PHILADELPHIA — Executives, venture capitalists, and others in the life science sector yielded no consensus last week at the Philadelphia area’s annual biotech conference over why the region’s venture capital financing lags behind that of the nation’s top-tier clusters — and whether more local VCs are needed are a result.
CEO Council for Growth, a group of more than 70 business leaders in Philadelphia and 10 nearby counties, timed to the conference its release of a report faulting the region’s technology commercialization effort. The CEO council contended the region doesn’t generate the volume of commercial tech activity, including biotech startups, that it could given its concentration of academic institutions and pharmaceutical companies.
In its 36-page report, “Accelerating Technology Growth in Greater Philadelphia,” the CEO council urged business leaders to encourage serial biotech and other tech entrepreneurs to create partnerships with scientists, universities and the public; advocate for greater federal research spending; connect with researchers; and market the region more to VCs and entrepreneurs.
The report also urged academic institutions to promote commercial tech transfer, while calling on governments to fund more tech incubators for startups; raise or at least maintain research funding and support the agencies that oversee it; bring together scientists and potential investors; develop a new award program for scientific achievement; and lower taxes.
The report based its findings on a survey of Philadelphia-area CEOs, as well as data on venture capital financing, academic R&D activity, and patent filings that compared Philadelphia with nine regions — Baltimore, Boston, New York, Pittsburgh, Raleigh-Durham, San Diego, San Francisco, Seattle, and Washington, DC.
The report was commissioned by the Economy League of Greater Philadelphia, a nonprofit policy research group that champions regional economic growth. The group, which was previously called the Pennsylvania Economy League, changed its name last January to reflect the presence of New Jersey and Delaware in its region of study. The CEO council is affiliated with the Greater Philadelphia Chamber of Commerce, which has 5,000 member companies in Philadelphia and 10 nearby counties in Pennsylvania, New Jersey, and Delaware.
“The Greater Philadelphia region has a tremendous opportunity to become an economic leader. It possesses a strong commercialization infrastructure, one of the nation’s largest and richest life sciences industry clusters, and one of the world’s leading collections of colleges and universities,” the report concluded.
Despite those advantages, the report found that Philadelphia ranked seventh of the 10 regions in venture capital investment between 2002 and 2006, while at the median or higher on four other benchmarks of technology activity: fifth of 10 in the amount of academic R&D funding in 2005; fourth in the number of degrees conferred in 2004; fourth in the number of patents awarded between 2000 and 2004; and second in the number of invention disclosures between 1996 and 2004.
Changing the Culture
Russel Kaufman, chair of the CEO council’s venture capital working group, told
BioRegion News the VC gap is a consequence of cultures that have worked against commercialization within the two pillars of the Philadelphia region’s life sciences cluster — the corporate culture of pharma companies, and the culture of academic institutions that have emphasized winning government research grants and securing tenure.
“It’s not the venture capital that’s the problem. It’s the entrepreneurs. If they can take the ideas, take the company and develop it, venture capital will flow into the area from New York, from Washington [DC], from Baltimore, from around the region,” said Kaufman, who is also president and CEO of the Wistar Institute, a Philadelphia nonprofit biomedical research institute.
“The lack of venture may be a consequence of not having enough entrepreneurs. On the other hand, if entrepreneurs know that there’s a lot of venture capital, then they’ll be more likely to move into an area,” Kaufman said. He spoke minutes after moderating a panel talk during Biotech 2007, the annual meeting of Pennsylvania Bio, BioNJ (formerly the Biotechnology Council of New Jersey), and the Delaware BioScience Association, held at the Loews Philadelphia hotel last week.
The CEO of an early-stage biopharmaceutical company attending the conference said in an interview that startups generally feel more comfortable dealing with local venture investors.
“It matters. People invest locally, no question about it,” said John Maki, president and CEO of Vicus Therapeutics of Morristown, NJ. “My view right now is that there are a lot of good VCs here, and I think they’ve got the right angle too. So I’m very positive. I feel that in the local market between New York, Philly, and Princeton, there’s more than enough capital.”
That’s because venture capitalists serving the Philadelphia region can stretch north past New Jersey, into New York and Connecticut, he added.
Among VC firms Maki singled out for building private businesses within the region were Philadelphia-based Quaker BioVentures, which invests solely in life sciences companies; and two national firms that maintain offices in Princeton, NJ — Domain Associates, which focuses on early-stage life sciences ventures; and healthcare-oriented ProQuest Investments. Principals of two other VC firms, Crocker Capital and Kite Hill Capital, serve on Vicus’ board of directors. Yet because of longtime relationships, Vicus’ key investors are high-net-worth individual investors who retired from the private equity world.
Those relationships date back to Maki’s years on the finance side. Before starting up Vicus, he was managing director of Technology Directors Incorporated, managing director of the investment firm Audax Group, and a consultant who advanced to principal during a 14-year career at Bain Capital, the Boston-based VC firm founded by Mitt Romney.
The CEO council report drew support from the state’s biotech industry group, Pennsylvania Bio. Dennis (Mickey) Flynn, president of Pennsylvania Bio, told BioRegion News the report’s timing was especially welcome because its findings will help his organization as it crafts a strategic plan detailing how to advance the industry’s interests over the next five years.
Work on the report is nearly complete, Flynn said, except for portions addressing how to implement the group’s agenda. He said the report is set to be completed by the end of the year, “and maybe a little bit before then.”
“We will sit down with Mark Schweiker,” Flynn said, referring to the president and CEO of the Greater Philadelphia Chamber of Commerce and former Pennsylvania governor, “and then map out how we are able to move everything forward.”
The CEO council report “is the type of thing we absolutely needed to do,” Flynn added. “Tech transfer is so critical to the success of our industry. We need the information. We need to be able to take some steps to bring that technology forward.”
During a panel discussion on obtaining venture capital, the panelists agreed with the CEO council report that a stronger tech transfer effort can help generate the entrepreneurs likely to draw VC firms into the region.
The Philadelphia region’s largest academic institution in licensing fees, the University of Pennsylvania, has long been a tech-transfer laggard among schools of its size: Its 2006 revenue from technology licensing of $8.2 million is one-third below 2003’s figure of $12.3 million.
UPenn hopes to reverse that trend following its hiring last summer of Michael Cleare, who elevated Columbia University’s licensing income to $100 million in his previous position as that school’s executive director of science and technology ventures.
One panelist agreed with the CEO council that bringing technology forward through venture capital hinges on entrepreneurialism. But David U’Prichard, venture partner and senior advisor with Red Abbey Venture Partners, added that he saw signs that national VC firms are set to increase their presence in greater Philadelphia.
SV Life Sciences plans to base one of its executives in the region, U’Prichard said, while Domain Associates has established its East Coast office near Philly in Princeton, NJ. Talk in the industry has at least two companies — including MPM Capital, the world’s largest life sciences VC firm with $2.5 billion in capital under management — contemplating a similar expansion; the firm now has offices in Boston, New York, and San Francisco. MPM’s portfolio companies include Neuromed Pharmaceuticals, headquartered in the Philadelphia suburb of Conshohocken, Pa.
“It’s not the venture capital that’s the problem. It’s the entrepreneurs. If they can take the ideas, take the company and develop it, venture capital will flow into the area from New York, from Washington [DC], from Baltimore, from around the region.”
“I think it’s really encouraging, the signs that I’ve seen over the last year, that some of the big Boston VC houses are beginning to recognize that there’s a place called Philadelphia, and there is good science going on here,” said U’Prichard, whose firm is based in Baltimore and oversees $50 million committed by what it says are family offices and individual investors. The firm has completed more than 20 deals since it was established in December 2003.
“I’ve felt for many years that we need to get boots on the ground — in other words, partners from the big national VCs coming down from Boston, coming over from South San Francisco, and establishing one or two main offices, really to [put] their money to much more efficient use here locally,” added U’Prichard, who is a former chairman of Pennsylvania Bio.
Debbie Hart, president of BioNJ, said in an interview after the panel discussion that Princeton saw the arrival of another VC firm last month when London-based Advent Venture Partners opened an office there. Based there is Don Drakeman, who joined the firm earlier this year from Medarex, a Princeton-based biopharmaceutical company he co-founded.
Hart said investor interest in regional companies extends beyond Philadelphia or even Princeton: “We see Wall Street folks here on a regular basis. New York venture capitalists are involved as well. (Capital) comes from all over. California venture funds are investing here.”
James Datin, executive vice president and managing director for the life sciences group of Safeguard Scientifics, told conference attendees that another factor in the region’s VC gap is a preference by firms such as his for less risky, later-stage life science companies. In May, Safeguard announced it had co-led a $26 million Series C round for Philadelphia-based Avid Radiopharmaceuticals; two months later, the VC firm announced it had led a Series B round for Cellumen, a Pittsburgh cellular systems biology company.
In greater Philadelphia and elsewhere in the state, Datin said, many entrepreneurs needing early-stage funding have found financing through traditional seed-stage or “angel” investors — or through funds created by Pennsylvania using tobacco-settlement money. The fund serving the Philadelphia area, BioAdvance, invests between $250,000 and $1 million in seed financing for startups. BioAdvance has invested $11.5 million in 21 life sciences companies and nine academic projects since its first investments in 2003.
Datin sits on the board of a Pennsylvania fund, Ben Franklin Technology Partners, which also finances deals in the $250,000-$1 million range. The fund is expected to finance about 40 companies this year, of 400 deal proposals submitted by entrepreneurs, he said.
Hart said in an interview that New Jersey is hoping to build more biopharma businesses in the region in part through a $105 million fund the state has formed with Lehman Brothers. The state provided $100 million of pension funds and Lehman supplied $5 million in capital to create the New Jersey Directed Investment Fund, which seeks to invest in private companies with headquarters or “substantial” operations in the Garden State, or which plan to make “significant” investments or promote economic development in the state. Lehman Brothers' private equity arm has $20 billion in assets under management.
Funds like New Jersey’s and Pennsylvania’s were created as alternatives to choosier VC firms, Datin noted: While Safeguard has completed $50 million in financings for five life science companies over the past 14 months, the firm typically funds just four to six deals a year, of some 600 submissions by entrepreneurs annually. He said Safeguard is interested in deals with companies specializing in diagnostics, later-stage therapeutics, medical devices, and services.
“I think in many ways, our region is underserved by traditional venture capital,” Datin said.
At least as far as early-stage companies go, Maki said: “This is where the center of the money is as long as you’ve got an advanced product and you’re in development. There’s no money anywhere for the earlier-stage side. It’s true anywhere, but it’s probably more so here.”
Glass Half Empty?
The CEO council based its findings in part on VC data between 2002 and 2006 from the quarterly MoneyTree Reports issued by PricewaterhouseCoopers and the National Venture Capital Association with Thomson Financial.
But more recent MoneyTree data not included in the report showed one likely reason for concern about commercialization — double-digit declines over the past year in VC funding in the region.
For the second quarter of 2007, MoneyTree recorded $196 million in 34 venture capital deals for the Philadelphia region, down 21 percent from $248 million in the first quarter and down 30 percent from the $279 million recorded in the second three months of 2006.
MoneyTree’s “biotechnology” category accounted for seven of the Philly region’s second-quarter deals, totaling $40 million, making it the region’s second-largest category of investment. During the second quarter of 2006, MoneyTree recorded $223 million in VC investment in 15 biotech deals.
Last week, however, Ernst & Young offered a more optimistic assessment of the region’s venture capital activity, based on third-quarter numbers strong enough to yield increases in financing for both Pennsylvania and New Jersey; figures for the Philadelphia region itself have yet to be calculated.
Keith Brownlie, E&Y area leader for life sciences, told BioRegion News that Pennsylvania’s VC financings rose to $750 million for the aggregate first three quarters of this year, up 24 percent from $604 million in the same period a year ago.
For the full 12 months of 2007, Pennsylvania’s amount of VC funding “will certainly exceed a billion [dollars]. That’s a good, safe statement,” Flynn of Pennsylvania Bio predicted.
New Jersey’s VC activity during the first three quarters of 2007 rose about 20 percent, from $920 million to $1.1 billion, according to E&Y.
For life science startups in the greater Philadelphia area, Brownlie said, “most of the money comes from funds outside the area. It will come from the West Coast, from Boston. A lot of the funds [that invest] in New Jersey companies come from the Philadelphia area. But there are enough funds out there.”
That, he said, is more important than whether the VCs who run these funds are based in the Philadelphia area.
“It doesn’t matter. The companies know where to find the money. And they’re not averse to going to California or Boston or wherever. If that’s where the money is, they’re going to go there,” Brownlie said.