Outlook ’04: BIOTECH –

Mick Jagger is still rockin’ with the Rolling Stones. And Goldie Hawn is still making movies. But no matter what they do they can’t stave off old age.

As we enter the New Year, drugs and services to treat them and other aging Baby Boomers are the hottest areas of the life sciences sector. As a group, Baby Boomers represent 30% of the U.S. population, or 78 million people. And many are now celebrating – or, rather, avoiding – their 60th birthdays.

As the Boomers age, they’re living longer and their rates of diabetes, heart disease, cancer and other afflictions are expected to soar. About half of all people who live to be 85 get Alzheimer’s disease. And cancer is a more common affliction for people over 65 than heart disease. So experts predict a spike in cases of degenerative brain disorders and cancer. The pharmaceutical industry is aware of this and is researching ways to ease the Baby Boomers’ pain, if not cure it altogether – so they can continue to make music, star in movies or just live longer lives as they march into their twilight years.

Stuart Collinson, a member of San Diego-based Forward Ventures and former chairman, president and CEO of Aurora Biosciences Corp., says that therapies for diseases of the central nervous system as well as cancer represent a potentially huge area of investment in 2004 and beyond.

This is a trend that was already well under way in 2003. Indeed, the potential for drug development has lured many investors in life science companies across all stages of development. Several life science sectors – such as biotech, pharmaceuticals and health care products and services – accounted for more than 15% of the number of venture capital deals through much of 2003, according to the PricewaterhouseCoopers, Venture Economics, National Venture Capital Association Money Tree Survey. Overall, the life sciences sector captured one-fourth of disbursements, second only to the software sector last year. And venture capitalists expect the life sciences boom to continue in the New Year, particularly because of the Boomer factor and drug development.

Among those that received venture capital in 2003 was Rinat Neuroscience Corp., a Palo Alto, Calif.-based spinoff from Genentech that is developing treatments for neurological diseases such as Alzheimer’s and Parkinson’s. Rinat took in a $40 million Series B from Prospect Venture Partners, MPM Capital and Schroder Ventures Life Sciences in 2003.

Aching Bones

Also, Kemia of San Diego received $20 million in three tranches from Forward, Alta Partners and Novartis. The company, which is developing treatments for age-related disorders such as osteoporosis and rheumatoid arthritis, could be back to the funding well again this year. And then there’s AmpliMed of Tucson, Ariz. The company, which is developing cancer-fighting drugs, received a $5.5 million Series A last year from Valley Ventures, Solstice Capital, Biotech Insight Management and Invest Bio. AmpliMed has already said it plans to go back to the funding well after it begins Phase II trials in late 2004.

Collinson sees more of these types investments happening in life sciences buoyed in part because of drug developments that already are in the pipeline. Leading that charge are established companies, such as Millennium Pharmaceuticals and Genentech Inc., public companies that all have seen positive developments in the testing of their respective oncology drugs.

Staying Healthy

“As Baby Boomers age, health becomes more and more important and we’re going to demand more health-related advances,” says Nick Vidnovic, manager of Mellon Financial Corp.’s private equity group in Pittsburgh. “I have a strong belief in life sciences. Just look at the demographics of our aging population.”

Genentech is hoping its novel cancer drug Avastin, which has been tested for colon cancer and kidney cancer, receives government approval in 2004. Rodney Ferguson, a partner at JPMorgan Partners who leads the firm’s life sciences and health care practice in San Francisco, attributes enthusiasm of the biotech sector in large measure to Genentech’s Avastin, which he says lifted the entire industry by reminding investors that successes are possible in the biotech industry.

And despite the fact that Avastin produced mixed test results in late 2003, the biotech industry is optimistic about its potential for all types of cancer, which is fueling investors’ interest in the space, says Nicholas Galakatos, general partner of life-sciences-focused MPM Capital in Boston, who expects a resurgence in pharmaceutical investing in 2004.

Helping to fuel investments of all kinds in life sciences is a slew of new funds that either closed recently or are near their target. Leading the charge is New Enterprise Associates, which is raising a $1 billion health care fund.

Investing should be more robust for early-stage companies in 2004 because their valuations have remained low, according to Thomson Venture Economics, whereas later-stage companies have seen their valuations increase as exit opportunities opened up through IPOs and M&A.

Terrance McGuire, founder and managing general partner of Waltham, Mass.-based Polaris Venture Partners, which devotes about one-third of its investments to life sciences, notes that product companies need a lot of financing through their development, which might lead investors to go after younger companies and startups. “If a company’s products prove successful, the payoff from a merger or an IPO will be a handsome reward,” he says. “The industry has come back to this normalized way of life in which we seen a subsequent step up in valuation after each funding round. Though we’re seeing exciting new products ideas and drugs coming out, we’re not pricing ourselves out of whack.”

Daphne Zohar, founder and managing general partner of PureTech Ventures, a Boston-based venture consulting company, says she expects to see more Series A deals getting done in 2004, especially for pharmaceutical companies targeting age-related areas such as osteoporosis, diabetes and neurodegenerative diseases, which she describes as high-profile research areas that have been neglected by investors but are of interest to Baby Boomers.

“The IPO window has opened and M&A opportunities are improving, so later-stage valuations will go up, closing off that avenue to most VCs in 2004,” she predicts. “VCs will be looking for fresh deals to invest in, so expect a lot more Series A deals in 2004.”

Galakatos from MPM Capital – which invested $160 million in 24 companies in 2003, according to Thomson Venture Economics – says now is probably the best investment environment he’s seen for biotech companies since the period between 1996 and 1998. Part of the reason for that, he says, is because of valuations. Although they’ve gone up in some areas, they are still low overall. And they could be pushed down further if the biotech IPO window closes in 2004, which it might considering the poor aftermarket performance of the handful of companies that debuted on the public market at the end of last year.

No Stinkin’ Profits

Most biotech startups and even those further along that have filed to go public have yet to show a profit. But most investors are not fearful of the sector turning into a bubble, says Charles Rothstein, senior managing director of Michigan-based private equity firm Beringea. Rothstein says one of the reasons biotech investing today won’t create a bubble tomorrow is because of the growth that an aging population provides. Plus, he notes, valuations across all stages have remained steady and attractive for investors.

So what’s gonna happen in 2004? Basically, it’ll be all about drugs, especially those that target the older demographics. During the genomics revolution, investors were transfixed by platform companies. “Now, people say that platforms have lost their luster, so the pendulum is swinging and more investors are taking a look at products and novel drugs in 2004,” says McGuire of Polaris.

Still, as any venture capitalist who likes to keep the cards close to the vest will tell you, it’s difficult to predict future trends. “It’s tough to say what’s going to be hot in 2004 since usually you notice those things only in retrospect,” McGuire says. “So if you have any idea what’s going to be hot 10 years from now in life sciences, give me a call.”