VCs See Jumbo Opportunity in Fighting Obesity –

Deep fried turkey, mashed potatoes and gravy, pumpkin pie with whipped cream, spiked eggnog, bourbon balls, honey-baked ham, rum-soaked fruitcake, champagne …

All those holiday meals and treats expanded American waistlines. And now that those heftier folks are resolving to lose weight in the new year, venture capitalists see a jumbo-sized opportunity: They want to carve out a chunk of the multibillion-dollar weight loss industry.

Venture firms pumped $234 million into obesity-fighting companies in the first 11 months of last year, 2.5 times as much as they invested in 2003 and more than 10 times as much as they invested in 2002, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.

Obesity is a growing problem and an increasing danger to public health. The U.S. Centers for Disease Control and Prevention (CDC) estimates that almost one-third of all American adults are obese, while approximately 10 million Americans are morbidly obese. Why the concern about girth? The CDC estimates that 300,000 Americans die each year from causes linked to obesity.

The National Institute of Diabetes & Digestive & Kidney Diseases estimates that 80% of Type II Diabetes cases are related to obesity, and it estimates that the cost of obesity on the health care system has been more than $63 billion since 1999.

With the medical need for obesity treatment so acute, “the regulatory environment may be moving on to reimbursement,” says Carl Goldfischer, a medical doctor and a managing director at Bay City Capital. “Obesity is being treated as a disease unto itself. This is quite favorable from an investment perspective.”

Jeffrey Barnes, a general partner at Oxford Bioscience Partners, adds: “When there is a large untreated patient population and you have a significant increase in the surgical treatments for them, coupled with the fact that the surgical treatments are not without their complications, this all spells opportunity for the medical device industry. Barnes points out that surgical treatments for the morbidly obese have increased 500% over the last 10 years.

Of the 10 million people who are considered morbidly obese, about 1% (or 100,000 people) received gastric bypass surgery last year, the most advanced form of treatment available to the general public. That leaves a huge portion of the morbidly obese population untreated. Also, as effective as gastric bypass surgery can be in reducing the weight of obese patients, it has relatively high mortality rates for the surgery, which is very invasive and irreversible. There are also potentially dangerous side effects, such as ulcers, wound infection and hernias.

Shocking Discovery

One potential alternative to the drastic surgery is using an implantable electronic device to stimulate the stomach and create a feeling of fullness. VCs have made several bets on companies in that space:

* EnteroMedics announced this past December that it closed a $16.9 million Series B round of funding. Bay City Capital led the round, which closed in July, with $5 million. Other investors included Aberdare Ventures, which invested $4 million; Charter Life Sciences, which invested $1.5 million; MPM Capital and some of the company’s founders. The St. Paul, Minn.-based company makes a minimally invasive stomach stimulation device. It hopes to begin clinical trials next year and have the second phase of clinical trials begin by 2006.

* GI Dynamics raised $12 million in a Series B last year for its stomach-stimulating device. The Newton, Mass.-based company is backed by Advanced Technology Ventures, Angel Healthcare Investors, Catalyst Health & Technology Partners, Cutlass Capital, Domain Associates, Polaris Ventures and Seedling Enterprises. “Whenever you see a lot of surgeries being performed, people are getting very interested in finding less invasive means,” says Christoph Westphal, a Polaris general partner and a GI Dynamics board member.

* IntraPace raised a $14.6 million Series C last year for its implantable gastric pacemaker to treat obesity. The Menlo Park, Calif.-based company is backed by the Angels’ Forum/Halo Fund, CB Health Ventures, Development Capital Corp., Guidant Corp., Johnson & Johnson, Draper Fisher Jurvetson ePlanet Ventures, Oxford Bioscience Partners and Toucan Capital.

Mir Imran, founder, chairman and CEO of IntraPace, says that the market opportunity is enormous, considering the serious effects on overall public health posed by obesity. “Scientists and health care providers are recognizing that reducing weight is not just for aesthetic reasons, but also that reducing the incidence of chronic diseases that are incredibly expensive to the medical community,” he says. “The problem is so large it requires a multi-faceted approach to solve it.”

Imran points out that the treatment of obesity as a disease is in its infancy. Doctors have yet to stratify and differentiate among obesity patients, as they have with cancer patients and heart disease patients. “We haven’t figured out what group of patients should be treated with one type of therapy and what group treated with another,” he says. “Right now we lump everybody into this 10 million patients.” He adds that over time doctors will learn of various risk factors and biomedical markers that will dictate treatment.

Devices so far offer some of the best hope for obesity patients who may not qualify for gastric bypass surgery. However, investors in these companies aren’t hawking their portfolio companies as ones that will control the marketplace and make such surgery obsolete. VC investors in the space, even in competing device companies, say that the obesity market is big enough to make all the current players a success.

“The electrical stimulations approach is obviously radically different than the surgery, but I don’t want to imply that these are mutually exclusive,” says Barnes of Oxford Bioscience. He says that some patients may not be candidates for gastric stimulation and have no choice but to have one of the many surgical techniques, and there are patients who are not surgical candidates. “It may be possible to develop a regime of gastric stimulation to the point of being a surgical candidate. The market is certainly big enough to support a number of different modalities.” Barnes says that further advancements in obesity treatment will dictate treatment methods for different patients.

VCs are also placing bets on companies that make drugs to combat obesity, like Kadmus Pharmaceuticals of Irvine, Calif., and Orexigen Therapeutics of Laguna Nigel, Calif. Kadmus announced early last year that it raised $15.3 million from Bio*One Capital, CDP Capital, NeuroVentures Capital, Sanderling Ventures, Softbank Life Science Ventures and VenGrowth Advanced Life Sciences Fund. Orexigen, which also develops drug therapies to combat obesity, raised $11 million in a Series B last year from Domain Associates, Kleiner Perkins Caufield & Byers and Soffinnova Ventures.

According to Polaris Ventures’ Westphal, venture capitalists are every bit as interested in supporting pharmaceutical companies that fight obesity as they are in medical devices. “The large pharma companies have spent hundreds of millions of dollars on this,” he says, noting that the size of the market and VC interest in pharma have helped lead to the venture world’s interest in obesity. VCs are making selective bets in this area, he adds, because the approval process is much longer. Westphal estimates that the approval process for drugs is between five to eight years longer than that of devices.

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