Anti-terrorism front emboldens startup investors
by Katherine Goncharoff
TheDeal.com
Posted 06:56 PM EST, Feb-12-2002
The deal flow is still only a trickle, but a number of startups focused on thwarting bioterrorism are attracting attention, and some are already luring venture money.
In the past, venture capitalists shunned biodefense companies because they have only one likely customer: the government. Instead, they tend to favor startups with numerous market avenues.
But things are looking up for the sector, particularly for those companies that hedge their bets with products the private sector could buy as well.
“Biodefense companies are definitely starting to get the attention of VCs, but it's a little early to tell exactly how many checks will be written,” says Linda Powers, a managing director with Toucan Capital Partners, a biotech venture capital fund based in Bethesda, Md.
The budget President Bush sent to Congress last week includes $5.9 billion to defend the U.S. against biological attack — a 250% increase. That would boost medical early warning systems to detect infectious outbreaks and provide funding for police, firefighters and emergency medical personnel.
Sept. 11 and the anthrax attacks that killed five people raised the specter of a long fight against bioterrorism, boosting the prospects of companies that detect the presence of harmful agents in the environment or drugs to protect or cure victims.
“Now that there is clearly going to be significant amounts of government funding available for these efforts, VCs may start to make investments in this area, but there are certainly a great many risks attached to these types of investments,” said Arthur Klausner, a general partner with Domain Associates llc, a venture firm in Princeton, N.J. that specializes in biotech.
Several startups in the field have been funded. Last week, Albuquerque, N.M.-based MesoSystems Technology Inc., a four-year-old maker of hand-held devices to identify the presence of harmful agents, raised $3 million in Series A funding. The cash came from Ardesta llc, an Albuquerque-based early-stage VC firm.
Ardesta was drawn to MesoSystems, in part, because of a customer base that includes fire departments nationwide and the National Guard. MesoSystems has also received $12 million in research and development funding from the U.S. Army, U.S. Marines and the Special Forces unit of the Department of Defense.
MesoSystems CEO Charles Call said that since October the company has been getting at least a phone call a day from a venture capitalist or investment banker interested in the sector.
“We're not just working on one but on several products related to environmental and biological hazards including wearable devices, systems for mail processing and systems for ventilation ducts,” Call said.
Other biodefense startups with potential outside government have also had good fortune recently. Advancis Pharmaceutical Corp., a startup in Gaithersburg, Md. developing anti-infective drugs, raised $15 million from HealthCare Ventures in November and a total of $30 million to date. The firm's therapies, which improve the effectiveness of antibiotics, can be applied to treat anthrax and smallpox. It is conducting Phase I clinical trials.
Quorex Pharmaceuticals Inc. of Carlsbad, Calif. last year landed $20 million in a round led by Tullis-Dickerson & Co. to develop an antibiotic that can prevent the onset of bacterial infection by disrupting communication between invading cells. Quorex, which has raised $22 million to date, claims its therapies are applicable to a range of pathogens, including anthrax.
Axxima Pharmaceuticals AG of Martinsried, Germany, raised €30.6 million ($26.8 million) in October from Bear Stearns Health Innoventures llc to develop anti-infectious therapies that again can be applied to anthrax.
In the past, funding for biodefense-related startups tended to be the province of the Defense Advanced Research Projects Agency, or DARPA, a federal agency that acts as sort of a venture capital arm for the government. DARPA has backed high-risk, homeland security-type projects such as the development of Arpanet, the Internet's predecessor, and the B-2 stealth bomber. Some VCs believe the government should continue to manage such funding.
“Funding for these companies is something that needs to be done,” noted Jim Barrett, a partner with New Enterprise Associates in Bethesda, Md., who specializes in biotech investments. “The big question is, 'Should the resources come from the public or private sector?'”
Barrett answered the former, citing the risks of selling to government and the danger of government meddling in the market. Venture capitalists saw a lesson when U.S. government recently considered overriding German drugmaker Bayer AG's Cipro patent to buy pills at a better price from generic makers. Ultimately, Bayer agreed to sell the anti-anthrax antibiotic to the government at half price.
Powers said that when the first anthrax attacks occurred in October, venture capitalists were unsure whether bioterrorism was a “flash in the pan” and were highly skeptical about investing in the sector.
But now that Washington policymakers clearly view bioterrorism as a long-term problem, some venture capitalists are taking a second look. “Unfortunately, most of the bioterrorism type stuff, with the exception of biometrics startups, require a long development period and a lot of patient capital,” Powers said. “This will not be a walk in the park for VCs.”
Interest in funding biometrics companies, which analyze human body characteristics such as eye retinas, irises and voice patterns for authentication, has grown along with biodefense.
Investors said they are most likely to fund bio startups with products that address other markets.
“Investments in sensor technologies could be attractive if you were addressing markets that go beyond defense, such as air or water contamination, but the development of a vaccine for infectious diseases really needs to be done within the bowels of a large pharmaceutical or academic effort or should come out of existing research,” said Jim Garvey, a managing partner with Schroder Venture International Life Sciences in Boston, Mass. For now, Schroder will not invest in the sector, he said. |
