A pair of new financing programs totaling $35 million marks the most ambitious effort by Arizona’s life sciences community to quench the thirst for startup capital that has long frustrated early-stage companies seeking to spin out of the state’s research universities.
Life sciences leaders and investors in the Phoenix area have joined to launch a private $20 million venture capital fund intended to finance startups in mostly mid- to late- pre-clinical phases of developing treatments and prevention of cancer and diseases of the central nervous system. The Translational Accelerator, called TRAC for short, will award between $500,000 and $2 million to early-stage companies that are either located in Arizona or planning to relocate to the state.
Another $14 million will be made available by Abraxis Bioscience for startup life sciences businesses focusing on diagnostics, prognostics, therapeutics, and medical devices and services. The capital will be distributed through Catapult Bio, a new nonprofit organization the biotech company is forming with the Translational Genomics Research Institute Accelerators, with help from government leaders and a public-private regional economic development group.
Both programs are designed to fill a capital gap in Arizona that some say has hindered spinouts of TGen and the state’s research universities from growing in the state. The gap exists as companies evolve from their earliest phases, where subsidies can range from government or corporate grants to angel capital, money from family and friends, or even personal capital; and the later stages of clinical trials, when startups typically begin drawing interest from venture capital firms or pharma giants interested in acquiring the fledgling firms’ technologies.
That gap can impede the hiring of a management team, the crafting of a marketing strategy, and even the completion of clinical trials, which is why until recent years, many Arizona life sciences startups moved out of state, to areas richer in capital, such as Texas and especially California, observers have noted.
“TRAC is trying to address the gap you see around the country, even in San Diego or Boston, of the lack of seed or pre-seed venture capital, the $500,000 to $2 million size deals,” Walt Plosila, vice president of Battelle’s Technology Partnership Practice, told BioRegion News. Battelle compiled a series of reports outlining an Arizona life sciences strategy for the Phoenix-based Flinn Foundation, an investor in TRAC.
“Arizona gets about one-half of 1 percent of all national venture investments. Even in having a good year, it’s very small relative to its share of the population in the country. It should be getting more like 2 percent if it were like its population base,” Plosila said in an interview.
Plosila is a key figure in the development of Arizona’s life sciences industry from a nascent cluster earlier this decade. In 2002, Plosila authored the Arizona Bioscience Roadmap, which identified lack of capital as a key challenge for the industry to surmount. Last December, Plosila completed Growing Northern Arizona’s Bioscience Sector: A Regional Roadmap. That report, which can be read here, detailed the strengths and challenges of the life sciences industry in northern Arizona [BioRegion News, Nov. 26, 2007]. The roadmap identified a host of issues hampering the region, from a lack of affordable housing, to the needs for more facilities, more technology commercialization, more entrepreneurs, and more students willing to stay in the region and build careers within the industry [BioRegion News, Nov. 26, 2007].
In a follow-up report to the roadmap released late last year, Arizona’s Bioscience Roadmap: Toward 2012 — Progress and Directions Toward the Future, Plosila and Battelle reported that three segments comprising the state’s medical device industry — medical/healthcare products, medical/healthcare services and biotech equipment — accounted for most of the nearly $80 million in VC investment recorded for Arizona during the first three quarters of 2007. The state was on pace to more than double the $40 million in life sciences capital recorded for Arizona in 2006, and to enjoy its best total of capital since all of 2002, when about $110 million was awarded.
Most of those dollars are later-stage, not the seed stage of financing, and much of that money comes from VC firms outside Arizona, Plosila noted.
“Arizona-based venture firms, which have invested more and more in biosciences in the last 10 years, don’t have much in the way of new dollars to invest. The monies they’ve got left are to reinvest in the next stage of their current investments. They don’t have much in the way of new dollars to invest,” Plosila told BRN.
Figures by two venture capital market trackers, however, reveal a mix of strengths and weaknesses in the ability of Arizona startups to raise venture capital.
According to the quarterly MoneyTree Report, produced by PricewaterhouseCoopers and the National Venture Capital Association, with Thomson Financial data, seven Arizona life sciences companies raised a total $31 million in capital all of last year, up from five companies raising a total $23.6 million in 2006.
But MoneyTree also showed how medical device investment propelled the state’s life science capital growth. Four medical device firms received a total $18.8 million in 2007, from two collecting $7.2 million a year earlier. The state’s biotech segment dipped during that period, from $16.4 million in 2006 to $12.2 million in 2007, even as the number of deals stayed flat at three.
Medical device deals accounted for all of the VC activity recorded for the Phoenix metro area by Dow Jones VentureSource, formerly VentureOne. During 2007, the region racked up $37.7 million in two device deals, more than double the $16.8 million in four deals recorded in 2006.
“Arizona is building a critical mass of companies, so there’s more interest from the national venture industry,” Plosila added. And the state benefits from its proximity to the nation’s top state for life sciences investment: “It’s easier for California venture firms to invest in Arizona than going to Texas or Florida.”
Planting a Seed
TRAC has already done some investing of its own, namely a seed investment of an undisclosed amount in Silamed, which will use the funding toward pre-clinical work as well as its business plan and investor presentation. TRAC is trying to form a syndicate with venture firms from outside Arizona interested in teaming up on a future series A financing round later this year.
Eric Tooker, president of Medical Consultant Services and one of TRAC’s four managers, told BioRegion News the program is close to crafting financing agreements for two or three additional companies: “Within the next two months, it’s likely that we’ll make announcements.”
Most of TRAC’s investments will be at the smaller end of the $500,000 to $2 million range, so the fund can spend larger amounts of capital for follow-on financing rounds. TRAC’s assistance will vary with the needs of the companies it funds, Tooker said.
“For some companies, it’s going to be pre-angel or instead of angel funding. And then, in some other companies that already have seed investment, we will be really their first Series A financing,” Tooker said in an interview. “There are several companies that we’re interested in where we’re going to put in a seed investment. That money is going to be used to get them investment ready.”
One challenge TRAC will work to address, he said, is the region’s dearth of locally based venture capitalists specializing in life sciences investments. While Arizona is home to many high net worth individuals, most of them made their fortunes in industries outside the biotech, pharmaceutical, or medical device industries: “That is one reason why it was so difficult, and we had to do so much work, to get the TRAC fund off the ground.
“Our fondest hope is that the success of the TRAC fund will show that you can invest in life sciences in Arizona, and that that’s a good investment.”
“Our fondest hope is that the success of the TRAC fund will show that you can invest in life sciences in Arizona, and that that’s a good investment,” Tooker added.
TRAC will likely make between eight to 10 investments initially using the $20 million fund. Once that money is all spoken for, TRAC plans to launch another fund aimed at similar startups, with help from VC firms from outside Arizona that are interested in expanding into the state.
Joining Tooker in managing TRAC are John Bentley, a partner with Grayhawk Venture Partners; Richard Love, a former senior TGen executive and ex-CEO of ILEX Oncology; Dan Von Hoff, chief scientific officer of Scottsdale Healthcare, and TGen’s physician-in-chief and director of its translational drug development division.
Investors in TRAC include the Flinn Foundation, which has long worked to advance the growth of life sciences in Arizona. “Our total support on that will probably max out at $2 million,” John Murphy, president and CEO of the Flinn Foundation, told BioRegion News.
That’s a fraction of the total $20 million TRAC fund, and less than 1 percent of Flinn’s investment endowment portfolio of $210 million.
“There is an increased pool of candidate discoveries coming out of the research laboratories,” Murphy said — especially TGen, which opened its main Phoenix lab in 2005, and a second $46 million facility, TGen North, in Flagstaff, Ariz., last April: “The pipeline is starting to perk.”
Flinn got involved in TRAC, Murphy said, after speaking with several VCs from outside Arizona but familiar with the state, asking them why they had not participated in financing deals there. The VCs told Flinn they were wanted see more deals done in the state, preferably by local investors.
“We were asked, ‘Why not locals investing in? If so many of you leaders in Arizona believe in the product and what you’re doing, why are you not invested in validating this proof-of-concept?’ ” Murphy said.
Murphy said TRAC and Catapult Bio were not a result of the state’s $1 billion budget shortfall, which has triggered fears in life sciences circles that Gov. Janet Napolitano and state officials will respond in part by cutting spending for the state agency created to promote the life sciences, Science Foundation Arizona. That’s because state funding has tilted more toward research and workforce development than capital formation.
Arizona officials last year approved a four-year, $100 million funding schedule for SFAz, which is modeled after a similar program in Ireland. Earlier this month Mary Harney, an Irish member of Parliament on a fact-finding mission for her government, visited Arizona and urged lawmakers not to balance the budget by cutting SFAz.
Napolitano’s office announced the creation of Catapult Bio, since it was a partner in the creation of that program, joining the city of Phoenix and the public-private Greater Phoenix Economic Council in working with TGen with Abraxis.
Catapult Bio is one of two programs totaling $21.5 million being funded by Abraxis; the other launches a National Personalized Healthcare Network, created to increase personalized medicine clinical trials.
Barry Broome, president and CEO of the Greater Phoenix Economic Council — which promotes economic development in Phoenix, its county of Maricopa and 18 member communities — said his group will market and promote Catapult Bio as a virtual technology accelerator: “It’s not going to be defined by a building and a space. It’s not going to be defined be a single relationship.”
While TGen is based in Phoenix, Catapult Bio will not be limited to helping its spinouts, but will assist a variety of life sciences companies interested in growing elsewhere in the state, Broome said. To that end, Catapult Bio will work with a variety of research institutions and healthcare providers statewide — including the University of Arizona Medical School, the Biodesign Institute at Arizona State University, Barrow Neurological Institute of St. Joseph’s Hospital and Medical Center, Mayo Clinic Arizona in Scottsdale, Ariz., and Scottsdale Healthcare.
“It’s going to be the launch pad for bioscience enterprises throughout the region and throughout the state of Arizona,” Broome said.
Catapult Bio will even look beyond state borders, he added, by working with California’s universities and research institutes. “When you think about how science and technology enterprises are built, they’re often built in multiple locations. Our philosophy is, ‘How can we strengthen California’s science and technology market, because we’re right next to California, and that benefits us?’
“There’s nothing that says we wouldn’t help a science-based enterprise in California do well. That’s not going to be our primary function, which will be to build up greater Phoenix and Arizona. But the goal is to be world-class, the goal is to be global, and not to be captured in a parochial mindset.”
Catapult Bio and TRAC leaders say they will look to distribute funding to companies across the state, though Murphy cautioned that TGen spinouts are likely to locate near the institute’s main Phoenix lab, while Tucson can expect a share of companies because that region has developed the state’s most extensive base of angel capital investors.
That base should grow, Murphy said, now that Swiss-headquartered Roche on Feb. 19 completed its $3.4 billion acquisition of Tucson-based Ventana Medical Systems, a move designed to improve the pharma giant’s medical diagnostics business. Roche has promised to keep Ventana’s current operations and more than 600 employees in Tucson.
Roche is one of three pharma giants with significant operations in Arizona. Sanofi-Aventis is expanding its Oro Valley, Ariz., campus, while Merck’s capital entity has invested $10 million in Series C financing in another Tucson company, High Throughput Genomics. Murphy said the pharma companies are likely to take interest in the technologies of TGen spinouts, which in turn should spark investor interest in Arizona startups, with help from the two new capital programs.
“We believe that the combination of Catapult and its finish line fund, and TRAC funding will sow the seeds to take the potential spinoffs here to the next level,” Murphy said.