Less than nine months after it took in €30 million ($36.7 million) in Series C VC funding, Cellzome announced this week that it had signed an agreement with Bayer to use its chemical proteomics technology in identifying lead compounds.
The Bayer deal — along with a similar agreement with Johnson and Johnson announced in October, and two others set to close in the first half of 2004 — seem to indicate that the Heidelberg, Germany-based company, a spin-off from EMBL, is on a path to accomplish what VCs have been urging proteomics technology start-ups to do for the past year: get into drug discovery, and do it fast.
“Cellzome got the deals because it could already — today — give [pharma] relevant information and knowledge for their drug discovery program,” said Jean-François Formela, a principal for Atlas Ventures, which invests in Cellzome.
ProteoMonitor talked this week with Formela and other venture capitalists about what Cellzome did right, what it still needs to do, what lessons similar companies can learn, and what the outlook is for these companies in 2004.
Drugs, Drugs, and More Drugs
VCs have been saying for some time that the key to winning access to pharma’s wallets is to directly apply proteomics technologies to drug development, and many companies have recently heeded the call. This year, for example, Myriad Proteomics — which markets a chemoproteomics technology similar to Cellzome’s — got a new CEO, took on a drug discovery focus, and renamed itself Prolexys Pharmaceuticals (see PM 7-4-03, 9-26-03). But making this particular switch “is not a realistic model for most of these companies,” according to Francesco De Rubertis, a partner with Index Ventures, another investor in Cellzome. “That is where the challenge is, and that is where the attrition is going to come.”
Even Cellzome, despite its success with pharma, has yet to prove it can sustain the model. The pharma deals provide validation of technology, much-needed revenue, and the potential for valuable long-term relationships, but the company will ultimately need to show that it can maintain an internal drug discovery pipeline using its technology. “To get VCs, you should … show a clear path to credibility as to why you would really be able to do drug discovery while leveraging unique and proprietary assays … for an internal purpose,” De Rubertis said.
What Cellzome has done so far is to show, through a variety of scientific and business moves, that it has the potential to succeed, VCs say. “Cellzome has shown with publications, with people they have on board, that they have set up a really interesting technology and have shown they can produce results. … It just looks convincing that it can be easily transferred into commercially attractive results,” said Jörg Ruppert, investment manager of Heidelberg Innovation in Heidelberg, Germany, another Cellzome investor.
It also can’t hurt that David Brown, a former Roche executive, has been the company’s CEO for the past year. More important even than the strength of a technology is the strength of the business sense that can convert a technology into a drug, Ruppert and others said. “Too many of these companies have had scientific management which has failed to listen to the customer, namely the pharma company,” added Michael Lytton, a general partner with Oxford Bioscience Partners, which does not invest in Cellzome. According to Ruppert and De Rubertis, this is exactly what Cellzome avoided when the com-pany hired Brown as CEO and former AstraZeneca strategy leader Jim Taylor as vice president of business development. “I think why Cellzome has been able to attract so much funds is because the guys who are really running the show at Cellzome, even though they are leveraging an in-house proteomics proprietary platform, are really drug discoverers, like David Brown,” De Robertis said. “The guys know how to develop drugs.”
VCs Pick Promising Proteomics Startups
While Cellzome may be the company of the moment among some VCs, there are a few other start-ups that inspire some enthusiasm. One is Europroteome of Henningsdorf, Germany, which received an ex-tended Series A round of funding in July following a round of layoffs that reduced its staff by 25 percent. Europroteome has “shown in an excellent way how you can correlate clinical data with proteomics data, and from the start come up with meaningful results because they are closely associated with the clinic,” Ruppert said.
De Robertis named London-based Inpharmatica and Paris-based Hybrigenics as two potentially promising companies, because they try to “downstream integrate,” while Hybrigenics in particular has strong enough people that “they might be able to transition” into a drug discovery company, he said.
Lytton chose Affinium Pharmaceuticals of Toronto as a potential winner. “We’re not an investor, but they have shown an ability to do significant pharma deals, and to have a product focus,” he said. Pharma deals are “terribly important” Lytton said, because “typically VC has at most supplied somewhere between one-quarter and one-third of total capital needed to grow to maturity.”
A Twinge of Hope for 2004
While no one is predicting a big windfall for any of the proteomics technology companies in 2004, VCs do express some cautious optimism that the market may slowly pick up next year.
“I would hope 2004 would be better, because the economy is better, and the whole environment seems to be getting a little better,” Formela said. Added De Robertis, “It’s difficult to be more difficult than the last couple of years.”
Lytton said that in the US, at least, there is “reason to be hopeful for 2004 because of the much more flexible approach taken by the FDA to drug approvals under its new commissioner, and as a result, hopefully the early signs of an IPO market will continue through 2004 as more products get approvals.” With a greater chance of getting products to market, he said, companies would have an easier time attracting VC interest.
More important perhaps than the specific conditions for 2004, however, are the general trends — and these are headed in biotech companies’ favor, according to Formela. “The good news is that biotech companies with all the new tools and the structure of the industry can actually get into drug discovery now,” he said. “It’s the formation of a trend … where it’s possible for a biotech company to be dangerous — to actually make some relevant and meaningful discovery.”