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Indiana life sciences sector copes with shrinking VC pool

October 30, 2010

Health care reform, insurance reimbursement for drugs and medical devices, and higher hurdles for U.S. Food & Drug Administration approval.

All are top concerns of the life sciences industry. But more pressing for some early-stage and aspiring life sciences firms in the state is the sorry state of venture capital in the sputtering economy.

Venture funds nationwide crested at $100 billion in 2000, but that number last year had drooped to $18 billion.

“It’s incredibly difficult to raise capital right now … . The industry, broadly, is really suffering,” Jonathan Silverstein, a general partner of New York City-based Orbimed Advisors, told the Indiana Life Sciences Summit. The Oct. 26-27 event at the Westin Hotel downtown was hosted by BioCrossroads, an Indiana life sciences industry group.

Silverstein said there’s talk that up to half of venture funds may even disappear amid a 15-year low in fund formation.

“It’s very hard to find venture partners that are willing to participate with us,” said John Diekman, founder and managing partner of Menlo Park, Calif.-based 5AM Ventures.
 

dimarchi-richard-mug DiMarchi

The company invests in early-stage life sciences firms, including Carmel-based Marcadia Biotech, which is developing drugs for obesity and diabetes.

Venture-capital firms of course aren’t the only source of funding for upstart life sciences firms. Area companies such as Logical Semantics, which develops speech-recognition software, or SonarMed, which developed an airway-monitoring device, have enjoyed hundreds of thousands of dollars in government grants under the U.S. Small Business Administration’s Small Business Innovation Research/Small Business Technology Transfer Program, for example.

But reductions in venture funding are clearly a concern, such that the summit sported a panel to discuss funding in a capital-constrained economy.

One common theme: Your odds of landing investment are better in less risky, underserved niche areas. So-called orphan diseases are one area of promise, Silverstein said.

For example, his Orbimed has put tens of millions of dollars into Montreal-based Enobia Pharma, which is developing an enzyme-replacement therapy for the genetic bone disease hypophosphatasia.

It’s a relatively small market, but the drug is likely to be pricey and could be worth up to $1 billion a year, Silverstein said.

“Overall, innovation and novelty is going to win the day in getting substantial backing,” he added.

Richard DiMarchi, founder of Marcadia and a former Eli Lilly scientist, said odds for funding are improved by “reducing [product] to something that is fundable because it is doable … . Pick a project that is doable.”

Panelists also predict renewed mergers and acquisitions of emerging life sciences firms, particularly by pharmaceutical giants finding it expensive to develop product in-house.

Among many firms Lilly has snapped upin recent times is Cambridge, Mass.-based Alnara Pharmaceuticals, which is developing proteins to treat metabolic diseases such as exocrine pancreatic insufficiency. Lilly paid $180 million for the company.

But many of these acquisitions by big pharma companies, as well as venture funding, are aimed at firms in the later stages of development. Alnara’s product, for example, is already under review by the FDA.

The upside is, Indiana does enjoy some funding advantages that other states do not, said Steven St. Peter, managing director of Boston-based MPM Capital, which recently opened a Midwest beachhead in Kansas City, Kan.

He mentioned, for example, the $58 million INext Fund, created in January, that provides funding to other life sciences funds, such as Orbimed and 5AM Ventures, as a catalyst for them to invest in the region.

As of the third quarter of this year, Indiana life sciences companies had managed to raise $21.5 million in venture capital, according to BioCrossroads. The state ranked second in the Midwest in sheer number of deals.

“We think Indiana and the surrounding states are a potential gold mine,” 5AM’s Diekman said. For example, Indiana is home to a concentration of animal health and crop sciences firms.•

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