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VCs: Proteomics Firms Need Route to Products to Get Funding in 2003

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In last year’s tough economic climate, raising venture capital and closing new partnerships were difficult tasks for proteomics companies. But will the tide turn in 2003? To answer this question, ProteoMonitor asked a number of venture capitalists about their outlook for proteomics, and what their priorities are when deciding who will get money this year.

“The biggest challenge facing these companies,” said Chris Earl, managing director at Perseus-Soros BioPharmaceutical Fund in New York, “is to come up with a business model that will lead to success, however they may define that.”

Perseus-Soros mainly invests in later-stage companies with products in the pipeline.

Indeed, most investors seem to judge a proteomics company’s potential for success by its ability to develop its own therapeutic products, be it a small-molecule drug or an antibody, and therefore demand a product focus from day one. Companies offering merely a new technology as a service to pharmaceutical companies are less attractive candidates for funding, venture capitalists said. “The timing of corporate partnering revenues is always a bit uncertain, such that it is quite important that a company have its own internal development project,” said Michael Lytton, a general partner with Oxford Bioscience Partners, which made a follow-on investment in UK-based Astex Technology last year. “There should be a strategy for internal development focused on a specific disease area the technology platform is best suited for.”

This does not mean that every proteomics company should — or can — transform itself into an integrated drug company that brings products to market. But it should be able to show a clear route to a product. “For investors as well as pharma partners it is important to see this link, a stringent connection between the technology in proteomics and the product,” said Jörg Ruppert, investment manager of Heidelberg Innovation in Heidelberg, Germany. Ruppert’s company has made investments in a number of European proteomics-based companies, including Xerion Pharmaceuticals, Cellzome, BioVision, and Europroteome.

Part of convincing investors and potential partners is a demonstration — for example through a proof-of-principle study — that the platform technology is actually suited to drug development, and that it can deliver on its promises. “It’s terribly important that the platform has conferred demonstrable benefits in accelerating drug discovery in a cost-efficient manner,” said Lytton.

But is it realistic to expect a pure-play proteomics company to ever get to a product? Some do not seem to believe so. “Right now we are only investing in companies that use proteomics as a piece in an integrated discovery platform which will lead to the development of new drugs,” said Chris Ehrlich, a venture partner at InterWest Partners. Companies solely focused on proteomics, with a need for a lot of capital and time to develop a product, he said, will have a hard time raising funding in 2003. But there are ways to become more interesting to investors: “Whatever technologies, whatever strategic relationships they can get involved in that will help them advance their platform towards getting drugs in the clinic will be something that is more attractive to the venture community,” he said.

Drug-focused proteomics companies might also be more likely to strike a deal with big pharma than purely technology-based ones, investors said. Pharmaceutical companies, being saturated with genomics and proteomics technologies that promised to accelerate their R&D, “are not likely to spend lots of money on new proteomics technologies,” said Ehrlich. “They are likely to spend lots of money on promising new drugs, even at very early stages of their development,” he added, citing two multi-million dollar partnerships that Pfizer closed less than a month ago with biotechnology companies Neurocrine and Eyetech.

However, investors are not shunning novel proteomics technologies altogether. “If you only invest in products now, there will be a gap in the near future, which makes it important for excellent technology to get funded,” said Ruppert. Lytton agreed with this, saying that in proteomics, like in other areas, “there is a need for significant new technologies that are major improvements over the existing platforms.”

However, several investors noted that in 2002, they did not see any fundamentally new technologies they regarded as worthy of investment. Proteomics companies seeking seed funding for a new technology might face similar difficulties this year: “It would really have to be unique and provide advantages that no other proteomics company has, which is increasingly difficult,” said Ruppert.

One area that could arouse some interest from investors is protein chips. Lytton said his company has so far not invested in protein array companies “because we feel that that technology has not progressed to the point where it’s truly useful to pharmaceutical companies.” However, given technical improvements, “perhaps that would be an area that we would be interested in,” he said.

Moreover, proteomics companies that focus on finding ways to interfere with protein-protein interactions might be in a good position. “Inhibition of protein-protein interaction is what we think is the next great investment opportunity, and we are actively looking,” said Ehrlich. InterWest, he said, even held a meeting last year to discuss this path to drug development.

In this spotty proteomics funding climate, where initial public offerings seem to be next to impossible, with investors still recovering from losses from genomics companies, VCs advise proteomics companies to stretch their funding as far as they can. Compared to firms that have used up their money in the hope for a near IPO, “companies that got financed in 2000 and have been more measured in their spending are in better shape [now]” said Earl. One strategy to increase the cash on hand might be to merge, and an alternative to an IPO could be acquisition by a larger company, or bringing products to market.

But what is needed most is renewed — and justified — trust of investors in the power of biotechnology, of which proteomics is merely a part. Said Ruppert: “Biotech is ultimately about your health, and this will always be an interesting and lucrative area to work in. But only for a few.”

— JK

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