Unlikely Matchmaker For Young Biotechs

Standing in front of a group of biotech entrepreneurs the day before an investor forum at Stanford University earlier this month, Michael Weingarten was like a teacher gently prodding his students before a big exam. He asked over and again if everyone had what they needed to be ready for the next day. Did people have their schedules of one-on-one meetings? Were they happy with the meetings they had secured? How could he or his colleagues help?

Then, Weingarten reminded them of the importance of making the most of the day. “The whole goal of this event, hopefully, is to create relationships with investors,” he said. Weingarten is not a teacher or some kind of investment guru. He doesn’t have a stake in any of the biotech firms he was counseling. But as the director of the National Cancer Institute’s Small Business Innovation Research (NCI SBIR) Development Center, from which all the entrepreneurs had received grants, he does have an interest in the future of the companies he oversees.

Although the SBIR grant program has been around for decades, over the past three years NCI has shaken up its approach to managing companies that rely on the institute’s funding to develop cancer-related therapeutics, diagnostics, and devices. Amid a tougher financial climate for biotech firms, the agency has moved beyond simply handing out checks to playing the kind of role a more traditional investor would. And Weingarten, who leads the new support effort, finds himself actively shepherding the biotechs through the dark funding period between the inception of an idea and concrete evidence in humans that a cancer therapy might work.

“The senior management at the National Institutes of Health took a look at the SBIR program as a whole and asked the question, ‘Is this program really doing everything that it can?’ ” Weingarten explained to C&EN. After all, SBIR represents $650 million in funding across NIH. “It’s larger than any single venture capital fund,” he observed.

NCI’s new approach to managing its portfolio of funded companies began in 2007, when the institute created the SBIR Development Center. The managers brought in to run it, many of whom have experience in industry, are tasked with providing business development help and other services to the small companies in SBIR’s portfolio.

A year later, NCI launched a new grant, called the Phase II Bridge Award, intended to help companies push their products into clinical trials. A requirement for obtaining a Bridge Award is that an SBIR-funded biotech company secure matching funds from outside sources.

The new SBIR program is an explicit acknowledgment that the earlier SBIR grants often weren’t big enough to fund the kind of clinical-stage research that leads to larger investments from venture capital groups.

“The financing environment is still tough, particularly at this early stage,” said G. Steven Burrill, head of the life sciences investment firm Burrill & Co. It’s easier these days for a biotech to raise $30 million in venture capital for clinical trials than $3 million for early studies, he noted, which means start-ups are reliant on government funds, state and regional grants, and angel investors to keep their projects running.

In this setting, the $110 million in annual SBIR funding that NCI manages has become one of the bigger sources of early-stage capital. As a sign of how tough the environment is, applications for NCI SBIR grants were up 80% in 2009 over 2008, Weingarten said. And although the rigorous grant application process has traditionally attracted academics or new entrepreneurs, experienced businesspeople are now looking to SBIR for funds.

“We’re seeing a number of companies that in the past would probably have gone the venture route,” Weingarten said. “They’re serial entrepreneurs, but because of the tightness in capital, they don’t have the same access to funding as in the past.”

All of which has brought SBIR staffers to their new role as matchmakers. The venture forum was introduced last year as a way to showcase the program’s most advanced companies to investors and potential partners. Of the 400‑plus small businesses within NCI’s portfolio, more than 60 applied to make their pitch at Stanford. A panel of industry experts—including venture capitalists, pharma executives, and start-up lawyers—then winnowed the list to the 13 chosen companies.

SBIR laid the groundwork for the meeting by pairing each biotech chief executive officer with a mentor who provided feedback and guidance on the key points to hit in their investor presentations. With help from the San Jose BioCenter, a business incubator that partnered with SBIR to organize the event, companies created wish lists of the top investors they wanted to meet. The investors created similar lists, and before the forum, every biotech had at least one meeting set up; many had several.

On Nov. 8, the day before the meeting, Weingarten gave his pep talk, and two local start-up lawyers provided the biotech executives with some last-minute advice. They focused on the most common mistakes small companies make when trying to attract investors. Some of their points seemed obvious—“don’t run out of money,” for example. But they were meant to help the companies think more deeply about their long-term strategies and how much financing they realistically need to get their projects to the next level.

The day of the forum, a crowd of 175—including more than 100 people from traditional venture capital firms, the venture arms of big pharma companies, big pharma itself, and medical device companies—drifted into a meeting center on Stanford’s campus. The Stanford location was strategic: So many venture capitalists are located in the Bay Area that it took little effort to attract an audience that appeared genuinely interested in at least hearing about a new crop of biotech companies.

The spectrum of stages of development for the 13 companies presenting was broad. For example, San Diego-based Zacharon Pharmaceuticals, which is developing drugs that target glycans, has already raised an initial round of financing from Avalon Ventures, a traditional life sciences venture capital firm. Zacharon was presenting at Stanford in hopes of attracting a second round of money that would enable it to move one of its two lead molecules into the clinic, CEO Robin M. Jackman explained to the audience.

Boston-based Eutropics Pharmaceuticals is closer to its roots as a spin-off of Dana-Farber Cancer Institute. The biotech firm only recently picked its lead drug candidate, for multiple myeloma, putting it at least two years away from Phase I clinical trials. Potential partners at the meeting were more likely to be interested in Eutropics’ close-to-market diagnostic assay, which determines whether a patient with multiple myeloma will respond to a marketed drug.

Meanwhile, Presage Biosciences, which has developed a way to test whether solid tumors will respond to different cancer drugs, has already partnered with some big pharma and biotech companies looking to test-drive its technology. And one device company there, Fluxion Biosciences, had already raised two rounds of financing.

Speaking to attendees during the forum, Weingarten made sure to mention that many of the companies would be eligible for the Phase II Bridge Awards. Although product development at many of the NCI-funded companies is still in a stage earlier than what most venture capitalists are looking for, the government money might sweeten the deal.

Investors said the event was worth their time. Many noted that the companies were promoting edgy technology that would likely be a tough sell in traditional venture settings. “The quality of the companies we saw, I think, was excellent,” said Alex de Winter of Mohr Davidow Ventures, a Menlo Park, Calif.-based investment firm that focuses on early-stage companies. “They weren’t all ‘me too’ companies” pursuing well-trodden drug target territory. Many are working on science with technological challenges, which makes funding from a source such as NCI all the more important, he explained to C&EN at the forum.

De Winter, who was part of the team that vetted the 60 companies that applied to present during the meeting, said NCI’s rigorous peer review process provided some validation for the technology presented.

Others pointed out that the lengthy application process doesn’t necessarily mean a technology is mature enough for private investment. “Peer review is always useful,” Burrill agreed. “The challenge is not necessarily at the science level. The question is whether this is a piece of science you can build a business around.”

Indeed, investors speaking on the sidelines of the event said some of the biotechs being highlighted were not ready for the spotlight and maybe weren’t even developed enough to have been spun out into a company in the first place.

“Some of the companies are definitely prime time for investment and others are not,” observed Yael Weiss, director of licensing and external research at Merck Research Laboratories. Weiss also served on the review committee that picked the presenting firms. “In most cases, I think the companies were ready for investment and had reached some kind of proof of concept.”

NCI continues to build the infrastructure to help its funded projects become viable companies. In early 2011, for example, the development center is rolling out a regulatory assistance program in which up to 40 biotech firms can apply to get time with a regulatory consulting firm hired by SBIR.

It will be months before NCI has any metrics on whether the Stanford meeting was a success. But Weingarten said he’s happy with the relationships forged at the inaugural venture forum, held in Boston last fall. One company, 20/20 GeneSystems, launched a diagnostic screening services business following talks with a big pharma firm at the forum. Weingarten said several other firms are now in serious discussions or at the due diligence stage of fundraising as a result of interactions at the meeting.

The biggest winner from last year’s meeting by far was Syntrix Biosystems, which scored a $30 million investment. The Seattle-based biotech had had some contact with the investor, PCG & Co., before the meeting, “but I think the conference helped validate their thinking before moving on the investment,” Syntrix CEO John Zebala said. The influx of cash is enabling Syntrix to push its lead cancer drug candidate, the antifolate aminopterin, through Phase II trials.

Zebala added that Syntrix would not have been able to survive without NCI’s support. “We wouldn’t be here without it. No question,” he said. “We have raised to date about $20 million in SBIR funds across many projects. Some were successful, some were not successful, but the point is we had the money and the flexibility to try new ideas.”

The hope is that one or more of the 13 companies featured last month will be able to leave the nest with as much success as Syntrix.

Weingarten and his colleagues are already thinking about how to get the next crop of companies ready for their turn in the spotlight. He and his staff recently met with 11 Bay Area venture capitalists to fill them in on the government’s program and take the temperature of the areas they think are hot investments. SBIR is effectively a seed start-up fund, he noted, and it needs to be attuned to the needs of the market.

“Ultimately, the success of the program is going to be determined by how many of these new products make their way to cancer patients,” Weingarten said.