This is part two of a two-part series examining the venture capital landscape in the life science research tools and molecular diagnostics markets. To read part one, click here.
NEW YORK (GenomeWeb News) – Despite the recently soured economy, venture capitalists have remained relatively optimistic about investment opportunities in the life science research tools and molecular diagnostics sectors, according to industry insiders.
In particular, the VC landscape for life science tools and molecular diagnostics may be buoyed by advances in nanotechnology, particularly nanofluidics, high-throughput and single-molecule genomics and proteomics, and technologies enabling individualized health, venture capitalists from three early-stage life science investment firms told GenomeWeb Daily News recently.
However, the VCs also said that their optimism was tempered by a host of inherent problems with investing in the research tools space – in particular, higher risk aversion among potential acquirers and the lack of an IPO market has dampened the chances of early-stage investors landing a profitable exit. In addition, pending public policy surrounding the way early-stage investments are taxed has the potential to discourage VCs from taking a long-term investment stance, they said.
So how are life science tool investors skirting these issues?
"We're very selective right now with our investments in companies that are going to be extremely capital efficient," Josh Phillips, a general partner with Boston-based Catalyst Health Ventures, told GWDN recently. "We've just launched a new incubator in the medical technology space where we'll be leveraging a single team and doing multiple projects in a very capital-efficient way – outsourcing where we can; reducing overhead; not incurring fixed costs."
Catalyst has adopted this strategy primarily to combat what Phillips perceives as a dwindling number of potential exits for investors due to the reluctance of potential technology acquirers to buy in anything but well-established companies with relatively mature technologies, as well as a nearly non-existent IPO market.
Sue Siegel, a partner with Menlo Park, Calif.-based Mohr Davidow Ventures, agreed with a general consensus among VCs that the life science tools space is "not completely immune to the financial meltdown," and that investors have become much more selective.
"The great news about times like this is that huge things come out of people," Siegel said. "There is real creativity, and there is no scarcity of innovation. You see a lot of different technologies coming through, and you scratch your head on some and wonder how they are going to get to market. You sort of get a buzz around a few, but you just don't get many like that. So our investments haven't stopped; we've just become more selective about what we invest in."
Siegel also echoed Phillips' qualms regarding the dwindling number of potential exits for investors by also citing an increasing reluctance by pharmaceutical companies to create early-stage partnerships.
"In the past, pharma was willing to take more risks and collaborate with very small innovative companies that had technologies that they believed would be very enabling," Siegel told GWDN. "Now, pharma will do some collaborations, but they won't pay as much for them. They won't get into the complexity of past deals. And they're looking for the technologies to be much more turn-key."
Despite this, she said that pharma is looking much more closely at, and may be willing to make acquisitions and bigger collaborations in the molecular diagnostics space, including pharmacogenomics and pharmacogenetics. Part of the reason for this, she added, is that pharmaceutical companies in general are eager to identify companion diagnostics that can be coupled with their compounds or research areas of interest to help guide treatment and efficacy.
"We're seeing a lot of big companies looking at this space," she said. "Novartis is building out its molecular diagnostics efforts, and looking to collaborate, so they might become acquisitors. Abbott took that path years ago, and continue to look," said Siegel. "Roche has also had a presence because of their molecular diagnostics division, and we've seen some sniffing around from Sanofi-Aventis, Pfizer, and Johnson & Johnson, among others."
Within the molecular diagnostics space, Siegel believes the market is moving toward the convergence of "online tools that will enable behavior change in people like you and me, so when they go online they are able to use tools that allow them to engage.
"It's about more than just biomarkers, it's about individualized health – business models that combine science and the ability to interact online," she added, citing MDV portfolio company Navigenics as an example. "It's about understanding your predispositions to certain actionable conditions."
Steve Gullans, a managing partner with Boston's Excel Venture Management, agreed that "innovations around reducing costs and improving outcomes are a very high priority. In the past, if somebody brought in a new device that was absolutely going to make diagnosis or treatment better, you didn't ask so many questions about the economics. Today, the economic model is as important as is the technology," he said. "The acquirers of these, the big companies, will be doing their own economic analyses."
Catalyst's Phillips also pointed out another burgeoning problem within the molecular diagnostics space: a lack of synergy between diagnostics companies and tool providers.
"There is this reliance upon each other where the tool providers, the platform technologies, are trying to figure out how to do diagnostics; and the diagnostics companies are trying to figure out which platform to perform the diagnostic on," Phillips said. "That has yet to be figured out."
Both sides, he said, are not demonstrating as great an understanding about the other as needed to progress the space. "The two of them have to go hand in hand," Phillips said. "That is going to be a point of convergence going forward, where these two sides are going to have to get together to figure this out."
Beyond the molecular diagnostics space, other areas being eyed by VCs include nanotechnology, especially nanofluidics, and higher-resolution and higher-throughput analytical techniques in genomics and proteomics.
"We're quite bullish about the opportunities where you see materials science, physics, nanofluidics, and chemistry coming together," Gullans said. "We're seeing lots of opportunities of what we're looking for in the tools space – nanofluidic devices; less expensive detection systems; high-throughput genomics and proteomics – just giving more data per dollar. As with all early technologies, though, there is always a learning curve about what it is good for, and where it might provide ambiguous answers."
Gullans also said that the DNA sequencing space is evolving the most quickly "simply because the cost per base is plummeting. It's impossible to pick a winner, right now, though. If you have to pick the company that's going to be the winner five years from now, you just couldn't pick that today."
Areas of interest to Siegel and partners at MDV include technology platforms that can examine biology at the single-molecule or single-cell level, and the firm has already demonstrated its affinity for that space by investing in nanofluidics company RainDance Technologies; single-molecule sequencing outfit Pacific Biosciences; and cancer diagnostics startup On-Q-ity, which is using technology that captures and examines single circulating tumor cells.
"That's where it's all headed – single-cell analysis, single-molecule analysis, really trying to build up our understanding biology from the single cell, versus where we've always had it before, which is the population," Siegel said. "Pharma companies are definitely looking at creating models along these lines."
Siegel also cited the need for tools that enable fast, inexpensive studies around stem cells and siRNAs.
"Lastly, we're looking for tools that potentially could replace PCR, and do it in an isothermal fashion where you wouldn't have the cycling potentially occur," Siegel said. "That's a tough one, though, because will it truly be able to replace the standard that has become PCR? Are you willing to take on that challenge?"
To be sure, there is no shortage of increasingly entrepreneurial academic scientists that are willing to take on that challenge, among others. But they won't be able to do it alone and will invariably need increased collaboration with industry, according to Catalyst's Phillips.
"I think part of the issue is that you have the established platform guys – Life Technologies with PCR, which is the gold standard; and Illumina and Affy with established assay technologies, and platforms that perform those technologies," Phillips said.
"It's going to be very difficult for a new platform to come along and displace those technologies, because they are the accepted standards," he said. "They're behemoths now. Those companies have huge sales forces, and the technologies are ubiquitous."