strengthen cardiac structure after a heart attack. Zensun is backed by Morningside Investments of Hong Kong and the Shanghai city government, said Jack Z. Chen, chairman of the Transworld Capital Group, a consulting firm based in Arcadia Calif., with offices in Beijing and Shanghai.

Zensun was founded in 2000 by Dr. Mingdong Zhou, who earned a doctorate at the State University of New York, and Dr. Xifu Liu, whose doctorate is from the Genetics Institute at the China Academy of Sciences. Its heart treatment is now in phase two F.D.A. trials, which measure effectiveness.

Such trials are demanding and sometimes treatments do not win approval. The Orqis Medical Corporation spent nine years perfecting a system of increasing blood flow to help damaged hearts but did not receive F.D.A. approval. So backers decided last year not to invest fresh capital. The company is for sale to any firm that would continue development and try again for F.D.A. approval.

The president of Orqis, Kenneth Charhut, said he regretted the setback but remained positive about the industry outlook. "Given advances in technology and growing needs of aging populations," he said, "this is a time to invest in life sciences."