There’s Life In Life Science –

Ask the average VC what gets his motor revving these days, and he’s likely to start talking about life sciences. The sector offers the potential for enormous financial upside, and in a post-Sept. 11 world where priorities have shifted, the fact that life sciences companies could deliver massive societal benefits makes investing in these startups even more appealing.

Thus far, most of the talk has been backed up by action. In the first quarter of 2002 VCs invested $1.22 billion in medical/health/life sciences, accounting for one-fifth of total investments that quarter, according to PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association. That compares with $1.4 billion in the second quarter of 2000, when the VC market was near its peak, which shows this sector’s resiliency.

But despite that, even life sciences companies are not immune to the whims of the markets. Several IPO plans have been shelved, while any company looking for its next round faces an uphill battle in the current environment. All the while, the pressure to get products out the door is greater than ever. As one executive put it, “It’s a painful time to be an entrepreneur because you can’t throw caution to the wind.”

So, to get a better grasp on the challenges, expectations and funding situations of startups in this sector, we interviewed four venture-backed companies-all at different stages but none of them public yet-to learn what they’re experiencing.

PTC Therapeutics Inc.

Business: Small molecule drug discovery

Location: South Plainfield, NJ

Web site:

Employees: 74

Funding situation: Has raised $56 million to date. Last round was $40 million deal in August 2001 that valued the company at $76 million. Cash should last until the end of 2004, but another round in 2003 is possible.

Investors: Vulcan Ventures, CSFB, HealthCap, Bay City Capital, China Development Industrial Bank, CDIB Biotech, Delphi Ventures, Novo A/S, Tularik Inc., Pictet Global Sector Fund-Biotech, Three Crowns Capital, The Robert A. Swanson Family Trust, New Medical Techologies, The Manufactures Life Insurance Company USA.

Exit plans: Would consider an IPO when it has a product in clinical testing, which is probably three years away.

The Business Story

PTC Therapeutics is tired of all the nonsense.

One of the company’s main objectives is to prevent and treat diseases by over-writing so-called “nonsense mutations,” which prevent certain proteins from being completed and thus bring about disease. Its research in this area is targeted toward stopping mutuations that lead to maladies including HIV, cystic fibrosis and hepatitis C, but the potential applications of this approach are countless: According to Claudia Hirawat, vice president of corporate development, PTC knows of 1,800 genetic disorders impacted by nonsense mutations.

PTC overwrites these mutations by applying integrated RNA biology and chemistry platforms. The company hopes to have an application for an investigational grant by 2004. “A lot of our indications would qualify for orphan drug status right now,” Hirawat says. In exchange for developing drugs to treat rare disease, orphan drug status grants drug makers seven years of market exclusivity.

One thing that makes PTC unique within the RNA space is its chemistry capabilities. “Most biotech companies are built from the biology side and won’t add the chemistry until later because it is expensive,” she says. “We built chemistry and screening capabilities from the beginning…and we have some intellectual property on the chemistry of RNA.”

Like most biotech companies, PTC isn’t making money yet, and revenue is still a few years away. But that’s perfectly alright with the company and its investors, especially since PTC has so much cash on hand. “We could generate income through partnerships…as short-term revenue,” says Hirawat, “but we’ve tried not to dilute our efforts on drug discovery. That’s a luxury we have since we’re well funded.”

That said, PTC isn’t averse to partnerships, but when it enters them “we’re not focusing on the cash but rather partnering for the long term,” Hirawat says.

The VC Story

In part because it had a good story to tell, PTC didn’t feel the funding crunch last summer as acutely as other companies. All its initial VCs re-upped in August 2001 and a few new foreign investors joined the party. The company started its road show for that deal in Europe, and “by the time we had come back to the States we were done,” Hirawat says.

How did PTC have such an easy time? Hirawat says it’s because the company was forthcoming with financial information and had been meeting its goals on schedule.

“We were not doing something we couldn’t demonstrate yet,” she says. “We had a list of things we said we were going to accomplish, and we had gone far beyond that list.”

Another factor in its fund raising success was Peter Svennilson, a board member and PTC investor who runs Crowns Capital, a biotech investment banking boutique. Svennilson, who sits on several biotech company boards, played a key role in attracting investors to PTC’s first and second rounds.

Thus far, Hirawat says PTC’s investors have stayed supportive without being too clingy.

“I don’t think they’re active’ in the sense of us being policed,” she says. “These are very astute investors, and they certainly don’t interfere with our operations. We try to make good use of them.”

Sensors for Medicine and Science Inc.

Business: Medical sensors

Location: Germantown, MD

Web site:

Employees: 20

Funding situation: Has raised $45 million to date. Most recent round for $30 million came in March 2002. Current funding should sustain business for next three years.

Investors: New Enterprise Associates, Healthcare Ventures, Abingworth Management, Anthem Capital Management, Rho Ventures

Exit plans: Looking for merger or IPO opportunity. No timetable set.

The Business Story

In the race for the perfect glucose monitor-a must-have device for diabetes patients-Sensors for Medical Solutions has carved out its own path.

Most glucose monitors require patients to prick their finger and insert a blood sample into the monitor, a painful, inconvenient and error-prone process. Many people fail to test their glucose frequently enough, in part because doing so is such a nuisance. To answer this problem, S4MS is working on a noninvasive product whereby a patient gets an implant in his arm that reports the glucose level back to an external device-in this case, a watch. “The holy grail [for diabetes treatment] is to find a way to provide continuous monitoring noninvasively,” says Orly Mishan, director of business development.

Because this particular type of monitor is unprecedented, S4MS will have to go through several phases of testing before getting to FDA approval stage. Mishan estimates it will take about three years from now to reach that point.

To be sure, S4MS’s success in this area is no sure thing. Glucose monitoring is a highly competitive sector, and there are ways to achieve noninvasive monitoring without going the implant route. Other companies, for example, are developing optical sensors that shine light into the skin to determine glucose levels. But Mishan argues that’s tough to do technically and has not worked well enough in the past. “Thus far everyone that’s tried it has huge devices, and the accuracy is weak,” she says.

The real question to look at, she adds, is whether a company in this space has adequate technology. “The road toward the ideal glucose monitor is littered with carcasses…and the shakeout is occurring because people have technology that is just inadequate,” says Mishan, who joined S4MS after managing diabetes-related product planning and business development for Pfizer. “Thus far our technology looks pretty good, and we have confidence that further testing will prove that.”

Of course, another factor to consider is funding, but given its recent $30 million round-all of it earmarked specifically for developing the glucose monitor-the company won’t be hurting for cash anytime soon. “Any additional work we’re doing on other products would not come out of the $30 million,” Mishan says.

One of those other products, which offers a more immediate revenue stream, is an oxygen sensor the company has developed for a handheld monitor that tells users how many calories they’ve burned. Developed with Healthetech, the monitor is in field testing and should launch at the end of 2002.

The VC Story

In its latest round last March, the company raised $30 million from its existing VCs at a higher, undisclosed valuation. Mishan says that despite the downturn in venture financing, the funding process was successful, in part because the company had made significant progress since its previous round.

The company currently gets “a lot of attention” from its investors-including Dr. M. James Barrett, NEA general partner and chairman of the board-but clarifies that it isn’t being micromanaged. “In the [1.5 years] I’ve been with the company they’ve been very hands off,” she says.

While S4MS has no specific exit plans right now, it would consider both a merger and going public. “We’ll be opportunistic about it,” Mishan says.

Medical Scientists Inc.

Business: Predictive modeling software

Location: Boston, MA

Web site:

Employees: 25

Funding situation: Has raised $4.3 million to date, including a $2.3 million deal in June 2002. The company is targeting October to raise a $5 million round at a pre-money valuation of around $30 million.

Investors: Active Health Management, Psilos Group

Exit plans: No specific plans, but open to merger with complementary company.

The Business Story

Imagine being able to predict how many people will contract a disease next year, or determining which individuals, if not treated preventively, are at the highest risk for one of those diseases.

At Medical Scientists Inc., that dream is already a reality-and a lucrative one. “We’re looking for revenues to increase by 250% this year…which should put us just south of $5 million in revenue,” says Dr. Harry Poteat, founder and vice chairman. “We’re pretty happy…to be undergoing stable, steady growth.”

The Boston-based company, founded in 1992 by Poteat and other Harvard-trained doctors, sells its predictive modeling software to health maintenance organizations, corporations and pharmaceutical companies. Just last April, the company signed up Blue Cross and Blue Shield of Minnesota to use its MediSave product, which predicts how many individuals will be stricken with a specific disease and how much treating that disease will cost their health plan.

So how does the company come up with these projections? In the case of MediSave, it uses a triangulated approach, incorporating actual claims data from seven million people, research on how diseases affect populations and expert opinion. The fact that MSI incorporates qualitative information into its model helps set it apart from the more traditionally used actuarial models. “We consult with Harvard doctors [some of whom work at MSI] and integrate it into the projections,” Poteat explains. “That drives actuaries crazy.”

The company also sells Hybrid, a solution that uses artificial intelligence technology to identify people who are likely to experience costly health problems in the future. This tool might persuade a corporation, for example, to cover more expensive drugs for certain employees if doing so is likely to prevent higher costs down the road. “It’s building these rules so that HMOs can focus their resources on individuals who are going to be ill in the future,” Poteat says.

But whether it’s Hybrid or MediSave, the motivation for clients often comes down to the same thing: cost savings. Corporations and HMOs want to reduce their health costs, while pharmaceutical companies want to be able to show an HMO, for example, how much money their disease-fighting drug is going to save that provider.

And in the current market, where cost cutting is king, Poteat is optimistic about the company’s growth potential.

The VC Story

Back in August 2000, Medical Scientists was poised to go public through a merger with investor Active Health Management Inc. But the NASDAQ’s nose-dive ruined those plans, so the company had to go back to its investors for cash earlier this summer.

“In 1999 there was a feeling of hey, I like the people in this company…I want to take the risk and go after this’,” Poteat recalls. “But when we raised the round post September 11, it was like when are you going to be cash-flow positive?'”

Indeed, during the company’s last round the VCs were concerned about the financing risk, and so they stipulated that MSI had to get to the break-even point. The company has met that goal for two consecutive quarters now, which helps to explain why its investors aren’t holding the reins too tightly. “Right now everyone’s taking a wait- and-see attitude and letting us run the show,” Poteat says. “If you do what you said you were going to do, people will generally leave you alone.”

MSI plans to tap the market again in October for a $5 million round at a valuation of between $25 million and $35 million. That money will be used to increase the size of its sales force and build up its IT infrastructure, Poteat says.

Message Pharmaceuticals

Business: Drug discovery, with a focus on messenger RNA

Location: Malvern, PA

Web site:

Employees: 22

Funding situation: Raised $2 million Series B round in August 1999 and has since been supported by bridge loans from its investors. Those bridge loans were converted into equity recently when the company was recapitalized.

Investors: Anthem Capital Management, Euclid Partners, GeneChem Technologies Venture Fund, Oxford Bioscience Partners, SR One Ltd.

Exit plans: No specific plans yet, but an ideal exit would be to merge with a chemistry company that can advance its programs.

The Business Story

By now you’ve probably heard at least one story about a judge sentencing a parent to jail after his child got in trouble with the law. Indeed, several towns across the U.S. have passed laws that hold parents responsible for their offspring’s actions; embracing the theory that by punishing the parents the kids are more likely to behave.

In some ways that’s analogous to what goes on at Message Pharmaceuticals. Instead of targeting the proteins that actually cause disease, Message Pharmaceuticals centers its efforts on the messenger RNA that regulate those proteins.

Right now its main focus is developing a drug that would downregulate the protein that causes Alzheimer’s. Briefly defined, downregulating is influencing RNA so that it expresses less of a protein.

The next step for Message is to add more chemistry to the program to move it forward and outlicense the program to large pharmaceutical companies. Meanwhile, the company is working on another major collaboration that it hopes to start before the end of 2002.

On its face, Message’s story sounds largely positive: It has a unique approach to fighting a devasting disease, and already has external obligations bringing in revenue. But look behind the scenes and you’ll find a startup that has faced rejection in the fund-raising market, and a company that has been forced to change its focus and slim down.

“We’ve scaled the company back a bit to conserve the limited cash that we have,” says CEO Chris Cashman, a former global director at Pfizer just four months on the job. “We’re putting more efforts on research collaborations with pharmaceutical companies to fund research in areas where they’re interested…and we’ve had moderate success with that strategy.”

The VC Story

Since its Series B round in 1999, the company has been denied a third round on two occasions. Cashman lays much of the blame on market conditions and bad timing. “There have been a couple false starts,” he explains. “The company ran into the wall that everyone else ran into, with the market falling last spring (2001) and then September 11. It was a misfortune of timing more than anything.”

That said, the company’s existing investors didn’t abandon Message, opting instead to keep it afloat with a series of bridge loans in 2000 and 2001. Recently those loans were converted to equity, the company was recapitalized and its focus was narrowed, putting it in a much stronger position to go for a Series C deal later this year, when it hopes to raise $10 million or more. “We needed to get our house in order first,” Cashman says. “We’re going to need that [$10 million or higher] level in order to advance our programs.”

Part of the company’s retooling meant setting realistic expectations that both management and the VCs were comfortable with. According to Cashman, the investors now have a better feel for the resources involved with this type of research, something he is quite familiar with having worked at Pfizer. “There was a definite mismatch here [before],” he says.

Down the road, the company is open to any exit option, but an ideal scenario is a merger with a chemistry company. “We’re always on the lookout for merger or alliance opportunities where we can take our platforms,” he says. “An ideal one would be to marry with a chemistry company that can advance our programs.”