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Venture capital climate in RTP improving

Frank Vinluan

Early stage life science companies still developing their technologies can fall into a gap: too expensive to be supported by more grants or angel investments yet not far enough along to secure venture capital interest.

In the worst economy in generations, their funding challenges are more pronounced. But the first quarter saw several companies in North Carolina’s Research Triangle draw venture capital investments for continued development of pharmaceutical products and medical technologies. Among them, antiviral company Chimerix raised $45 million; nanotechnology company Liquidia Technologies raised $10 million; and diagnostic technology firm Advanced Animal Diagnostics raised $11 million.

Jimmy Rosen, a partner at Durham, North Carolina-based venture firm Intersouth Partners, says if the fund-raising environment were a sick patient, that patient would be improving but not yet recovered. But Rosen insists that companies with unique, novel technologies continue to be attractive investments.

“There’s almost always money available for the best deals out there,” Rosen said.

Intersouth is investing from a $275 million life science and technology fund, which was raised in 2006 when financial conditions were considerably better than they are now. Rosen says a venture firm’s ability to secure new dollars for investing is tied to the firm’s ability to exit existing investments. The limited partners who have invested with the venture capital firms won’t invest more money until their existing investments become liquid.

If investing is a cycle, there are now signs of improvement in parts of that cycle. Exit activity in the first quarter improved compared to a year ago, according to an analysis done by Thomson Reuters and the National Venture Capital Association, or NVCA. Their report showed 109 merger and acquisition deals in the quarter. Of the 14 venture-backed initial public offerings in the first quarter, six were in the life sciences.

The first quarter also saw 36 venture capital funds raise more than $7 billion, according to a separate Thomson Reuters and NVCA analysis. That figure represents a 76 percent increase in dollar commitments compared to a year ago when 44 funds raised $4 billion. The NVCA says the quarter was the strongest for fundraising since the third quarter of 2008 and the best first quarter since 2001.

Even so, Scott Gosnell, CEO of WindCastle Venture Consulting in Columbus, Ohio, says that the challenge for new investing activity is that the returns that venture firms see from their existing portfolios have not measured up. Gosnell says it has gotten more difficult to steer drugs through the regulatory process, requiring more dollars of investment and more time in R&D. Also, partnering with a big pharmaceutical company isn’t always seen as the best exit because some of the small biotech companies are finding terms that aren’t as favorable as they once were.

Durham-based Pappas Ventures, which focuses exclusively on investing in the life sciences, has benefited from recent exit activity. Plexxikon, a venture-backed pharmaceutical company based in California and a Pappas portfolio company, was acquired this month by Japanese firm Daiichi Sankyo for $935 million. Its lead drug candidate is a treatment for melanoma.

Pappas continues investing through its latest fund, a $102 million fund that closed in 2009. That fund has invested in eight companies to date, including Triangle companies Liquidia and Chimerix. Partner Ford Worthy says that he has heard of some venture firms adjusting their investment strategy to focus on later stage investments as a way of reducing risk. But he says Pappas Ventures continues to be interested in early stage companies.

Historically, “early stage” meant a company a year, perhaps 18 months from clinical testing. Now Pappas exercises more scrutiny about how far away a company is from the clinic. Years ago, the firm invested in companies that turned out to be further away from clinical testing than that 18 month threshold. No longer.

“We’re probably even more rigorous in making sure that if we invest, we can in fact get to the clinical stage in that period,” Worthy said.

Rosen acknowledges that Research Triangle Park does not draw the same kind of investment dollars that Silicon Valley does, or even Boston, Massachusetts. While many companies have had difficulty securing funding, he says that for the Triangle deals that are happening it’s important to note where the money comes from. Triangle companies are attracting more interest from firms beyond North Carolina’s borders. Intersouth’s recent investment in Advanced Animal Diagnostics was joined by Novartis Venture Funds, the investment arm of Swiss pharma Novartis.

Another example is Liquidia, whose novel drug delivery technology has attracted investments from Maryland-based New Enterprise Associates and Canaan Partners, which has offices in Silicon Valley and the Northeast. Liquidia also recently attracted a $10 million equity investment from the Bill & Melinda Gates Foundation, notable because the foundation selected a Triangle company rather than one closer to its Northwest base to be its first biotechnology investment.

Rosen says that companies securing these “high quality deals” raise the profile of the Triangle as an investment opportunity, which should help the region draw more venture interest from firms based in other parts of the country.

“Being in the third most robust area for investment in the United States is not a bad place to be,” he said.

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