Filling the Rx with VC –

P. Sherrill Neff, a founding partner of Philadelphia-based Quaker BioVentuers, is on the verge of closing three deals, and he jokes that he’s ready to take the summer off as soon as the funding details are finalized. But it’s hard to imagine Neff doing something other than promoting the City of Brotherly Love as a great place for biotech startups to raise venture capital.

Neff is chairman of the VC committee for the BIO 2005 conference, which will be held in Philadelphia in June. He’s also chairman of the Greater Philadelphia Venture Group. So he might be excused if he wants to take a little vacation. But, in truth, Neff doesn’t plan on slowing his venture activities.

And he’s been quite active as an investor. Although Quaker is a relatively new player in the life sciences sector, the venture firm has closed on nine deals since he and a group of biotechnology industry veterans formed it in 2002. Quaker provides capital to life science companies in the Mid-Atlantic states, from New York to North Carolina. And the firm closed on its inaugural fund in the fall with $280 million in commitments, $80 million more than the firm had targeted. Of the deals Quaker has closed to date, just one has been outside of its home state.

Q Do Pennsylvania and the Mid-Atlantic region have a big enough pool of experienced entrepreneurs for your firm’s fund, as well as all the other VC firms in the area?

A Right, you need a big stable of serial entrepreneurs. Five years ago, I would have said we did not have that stable in existence. Today, we do. Now, when a company is started here, easily you can find three good CEO candidates.

Q So the deal flow is good?

A Yes. This is definitely a buyer’s market.

Q With you and your firm, as well as the Greater Philadelphia Venture Group and the Mid Atlantic Venture Association, pushing for more venture growth in the area, how have deal terms been affected?

A Deals are still more friendly here on the East Coast than the West Coast. I’m talking in terms of pricing, preference and board control. It’s rare when we get into a pricing war and the startups see competitive term sheets.

Q Why is that?

A It’s a result of supply and demand. There is an abundance of resources and entrepreneurs in the area. Plus, we prefer to co-invest with other firms [such as Burrill & Co., Domain Associates, New Enterprise Associates and OrbiMed Advisors]. Our firm isn’t competitive; it’s collaborative. You have to be that way when funding life science startups, because of how capital intensive certain startups can be. But you need more than just a lot of money; you need a lot of smart people around the table.

Q Even though you say things are stable and ordinary, many of the VC-backed biotech companies that went public last year. are not trading well in the aftermarket and the IPO market for biotechs has dried up. How has that affected your firm?

A Sure, there have been some IPO successes. But no doubt, the IPO market has turned into a flop. But it hasn’t affected us much. When we started Quaker, we didn’t want to be dependent on the IPO market. When we’re looking at funding a company, we prefer they consider selling [as an exit strategy] because that kind of mind-set forces entrepreneurs to sit down, think and then ask themselves who they’re going sell to when the time comes. When are they going to sell. And they have to ask why, too. We don’t want our portfolio companies to be dependent on cycles. But we do want them to think about all the possibilities. That’s the kind of company we want to fund.

Q So no IPOs whatsoever?

A None of us would frown on an IPO, if the sun, moon and the stars are aligned. But there’s not always that kind of frothy situation happening.

Q It seems like the M&A market is a good place to exit, especially lately. But aren’t M&A deals also dependent on cycles, much like IPOs?

A Overall, some of the best returns we’re going to get are from selling the company, no matter what the IPO market is doing. And that’s because it comes down to Big Pharma.

Q What do you mean?

A The region here is home to a number of research institutions as well as large pharmaceutical companies, such as Novartis. And when Big Pharma is looking for an interesting product to buy and perhaps complement some research of their own, they don’t have far to look. That’s why I say companies should consider not an IPO, but to whom they might sell.

Q Speaking of Big Pharma, a number of these companies [such as MedImmune, Novartis, Merck and Johnson & Johnson] operate their own corporate VC arm. And Amgen recently established a $100 million VC unit. You’re saying these companies potentially can help you exit a portfolio company, but they’re also increasingly your competition as you are sourcing deals. How does that affect your business?

A The question to ask is: Will the corporate VC arms be able to weather the bad times and good?’ It’s usually difficult for corporate venture capital units to consider their investments an opportunity for a divesture. They mostly look at their portfolio as strategic investment, and so it becomes difficult for them to spinoff the companies or sell them outright. That’s what gives us the advantage. And to answer your question, we’re on concerned about the increased in corporate VC. There are so few VC players serving the region here, we could use more.

Q Anything good to say about Big Pharma?

A The proximity that many of our startups have to large pharma is a major advantage. After all, the pharmaceutical base that we have here has contributed to our growth. They help in industry development, clinical development and commercial development.

Q A common theme from you is that it’s good to be a life sciences entrepreneur in and around Pennsylvania. Is that so?

A Yes. There is a core of experienced serial entrepreneurs that are emerging. And the flow of federal funds into academic medical research is stronger than ever. Tech transfer efforts are improving and venture capital resources are growing. We’re on the verge of achieving a critical mass.

Q How does BIO 2005 play into all of this?

A Besides the fact that Brenda Gavin [managing partner of Quaker BioVentures] will take part in one of the conference’s sessions [in a mock negotiation for a Series B round of financing], this event will be a great showcase for our region’s VC community.

Q And your vacation plans?

A I’m not ready yet.

P. Sherrill Neff

Managing Partner

Quaker BioVentures

Work: Previously, Neff was president and COO of Neose Technologies Inc. He led the drug company as it grew from a startup with a $30 million valuation to a publicly traded company.

Boards: Sits on boards of portfolio companies Biolex Inc., BioRexis Pharmaceuticals and Medmark Inc. Also sits on boards of Resource America Inc.; the Greater Philadelphia Venture Group; the University City Science Center; the Biotechnology Institute; and the Policy Board of WXPN at the University of Pennsylvania.

Email: alastair.goldfisher@thomson.com