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Investors Venture Into Biotech Territory

Three San Diego-based biotechnology firms were among the 11 largest U.S. venture capital investments in the third quarter, despite a downward trend nationally in such funding, according to a quarterly survey released by VentureOne and Ernst & Young.

San Diego-based companies Avera Pharmaceuticals Inc., MediciNova Inc. and Ceregene Inc. raised $124 million between them in the third quarter, reflecting an overall positive funding trend in the biopharmaceutical industry.

Venture capitalists invested $4.56 billion in 467 deals nationwide during the third quarter, down 4 percent from the same quarter in 2003.

The slowing comes after five consecutive quarters of investment growth and was seen as a recovery after the dot-com bubble burst in 2000, according to published reports.

The same published report suggested that VC funding has been revived by certain growth industries, in particular, wireless and biopharmaceuticals.

That is good news for San Diego, which is considered a hotbed for both industries.

Venture capitalists invested $272.3 million in 18 San Diego-based companies in the third quarter, up from $205.5 million and 14 companies in the second quarter.

Altogether, the biopharmaceutical sector raised $966.9 million in the third quarter , up 16 percent from the second quarter.

“Early-stage health care companies fared particularly well in the third quarter with 40 deals raising a total of $357.9 million , the most raised for health care company formations since mid-2002,” wrote Jeff Fialko, Ernst & Young’s VC advisory group leader for the mid-Atlantic area, in the Oct. 25 statement.

He added, “Early-stage health care investors were likely encouraged by the ability of the life-science companies with strong pipelines to find IPO exists in today’s highly selective capital markets.”

Like elsewhere, San Diego’s young and growing biotechnology firms rely on venture capital financing to get their multimillion-dollar research projects off the ground.

Yet, in recent years, startups have had a tough time attracting VC funding.

Maria Walker, the chief financial officer and administrative partner at Forward Ventures, one of the largest San Diego-based VC groups specializing in life sciences, said that her firm has funded early-stage firms “in the past” and will continue to do so “in the future.”

But, she noted, “At the moment, we are focusing at mid-or-later stage companies.”

Mid-to-later stage means companies that are on the verge of testing developed experimental drugs in humans or test them in people.

The more advanced the drug, the lower the risk for investors, who expect a return on their investment. Investors cash in when companies get acquired or go public, Walker said.


Return On Investment

Some people have criticized VCs for abandoning their traditional roles as early-stage investors, but Walker disagreed.

“You have to return money to investors at a reasonable time frame,” she explained.

Forward Ventures’ portfolio consists of a mix of early, midstage and late-stage companies.

Tom Clancy, a partner with Enterprise Partners, San Diego’s largest VC company, also said his firm has become more selective in its investments.

“Specifically, we have been favoring therapeutic investments in companies that can show a lower risk profile to Phase 3,” Clancy said.

Phase 3 is the last of three progressive stages of drug development.

The three San Diego-based biotechs that have raised significant funding prove that point.

Avera raised $48 million in a Series C round led by Perseus-Soros BioPharmaceutical Fund, a New York-based private management group, with significant participation by Schroder Ventures Life Sciences.

The company tests two compounds in people: A neuromuscular blocker for use in anesthesia and another to treat depression and anxiety. A third compound to treat psychiatric and neurological problems could be tested in humans soon, the firm said.

MediciNova, a specialty pharmaceutical firm, last month raised $44 million in a Series C round led by Essex Woodlands Health Ventures.


Looking To Tokyo

The firm could become the first U.S. company to list on the Tokyo Stock Exchange without having first gone public at home.

Four-year-old MediciNova bought a compound to treat premature labor from Kissel Pharmaceutical Co.

This drug plus three more compounds are now being tested in a Phase II trial, the second of three stages of development required before the Food and Drug Administration considers marketing approval.

Ceregene, which focuses on neurodegenerative disorders using gene therapy, raised $32 million in a second round led by Alta Partners and MPM Capital, and included Hamilton-Apex Technology Ventures in San Diego.

The firm has clinical trials for Alzheimer’s disease and expects to start clinical testing for Parkinson’s disease and amyotrophic lateral sclerosis. or Lou Gehrig’s disease.

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