BioWorld Today Columnist

In the fall, the funding patterns of the venture community were sending a scary message for those of us who love the "R" part of "R&D." While U.S. private biotech firms raised slightly more than $2 billion through August 2006 from venture investors and other private funds, most of that money was going to companies with clinical stage programs.

Even in the earliest rounds - seed and series A - 73 percent of the $504 million raised went to firms with Phase I, II or even III trials ongoing. Seventy-nine percent of those early round dollars went into "specialty pharma" companies that planned to avoid research altogether, instead developing in-licensed drugs wrapped in a new formulation or delivery approach.

Public investors also were clearly enamored with reduced risk and shortened timeframes for reaching product revenues. Specialty pharma plays and reverse mergers dominated the scene.

Year-end trends: We ended 2006 in a slightly more research-friendly mode. Slightly more than $3 billion went into private U.S. companies. Forty-eight seed and series A deals brought $860 million into 48 companies; 56 percent went into clinical stage deals, and 70 percent went into specialty pharma. (In some cases, the money would be used to acquire clinical candidates.) (See Table 1.)

Three of those early stage rounds went into companies with Phase III programs - I can't help but wonder if venture money isn't the high-cost provider, once you have programs that advanced. Corporate partners and royalty-buying groups like Symphony Capital and Royalty Pharma actually might be better financing buddies at that point.

Series B deals got $1 billion, with 53 percent heading into clinical programs. Series C and higher rounds sopped up $1.35 billion, with clinical stage deals grabbing 83 percent of those dollars. Of the 41 late-series deals, 19 were already in Phase II clinicals, five were in Phase III and five had marketed products.

That tells us something disconcerting about the public investors. While the private investors searched for reduced risk and shorter timeframes, the public investors continued to put great pressure on IPOs. Valuations stayed low, the median IPO raised a mere $60 million and the range was a whimpy $10 million to $109.5 million. Of the 21 U.S. IPOs, all were at least in the clinic and four had marketed products.

What About Today?

There continues to be a glimmer of change in the climate out there in VC-land. Maybe the hefty premiums paid in recent acquisitions have whetted their appetite for risk once more - though not by much. For first quarter 2007, 12 U.S. seed and series A deals raised a total of $211.5 million. Mimicking the 2006 results, 56 percent of that cash went into clinical stage deals.

I like to think that specialty pharma's fall from grace was seen in the drop to 51 percent of the seed/series A dollars from last year's 70 percent.

Slightly less than $240 million went into series B rounds, with specialty pharma and clinical candidates still very popular. Higher rounds pumped $1.08 billion into 18 deals with a whopping 95 percent of the cash headed into clinical stage companies. (See Table 2.)

So What Does This All Mean?

The investing themes developing over the past few years seem to be continuing. The classic venture investors want to see at least Phase II clinical trials under way, at which point it can be tough to justify taking their expensive capital.

Public investors still want to see double-digit net earnings growth year over year.

The good news: New classes of investors continue to get involved, and new business strategies keep coming.

Private philanthropic foundations, especially those focused on specific diseases, increasingly are an important source of dollars as well as clinical expertise, large compound libraries, disease-modeling proprietary assays, clinical connections to support efficient clinical trials and great diagnostic tools.

Royalty-purchasing groups are rapidly growing their war chests past the multi-billion-dollar mark, and starting to look at earlier-stage programs. Chimeric groups, like Quintiles' NovaQuest group, can bring extensive development infrastructure and expertise to bear along with big bucks.

There is growing willingness to invest in deals that look a lot more like virtual companies than ever before, and the ramp-up in M&A ensures that programs are getting funded - not just companies. International players, like the Indian specialty pharma firms, are entering the M&A fray to grow vertically and globally.

2007 promises to be an exciting time.

Robbins-Roth, PhD, founding partner of BioVenture Consultants, can be reached at biogodess@earthlink.net. Her opinions do not necessarily reflect those of BioWorld Today.