VCs Psyched over Brain Investments –

The venture business is famous for finding and funding the brainy and their ideas. Now the brain itself is becoming a hot area. One recent example: MPM Capital Partners was so crazy about psychiatric drug maker Somaxon Pharmaceuticals that it led a $65 million round in the company.

Of course, MPM isn’t the only VC firm that’s gaga over the so-called “neurotechnology” market. Investments in neurotech companies totaled $1.5 billion last year, up from just over $500 million in 1999, according to NeuroInsights, a San Francisco consulting and research firm. Neurotech companies make drugs and devices to treat disorders and diseases of the central nervous system (CNS), most notably the brain, as well as software and other tools to measure and understand the CNS.

Neurotech “is going to be one of several big areas [because] we have an aging population,” says Jean George, a general partner at Advanced Technology Ventures of Waltham, Mass.

Demographics are helping to drive the market. The world’s population is living longer and trying both to battle diseases associated with aging (such as Alzheimer’s, Parkinson’s and stroke) and to maintain higher levels of brain function late into life.

Technologies are also creating opportunities. For one, the advance of Functional Magnetic Resonance Imaging, which has created far more effective maps of brain and CNS activity than were previously available.

Coming into Focus

“Brain imaging is quite high resolution compared to a few years ago and seems to be marching in an exponential curve,” says Steve Jurvetson of Draper Fisher Jurvetson in Menlo Park, Calif. DFJ has invested in two neurotech companies: Everest Biomedical Instruments and Posit Science. Everest, based in Chesterfield, Mo., is developing a device to monitor consciousness. Posit, based in San Francisco, makes software to keep brain activity high later in life.

Another driver behind the increased interest in neurotech is the Human Genome Project, which revealed that half of our genes are expressed in the brain, far more than were previously thought, says Roger J. Quy, a neuroscientist turned general partner at Technology Partners in Palo Alto, Calif. “That’s opened up the potential for cures for what underlies symptoms,” he says. “Most treatments have been palliatives [treating symptoms, not causes].”

Quy says that neuroscience remains immature compared to other areas of the life sciences. “But it’s a large and growing opportunity,” he notes. Already, 20% of the U.S. population suffers some sort of brain disorder each year. Recent research suggests that as much as 25% of the populace endures at least mild mental illness every year. Plus, neurodegenerative diseases increase with age.

Not surprisingly, then, the area with the greatest potential appears to be neuro pharmaceuticals. Research into brain activity is creating potential for new kinds of drugs to treat everything from common psychiatric syndromes to sleep disorders to memory loss. Then there are approaches to such neural disorders as Alzheimer’s, Parkinson’s and stroke.

Mark Cochran, a managing partner at NeuroVentures Capital in Charlottesville, Va., says that interest in neuro drugs will drive the market, with promising areas of research including Alzheimer’s and epilepsy. Cochran, who was a research scientist before he became a VC, notes that drugs that work on epilepsy appear to also have applications for general pain and anxiety conditions. “So it treats an unmet medical need, and drugs have potential use beyond the field,” he notes. He also says that Alzheimer’s treatments may have beneficial effects for generic memory loss, though the problem with that market is that the FDA only has a model for approving drugs that treat Alzheimer’s, which may impede development of memory enhancers.

Cochran’s fund launched in 2000. It manages just $16 million, but it has made 10 investments and has already had two exits: Proxima Therapeutics and Cyberkinetics Neurotechnology Systems. Proxima, which makes devices to treat brain tumors, was bought by Cystyc for $160 million in February. It had raised $53 million in VC from NeuroVentures, New Enterprise Associates and a host of others, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.

Cyberkinetics, which makes devices to measure and analyze electrical impulses in the brain, went public by merging in October 2004 with Trafalgar Ventures, a subsidiary of a company that trades on the Nasdaq Bulletin Board. Founded in 2001, Cyberkinetics (Nasdaq: CYKN.OB) had previously raised $16.5 million in three rounds from Life Science Ventures, NeuroVentures and Oxford Bioscience Partners, according to MoneyTree. NeuroVentures’ stock holdings weren’t significant enough to be listed in the company’s proxy statement in April, but Oxford Bioscience held 7.3 million shares, which would have been worth $11.3 million based on a closing stock price of $1.55 on July 11.

Quy of Technology Partners says the FDA approval process is a major issue for investors to consider when looking at companies, especially in the wake of the COX-2 withdrawal after issues arose with Merck’s Vioxx. “Aspirin would never get approved today,” he fumes. “And the regulatory process is going to get more difficult, rather than less difficult.”

No More Blues

Still, he’s excited about the prospects of investments like BrainCells Inc., which is developing techniques for generating new neural cells that can help treat not only degenerative brain disorders but mood and anxiety disorders. The company, based in San Diego, Calif., raised a Series B for an undisclosed amount from A.M. Pappas Life Science Ventures in January. It previously raised $22 million from A.M. Pappas, Technology Ventures, Bay City Capital and Oxford Bioscience Partners, according to MoneyTree.

Quy has also invested in several neuro device makers, which offer more straightforward approval processes than drugs. Cochran of NeuroVentures also likes device companies, calling them “a hedge” against the risks of neuro drugs. “The economics of each are quite different,” he notes. “Devices have lower risk, but lower upside, maybe 3x to 4x over investment. That’s not good enough for a venture fund.”

There are also more straightforward drug development paths. ATV invested in Hypnion, which is developing a non-addictive drug for sleep disorders. It meets a clear market need in an area that has well-defined paths to market. MoneyTree shows that the Lexington, Mass.-based company has raised in excess of $67 million since 2000 from a long list of investors, including ATV, Forward Ventures and MPM.

ATV’s George says most big VCs will place bets on a couple of neuro companies during this early phase in the market. ATV also has invested in a neurodevice company, MicroVention, which treats aneurysms. The company has raised more than $50 million from the likes of ATV, Crosspoint Venture Partners, De Novo Ventures and U.S. Venture Partners, according to MoneyTree. MicroVention’s most recent round was in July 2003.

The slow development of companies like MicroVention, which raised its first round in 1997, could cause some VCs to wait before jumping into neurotech. In fact, George says she thinks most VCs won’t commit more fully to neurotech until markets have clearly developed and risks are better understood. “We clearly find the neural area interesting, but within neural we look at specific subsets, because it’s quite complicated to look at all aspects of the brain,” she says.

Still, VCs are likely encouraged by a number of exits in the space. NeuroInsights notes that a dozen neurotech-related companies have gone public since January 2004, 10 of which are VC-backed. Most of the newly public neurotech companies are trading below their IPO prices, but two have done particularly well: Neurometrix and Senomyx. Both are trading at twice their IPO prices.

The biggest winner was New River Pharmaceuticals, which makes treatments for pain and Attention Deficit Disorder. Its stock price has risen more than 240% since its $34 million IPO in August 2004. (New River’s private funding came largely from its CEO.)

Even in this year’s difficult IPO market, one venture-backed neurotech company managed to make it out: Icagen (Nasdaq: ICGN). The company, which makes small molecule drugs to treat epilepsy and many other medical conditions, raised $40 million in February. Founded in 1992, Icagen has raised more than $74 million over the years from a long list of investors, including Alta Partners, JPMorgan Partners and Venrock Associates, according to MoneyTree. Icagen has been trading below its $8 offering price even though it lowered its price to get the deal done.

With the slow IPO market in the United States, some VCs are getting exits on other exchanges. For example, Paion GmbH, a German company creating drugs to treat stroke and other thrombotic diseases, raised $52 million with an IPO on the Frankfurt Stock Exchange. Its backers include 3i Group, Genevest and Vertex Management.

Jurvetson says neuroscience is filled with exciting scientific breakthroughs, but the business models are still unclear. Posit Science, for instance, makes software that competes with pills. How should its products be priced?What are its competitive issues? Jurvetson says the model is still being defined.

That’s true for neurotech overall, he says. “The pace of learning is very exciting. But the risk is: Are these sciences and technologies that get people excited for their own sake, or is there a real business there?”

Perhaps some wise VC will invest in a company that makes it easier to know such things. Such is the potential for the neurotech market.

Michael Fitzgerald is a freelance technology writer. He can be reached at