Weight Warriors

Despite little to show for past investments, venture capitalists are ratcheting up their investments in companies fighting obesity—holding out hope for one big breakthrough drug or device.

Obesity treatments have been attracting substantial investments for at least a decade, but so far the landscape has been littered with failed attempts. Medtronic, for instance, paid $260 million in 2005 to acquire the maker of an implantable electronic weight loss device. But just a few months later, it was forced to admit that the gizmo proved no more effective than a placebo in helping patients lose weight. And then, of course, there was the whole fen-phen diet pill disaster, which cost drug maker Wyeth billions to settle lawsuits after users claimed to have suffered heart damage.

Still, venture firms are putting more money than ever into obesity drugs and treatments. Investment has picked up in the past two years, with VCs investing more than $480 million in 44 companies in 2006 and 2007 combined, according to data compiled by Thomson Reuters (publisher of VCJ). Venture capitalists are betting that their latest crop of investments—ranging from medical devices to fat-free cooking oils to newfangled exercise machines—will finally help them succeed in this enormous market.

Oversized market

About 88 million Americans are obese and 15 million suffer from morbid obesity (meaning they are at least 100 pounds overweight), according to the U.S. Centers for Disease Control. A single blockbuster obesity drug—if proven safe and effective—has the potential to achieve annual sales in excess of $1 billion, says market research firm Medtech Insight.

But unlike with other diseases, finding an effective treatment for obesity has proven surprisingly tricky because there are so many causes. “Obesity is multi-factorial,” explains Ellen Koskinas, a partner at InterWest Partners. “There are a host of physiological, behavioral and environmental aspects to consider.”

In other words, is someone overweight because he’s stressed out at work and eats too much or because of his genetic makeup? These divergent factors make it extremely hard to establish effective clinical trials and generate reliable data.

There is lots of voodoo in the market. The challenge is sorting out what is real science and what is pseudo science.”

Dan Broderick

One of the most effective treatments for obesity in recent years has been gastric bypass surgery and the less invasive Lap-Band, which is surgically implanted around the stomach to help severely obese patients lose weight by limiting food intake. VCs like Koskinas are investing in newer devices that promise to make the procedure safer, quicker and more effective.

Studies show that gastric bypass surgery can result in a person cutting his weight in half over five years, but the mortality rate from the procedure is as high at 2 percent. Lap-Band has proven to be safer, but it still comes with serious side-effects, including nausea and general discomfort, says Koskinas.

That’s why she led a $46.2 million round in EnteroMedics in the summer of 2006. The company, which is still undergoing clinical trials, uses electrical stimuli to regulate the nerves that control appetite and digestion.

“We have looked at dozens of obesity deals over the last five years,” says Koskinas. EnteroMedics was the one that caught her attention because it is a minimally invasive procedure that employs multiple mechanisms for treating obesity. “It also boasts a strong team of experts in the field and compelling human data,” she says.

EnteroMedics went public late last year on Nasdaq, but Koskinas says the IPO was not an exit, but rather an opportunity to raise more money for clinical trails.

Less invasive approach

Another obesity-fighting company that raised a new round of venture capital is Satiety, which pocketed a total of $30 million in series D financing from Skyline Ventures and others. Satiety is pioneering a less-invasive, non-surgical procedure that promises to reduce recovery times and complications compared to existing surgical options.

It is unclear how big and how fast outpatient surgical procedures for obesity will grow, but theoretically it should be a multibillion-dollar market in the U.S.

Barbara Lubash

The procedure, which has not yet been approved by the FDA, introduces a stapling device transorally and creates a restrictive pouch at the entry of the stomach. The overall effect is similar to other procedures that physically restrict the amount of food a patient can eat.

Skyline Managing Director John Freund says he’s been watching the obesity space for a number of years and never found a compelling investment until he saw Satiety. “Our criteria for the obesity space were different than for other diseases because there is no clear animal or chemical data that suggests something could work well,” he says. “However, we were very impressed with Satiety’s strong clinical data showing weight loss.”

Other investors and would-be investors echo Freund’s complaint about the lack of real science in the obesity space. “There is lots of voodoo in the market,” says Dan Broderick, a managing director at Prolog Ventures. “The challenge is sorting out what is real science and what is pseudo science.” He adds that many entrepreneurs make claims about their products without a shred of peer-reviewed scientific literature to support their assertions.

Prolog’s one bet in the space is Asoyia, a producer of trans fat-free soybean oils that raised $4 million in May. The investment is well timed now that some cities, such as New York, are taking the fight against obesity into their own hands and banning cooking oils that contain trans fat.

Broderick invested in Asoyia because the product is a viable, healthy alternative to other cooking oils on the market. “There is no debate in the medical literature about that,” he says.

He also believes that obesity has to be fought on several fronts, whether its drugs, diet, devices, exercise or a combination of all four. “Obesity provides lots of opportunity to investors because there is not a one-size-fits-all approach to treating the disease,” Broderick says. “There will always be a need for multiple avenues to remedy the condition.”

Still, some health care investors have steered clear of the field because they believe a single blockbuster diet pill could put every other approach out of business. Currently, there are at least 30 competing drugs under development by Big Pharma, as well as dozens more by startups, according to industry watchers.

Our criteria for the obesity space were different than for other diseases because there is no clear animal or chemical data that suggests something could work well.”

John Freund

Magic shot?

One such drug is being developed by Halsa Pharmaceuticals, which was recently awarded $250,000 from the Texas Emerging Technology Fund. Halsa holds the rights to a natural material that, when injected by a physician into an obese patient, is expected to cause immediate and substantial depletion of body fat. “We believe that Halsa’s technology has the potential to revolutionize the treatment of obesity,” says Charles Tate, chairman of the Texas Life Science Center.

“If just one of those drugs gets through, it would have an immediate impact on the rest of the market,” says one health care VC who is reluctant to make an obesity investment. “You could easily invest in something that nobody wants anymore because a better alternative just popped up.”

Some investors are trying to mitigate that risk by investing in companies that are not tied to a single treatment and can accommodate new technologies. For instance, Barbara Lubash, a managing director at Versant Ventures, has invested in NewHope Bariatrics, which develops and operates ambulatory surgery centers focused on the treatment of obesity. Founded in 2005, the company last year received $18.5 million from Versant, Austin Ventures and Square 1 Bank.

NewHope is currently rolling out its first surgical centers. It focuses primarily on gastric band procedures, but it is device-agnostic and could start performing other types of procedures if and when those devices are approved. “We do think other devices will come along,” says Lubash. “It is unclear how big and how fast outpatient surgical procedures for obesity will grow, but theoretically it should be a multibillion-dollar market in the U.S.”

Lubash is also excited by the fact that the Lap-Band recently gained Medicare coverage, meaning that for people 65 and over that procedure carries very little out-of-pocket expense. (Banding procedures typically cost from $15,000 to $40,000.) Most health care insurers have been slow to approve obesity treatments because they have cosmetic as well as health benefits. But industry analysts believe greater insurance coverage could help boost the market for banding procedures from just $320 million last year to $1 billion in 2011.

The question still remains: Will VCs finally get fat and happy from obesity treatments?