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Venture Capitalists Weigh in on What Recent Bioinformatics Investments Mean for the Market

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Increasing investments from venture capital firms in commercial bioinformatics indicates that the perceived value of the market is rising and suggests a level of optimism about the revenue potential of a segment of the life sciences space that historically hasn't been seen as particularly profitable.

In the last year, Strand Life Sciences and Ayasdi each scored about $10 million respectively from investors; Syapse and Spiral Genetics raised $3 million apiece; PathoQuest raised $5 million from a Series B financing round; Desktop Genetics received $582,000 in investments; Eagle Genomics raised $1.6 million; Tute Genomics raised over $1 million; and Knome raised $13 million from its investors. Within the first month of 2014, Maverix Biomics, DNANexus, Omicia, and GNS Healthcare each announced that they'd received venture capital funding to support ongoing development and commercialization efforts.

Some investors may also have been enticed by the slew of informatics companies being bought by instrument vendors such as Qiagen and Illumina. Whatever the draw, this influx of capital is a good omen because it means that investors are starting to pay attention to the area, according to Andrew Yang, the co-founder of Apache Design and one of the lead investors in the $6 million Series A fundraising round for Maverix Biomics. It also means the market is getting the financial backing it needs to flourish and grow. Funds flowing in stimulates activity, piques customer interest, and that’s how an "ecosystem starts to build up," he said during an interview with BioInform this week.

Much of the shift in investors' perspective is tied to technological advances in life science research, most notably next-generation sequencing, that have made it much easier to gain deeper insights into the biology behind diseases, and, by extension, to develop better diagnostics and therapeutics, according to Louis Lange, a general partner at Asset Management Ventures, which was also one of Maverix investors.

Moreover, improved NGS instruments have made sequencing a much cheaper and more accessible enterprise for larger swaths of the community, Lange noted. That means that while maybe a decade ago commercial bioinformatics software was developed with expert users in mind, now there's widespread demand across industry and academia for more user-friendly, intuitive analytical software and solutions that can support plant and animal-based research projects, he told BioInform. "There's a much broader audience" for simpler solutions like Maverix's that target biologists and not computational scientists, he said. "I think we are on the inflection point of the ability of these companies to make significant revenue compared to what we've seen in the past."

Though user-friendly informatics solutions have to date largely supported the research domain, cheaper sequencing and an accumulated body of research knowledge is now fueling a push toward using genetic analysis to inform better clinical decisions. That is leading to a growing need for IT infrastructure to host and run these applications and solutions that offer data and workflow management capabilities, according to Nat Goldhaber, managing director of Oakland, Calif.-based Claremont Creek Ventures.

Goldhaber told BioInform last week that Claremont Creek is looking both at companies supplying the analysis as well as those that provide supporting infrastructure. It most recently led a $15 million fundraising round for DNANexus with Google Ventures, TPG Biotech, and First Round Capital. Other companies in Claremont Creek's life sciences portfolio include Natera, a genetic testing company that offers high-throughput, sequencing-based prenatal testing; and Assurex Health, which offers genetic testing to help clinicians select psychotropic treatments for their patients.

Solutions such as those offered by DNANexus, Goldhaber said, reduce the economic burden of running NGS-based analysis by enabling users to cut costs associated with installing internal infrastructure and hiring IT staff to manage and maintain local clusters. Infrastructure providers that can eliminate those two costs will be "incredibly valuable," especially if genetic information continues its evolution from being "principally the province of research and development from drug companies or academic institutions" to include clinical use cases, he said.

One reason commercial bioinformatics companies haven’t had much success is because the industry has had to compete with a plethora of open-source solutions, which because they are by nature free, are very attractive to researchers on tight budgets, as well as those who don't appreciate black box software. But many of these solutions still require experts to install and run them, making it really hard for average biologists to use, Lange pointed out.

Furthermore open-source software need not be competition for industry. Rather it can provide fodder for the development of new commercial solutions to support the market, Goldhaber said. For example, companies have built and sold successful commercial products based on the open RedHat enterprise linux platform, he pointed out. "So too, I think there will be plenty of open-source application programs developed by universities and individuals that execute on our platform at DNANexus," he said.

Maverix also offers open-source software on its platform, including applications like the UCSC Genome Browser. This marriage of freely available software with cloud computing, which helps to lower the entry barrier for customers with limited in-house infrastructure for analysis and storage, appealed to Yang and were among the reasons he decided to invest in the company, he told BioInform. A 30-year veteran of the semiconductor industry where he worked with software and big data, Yang saw genomics as an area where he could bring both his business development and software expertise to bear.

Borrowing from experiences in the semiconductor space, Yang offered his perspective on the bioinformatics landscape and at the same time highlighted some metrics that he — and potentially other venture capitalists — use to evaluate prospective investments. He told BioInform that he founded his company Apache Design to focus on developing technology that would enable electronics, such as mobile phones, to run on less power, believing that in the long run this type of technology would prove profitable. That was more than a decade ago, and at the time much of the semiconductor industry focused on developing faster systems and had little interest in low power use. Then Apple launched the first generation of smartphones and the industry's focus shifted.

In the same vein, bioinformatics companies hoping to be competitive, he said, need to be thinking years ahead of the market and identifying emerging technologies that have the potential to be "key success factor[s]" for the life sciences industry — not simply chasing after "well established …commoditized solutions" — as well as developing business models that are cost effective and encourage customers to buy rather than create their own solutions. Couple forward thinking with good financial backing, a well-executed commercialization strategy, and the "[business] opportunity will come," he said.

He also stressed — as many within the bioinformatics community have — the importance of standardizing platforms and technologies. Referencing the semiconductor industry again, Yang noted that setting standards there spurred increased productivity and has resulted in major advances for the sector. That wasn’t the case nearly 30 years ago. Back then, research institutions cobbled together their own solutions and relied on in-house experts to answer their research questions. It wasn’t until the engineering and manufacturing communities began working together to establish standards that things began to change. This is what has to happen in the bioinformatics area "where you have so many silos established in pharmaceutical companies, government institutions, [and] research institutions," he said. This way, the community can start to "produce commercially stable, repeatable results, instead of using ad hoc analytic programs that are not supportable."

Exit prospects also look good for bioinformatics companies, according to investors, either through merging with or being bought by a larger company — sequencing vendors are possible candidates here — or through a public offering. "The marketplace for genetic analysis, I think, is going to grow with the same sort of extraordinary growth that we've seen the internet grow over the years," Claremont Creek's Goldhaber said. "We are just on the leading edge of that right now, so who knows what the proper outcome is long term for a liquidity event?"

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