Newly Formed Durata Therapeutics Acquires Pfizer’s Vicuron Subsidiary

Media Coverage ReportDecember 21, 2009-January 4, 2010

Coverage

BioCentury January 4, “VCs take over dalbavancin”

BioCentury Extra December 21, “Durata acquires Vicuron”

BioCentury Part II January 4, “Deals”

BioWorld Today December 23, “NewCo News: Pfizer Spinout Durata Pushing Dalbavancin to FDA

Approval” December 22, “Other News to Note”

Dow Jones VentureWire December 28, “Venture Firms Jump Back Into Antibiotics, With Winning Results” December 22, “Investors Spin Pfizer's Vicuron Into New Co. Durata Therapeutics”

Genetic Engineering & Biotechnology News December 21, “Durata Therapeutics Acquires Pfizer’s Subsidiary that Develops

Antibiotics”

Private Equity Hub December 21, “Durata Therapeutics Launches, Buys Virucon Pharma”

Mentions

BioWorld Insight January 4, “Experts Predict More Attrition, But More Opportunities As Well”

Press Release Postings

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Dow Jones VentureWireDecember 28, 2009Venture Firms Jump Back Into Antibiotics, With Winning Results

By Brian Gormley

When Cubist Pharmaceuticals Inc. (CBST) bought Calixa Therapeutics Inc. last week, it marked the third time in the last four years that an antibiotics start-up funded by Canaan Partners and Domain Associates had been sold.

Canaan and Domain were also among the investors in Peninsula Pharmaceuticals Inc., acquired by Johnson & Johnson (JNJ) in 2005, and Peninsula spinout Cerexa Inc., which merged with Forest Laboratories Inc. (FRX) in 2007. Investors at the two firms, working with other, like-minded venture capital firms, made several good moves along the way to drive the companies to success.

In the 1990s, pharmaceutical companies pulled away from antibiotics in favor of other markets, such as medicines for large, chronic conditions. But the problem of antibiotic resistance wouldn't go away just because drug makers had, something Canaan, Domain and other firms recognized early this decade.

In response they started Peninsula Pharmaceuticals to develop drugs for life-threatening infections. Peninsula licensed doripenem, a treatment for serious conditions in hospitalized patients, and a cephalosporin antibiotic aimed at a broad spectrum of pathogens, including the hospital bug methicillin-resistant Staphylococcus aureus.

Peninsula's success in demonstrating doripenem's clinical potential led to its $245 million merger with Johnson & Johnson, which wasn't interested in the company's cephalosporin. That drug became the basis for Cerexa, whose backers also included Peninsula investors Pappas Ventures and Montreux Equity Partners.

While developing this therapy, Cerexa added an arm to its Phase II study in which it compared the product to vancomycin, an antibiotic hospitals use when others have failed. Though not powered to show superiority over vancomycin, the encouraging results of that study gave

acquirers one more reason to believe Cerexa's drug would succeed, said Canaan General Partner Brent Ahrens. Forest bought Cerexa for just under $500 million in January 2007.

That same year, Canaan, Domain and Frazier Healthcare Ventures launched Calixa around an Astellas Pharma Inc. (ALPMY, 4503.TO) drug Cerexa considered but never acquired. The drug, CXA-101, targeted Gram-negative bacterial infections, which have emerged as an increasingly serious problem. Though CXA-101 is potent on its own, Calixa elected to combine the drug with a generic antibiotic, tazobactam--which is also part of the marketed anti-infective, Zosyn--to give it broader activity.

The opportunity to obtain such a drug candidate enticed Cubist to pledge $92.5 million up front, plus $310 million in milestones, for Calixa.

Canaan and Domain, which have invested together in several other deals as well, share many views on how to build biotechnology companies, said Ahrens. Peninsula, Cerexa and Calixa ran lean operations early on to minimize expenses. Another plus was continuity in management of the three companies, since Dennis Podlesak, now a Domain partner, served as chief executive of each one. "Not that we don't disagree on some things, but there's a lot of similarities about how we go about running our businesses," Ahrens said.

The firms are now teaming up with Aisling Capital, New Leaf Venture Partners and Sofinnova Ventures to spin the former Pfizer Inc. (PFE) antibiotics subsidiary Vicuron Pharmaceuticals out into a new company, Durata Therapeutics Inc., which aims to propel the injectable antibiotic dalbavancin to U.S. approval.

While Peninsula, Cerexa and Calixa were developing earlier-stage assets, Durata plans to begin testing dalbavancin in Phase III studies in late 2010. And whereas those companies were acquired before their products completed Phase III studies, Durata's fate hinges on the success of dalbavancin in the upcoming trials.

Part of the appeal of antibiotics, however, is that early studies are predictive of future clinical results. Peninsula's doripenem, for instance, has gone on to earn U.S. approval. In dalbavancin, venture firms are getting a product that has generated Phase III data in acute infections of the skin and skin structures, and one that has been in more than 1,000 patients.

There is potential that dalbavancin, which could be dosed once weekly, will enable patients who would now be hospitalized to receive daily intravenous antibiotic infusions to go home.

That would make it easier for patients to comply with their antibiotic regimen, said Domain Partner Nicole Vitullo.

Domain and Canaan continue to consider new investments in antibiotics, which are a good fit for small companies because the regulatory pathway is straightforward and clinical studies relatively inexpensive. "We find the anti-infective area feels very comfortable from the venture point of view," Vitullo said.

Dow Jones VentureWireDecember 22, 2009Investors Spin Pfizer's Vicuron Into New Co. Durata Therapeutics

By Brian Gormley

Five venture firms are financing a Pfizer Inc. spinout that plans to drive a new injectable antibiotic to U.S. approval.

Venture firms have formed Durata Therapeutics Inc. to acquire Pfizer subsidiary Vicuron Pharmaceuticals and its Phase III drug, dalbavancin. The amount Aisling Capital, Canaan Partners, Domain Associates, New Leaf Venture Partners and Sofinnova Ventures have committed to Durata is undisclosed, but New Leaf Managing Director Ron Hunt said it is significant.

Some of the capital was paid to Pfizer, which does not own equity in Durata, but the majority will go to develop dalbavancin, which is expected to enter Phase III trials in late 2010, Hunt said.

Spinouts are complex transactions, but they enable venture firms to piggyback on the investment that has gone into assets that are not priorities for their corporate owners. Pfizer, which paid $1.9 billion to acquire Vicuron in 2005, is keeping Vicuron's marketed antifungal, Eraxis, but is parting with dalbavancin and two preclinical Vicuron antibiotics.

Venture firms executed a similar deal in April 2008, when Aisling, Domain, Alta Partners and Arboretum Ventures funded Esperion Therapeutics Inc., which spun out of Pfizer after being acquired by the company in 2004. More recently, New Leaf and Domain teamed up with Pappas Ventures and Third Rock Ventures early this month to spin pain-therapeutics start-up Afferent Pharmaceuticals Inc. out of Roche Holding Ltd.

In Durata, venture investors saw an unusual opportunity to finance a drug all the way to U.S. approval, Hunt said. Dalbavancin is a long-acting, injectable, lipoglycopeptide antibiotic that has generated Phase III results in acute bacterial infections of the skin and skin structures. More than 1,000 patients have received the drug, which has potent activity against Gram-positive bacteria, including methicillin-resistant Staphylococcus aureus, according to Durata.

The drug's properties give it potential to be dosed once weekly, which could be a key value driver, according to Hunt. Instead of hospitalizing patients to control infection with daily intravenous infusions, hospitals could treat them with dalbavancin once a week and allow them to go home.

"Because [of] once-a-week dosing, we think it has the opportunity to be quite a large drug," Hunt said, though he did not give specifics. Durata is virtual for now, but Hunt said it will likely be based on the East Coast, and that details about its team and clinical strategy would come soon.

Antibiotics have been a fertile field for venture investors lately. Last week, Calixa Therapeutics Inc., an antibiotics start-up funded by Canaan, Domain and Frazier Healthcare Ventures, was acquired by Cubist Pharmaceuticals Inc. for up to $402.5 million in cash and milestones. Canaan, Domain and New Leaf were also among the investors in Cerexa Inc., an antibiotics company acquired by Forest Laboratories Inc. in 2007 for just under $500 million.

In addition to Hunt, the Durata board will include Aisling Partner and former Vicuron Chief Financial Officer Dov A. Goldstein; George Horner, an executive partner of Sofinnova and Vicuron's former chief executive; Sofinnova General Partner James Healy; Domain Partner Nicole Vitullo and Canaan General Partner Brent Ahrens.

BioWorld TodayDecember 23, 2009NewCo News: Pfizer Spinout Durata Pushing Dalbavancin to FDA Approval

By Jennifer Boggs Assistant Managing Editor

Pfizer Inc.'s antibiotic dalbavancin, which had advanced all the way to FDA review before getting hung up in the agency's shifting guidelines regarding noninferiority studies, is ready to head back to the clinic with start-up Durata Therapeutics Inc.

Five venture investors - Domain Associates LLC, New Leaf Venture Partners, Aisling Capital, Sofinnova Ventures and Canaan Partners - worked with New York-based Pfizer to structure a stock-purchase deal under which they would acquire the assets of Vicuron Pharmaceuticals Inc., which Pfizer bought in 2005 for $1.9 billion. The big pharma firm is hanging on to Eraxis (anidulafungin), a marketed antifungal agent, but the rest of Vicuron's pipeline, consisting of dalbavancin and two preclinical antibiotic programs, was transferred to Durata. (See BioWorld Today, June 17, 2005.)

That kind of spinout, especially one involving a late-stage asset, can be tricky, said Ron Hunt, managing director at New York-based New Leaf Ventures. "But we had a unique set of circumstances here," he told BioWorld Today. "We had a group of investors and a pharma firm willing to work collaboratively to fund a win-win [agreement]."

The VCs had been looking for a promising candidate in the antibiotic space, which is "still quite an interesting field to invest in," Hunt said, pointing to clinical development plans that require shorter trials than drugs in other indications such as cancer and a handful of recent successful deals involving antibiotic firms.

Last month, Cubicin (daptomycin) maker Cubist Pharmaceuticals Inc., of Lexington, Mass., agreed to pay $92 million for San Diego-based Calixa Therapeutics Inc., in a deal that could bring up to an additional $310 million in milestones to Calixa shareholders. Cubist will gain rights to a Phase II-stage antibiotic for Gram-positive Pseudomonas aeruginosa infections. (See BioWorld Today, Dec. 15, 2009.)

In October, Boston-based Paratek Pharmaceuticals Inc.'s late-stage antibiotic for drug-resistant infections scored a potential $485 million deal with Novartis AG, of Basel, Switzerland. And, a month later, Trius Therapeutics Inc., of San Diego, joined the list of biotech firms hoping to go public, filing for an $86 million initial public offering to fund Phase III studies of torezolid in complicated skin and skin structure infections (cSSSIs). (See BioWorld Today, Oct. 9, 2009, and Nov. 10, 2009.)

But for Hunt and Durata's other investors, Pfizer's glycopeptide antibiotic dalbavancin stood out.

For starters, the drug is backed by a wealth of clinical data, having been tested in more than 1,000 patients.

Results have shown "very nice Gram-positive coverage, including MRSA," he said. And, importantly, its pharmacokinetic profile allows for once-a-week dosing vs. the twice-daily dosing regimens required by other antibiotics, and could limit hospital stays for patients and even offer the possibility of outpatient treatment.

"So it lends itself to a very interesting health economics story," Hunt said.

It also helps that two of the VCs - and now board members - had formerly been execs at King of Prussia, Pa.-based Vicuron. Dov A. Goldstein, of Aisling, had served as vice president and chief financial officer, while George Horner, of Sofinnova, was CEO.

Pfizer, which already markets Zyvox (linezolid) for cSSSIs, received an approvable letter for dalbavancin in 2007 as a once-weekly, two-dose treatment in cSSSIs, including those caused by MRSA (methicillin-resistant Staphylococcus aureus). At that time, Pfizer said the FDA, which had recently published draft guidance on noninferiority studies as the basis for approval of antibacterial products, had requested additional data.

Dalbavancin wasn't the only antibiotic to stumble at the regulatory level. Cambridge, Mass.-based Targanta Therapeutics Corp. (later acquired by The Medicines Co.) received a complete response letter for oritavancin, as did ceftobiprole from Basel, Switzerland-based Basilea Pharmaceutica AG. And the agency informed another Swiss firm, Arpida A/S (now merged with Evolva SA), that another trial would be needed for approval of its antibiotic, iclaprim, in cSSSI. (See BioWorld Today, Jan. 21, 2009.)

South San Francisco-based Theravance Inc. and partner AstraZeneca plc, of London, finally won approval for Vibativ (telavancin) in September, nearly three years after first submitting its new drug application. (See BioWorld Today, Sept. 15, 2009.)

Durata has not yet released details for its clinical plan for dalbavancin. Hunt said the firm anticipates initiating another trial in the second half of 2010.

The good news is that Durata should be funded through to dalbavancin approval. The amount of investment by the five venture firms was not disclosed, but Hunt called it a "significant amount of capital," most of which will go directly to dalbavancin work.

After approval, the company will have to decide how to proceed with commercialization, but taking the drug to market on its own "could be one of the scenarios," Hunt said.

Durata has started putting together a management team. Its board consists of Hunt, Goldstein and Horner, as well as Nicole Vitullo, of Domain Associates; James Healy, of Sofinnova; and Brent Ahrens, of Canaan

BioWorld TodayDecember 22, 2009Other News to Note

Durata Therapeutics Inc., of New York, has acquired Vicuron Pharmaceuticals from Pfizer Inc., also of New York. Durata is a newly formed biotech company that was created by a five-member venture capital syndicate to pursue late stage clinical development of antibiotic programs. The acquisition was funded through a stock purchase by New Leaf Venture Partners, Domain Associates, Aisling Capital, Sofinnova Ventures Inc. and Canaan Partners. Durata is focused primarily on Vicuron’s antibiotic drug candidate, dalbavancin. Durata’s product portfolio also includes two preclinical antibiotic programs. Pfizer will retain the marketed antifungal agent, Eraxis (anidulafungin), which was formerly owned by Vicuron. Terms were not disclosed.

BioCentury January 4, 2010VCs take over dalbavancin

By Michael Flanagan & Stacy LawrenceSenior Writers

Four years and three complete response letters after dalbavancin was brought into Pfizer Inc. (NYSE:PFE) as part of the pharma’s $1.9 billion acquisition of Vicuron Pharmaceuticals Inc., a group of VCs have spun the asset back out with plans to do the clinical work needed for regulatory approval. Newco Durata Therapeutics Inc. plans to begin a Phase III trial of the once-weekly injectable antibiotic in 2H10.

The syndicate could reprise its successful role in bankrolling Cerexa Inc., which spun out just as Peninsula Pharmaceutical Inc., was being acquired by Johnson & Johnson (NYSE:JNJ) in 2005. Starting with $50 million in initial funding, Cerexa ran a Phase II trial of ceftaroline, a fifth-generation cephalosporin, and was sold to Forest Laboratories Inc. (NYSE:FRX) a year later for just under $500 million (see BioCentury, Dec. 16, 2006).

Durata’s VCs include three Cerexa alums: Canaan Partners, Domain Associates and New Leaf Venture Partners. They were joined by Aisling Capital and Sofinnova Ventures. Aisling’s Dov Goldstein and Sofinnova’s George Horner know dalbavancin well, as they were CFO and CEO, respectively, at Vicuron when it was acquired in 2005.

Dalbavancin completed three Phase III trials showing noninferiority to vancomycin, cefazolin followed by oral cephalexin, and to linezolid on the primary endpoint of clinical response in complicated skin and skin structure infections (cSSSI). Nonetheless, FDA issued three approvable letters; the most recent in 2007 requested additional data.

In September 2008, Pfizer said it was withdrawing global marketing applications and planned to run an 18-month Phase III trial to show non-inferiority to other antibacterial drugs in severe cSSSIs.

Ron Hunt, managing director of New Leaf, said Durata won’t discuss its development strategy until early this year after a management team is in place. “But we think it offers an interesting

and unusual investment opportunity for a venture syndicate to fund a company with the objective being FDA approval.” If successful, this could lead to an early exit.

While the details of the deal weren’t disclosed, Hunt said Pfizer was willing to structure the terms so that “the vast majority of our committed capital will be put towards advancement of the asset,” rather than for upfront payments to the pharma.

Durata also received rights to Vicuron’s preclinical pleuromutilin and lincosamide antibiotic programs, while the pharma retained its marketed anti-fungal agent Eraxis anidulafungin.

BioCentury ExtraDecember 21, 2009Durata acquires Vicuron

Newco Durata Therapeutics Inc. (New York, N.Y.) acquired Vicuron Pharmaceuticals Inc., a subsidiary of Pfizer Inc. (NYSE:PFE), for an undisclosed amount. Durata gains dalbavancin, a lipoglycopeptide antibiotic slated to begin a Phase III trial in 2H10 for complicated skin and skin structure infections (cSSSIs). In 2008, Pfizer withdrew an NDA in the U.S. and an MAA in Europe for dalbavancin. FDA has issued three approvable letters for the compound, the most recent of which came in 2007 and requested additional data.

Durata also gains Vicuron's preclinical pleuromutilin and lincosamide antibiotic programs. Pfizer will retain rights to its marketed anti-fungal agent Eraxis anidulafungin, which it also acquired through its 2005 acquisition of Vicuron. Durata was formed by New Leaf Venture Partners; Domain Associates; Aisling Capital; Sofinnova Ventures; and Canaan Partners.

BioCentury Part IIJanuary 4, 2010Deals

Durata Therapeutics Inc., New York, N.Y.Pfizer Inc. (NYSE:PFE), New York, N.Y.

Business: Infectious

Newco Durata acquired Pfizer’s Vicuron Pharmaceuticals Inc. subsidiary for an undisclosed sum. The deal includes dalbavancin, which is slated to start a Phase III trial to treat complicated skin and skin structure infections (cSSSIs) in 2H10. In 2008, Pfizer withdrew an NDA in the U.S. and an MAA in Europe for the second-generation, once weekly glycopeptide antibiotic. FDA has issued a total of three approvable letters for the compound, the most recent of which came in 2007 and requested additional data. Dalbavancin already has completed three Phase III trials for CSSI (see BioCentury, Sept. 15, 2008). The deal also includes Vicuron’s preclinical pleuromutilin and lincosamide antibiotic programs. Pfizer will retain rights to marketed anti-fungal agent Eraxis anidulafungin, which it also acquired through its 2005 acquisition of Vicuron.

Durata was formed and funded through a stock purchase by New Leaf Venture Partners; Domain Associates; Aisling Capital; Sofinnova Ventures; and Canaan Partners. Two former Vicuron executives will serve on Durata’s board: Aisling’s Dov Goldstein, who was formerly EVP and CFO of Vicuron; and Sofinnova’s George Horner, the former CEO, who will serve as an independent director.

Genetic Engineering & Biotechnology NewsDecember 21, 2009Durata Therapeutics Acquires Pfizer’s Subsidiary that Develops Antibiotics

Durata Therapeutics is taking over a Pfizer subsidiary focused on antibiotics called Vicuron Pharmaceuticals. It gains late-stage dalbavancin and two preclinical programs. Pfizer will retain the marketed antifungal agent Eraxis™, used to treat Candida infections in the blood, stomach, or esophagus.

Durata is a newly formed biopharmaceutical company, created by a five-member venture capital syndicate to pursue late-stage clinical development of novel antibiotic programs. The acquisition of Vicuron was funded through a stock purchase by New Leaf Venture Partners, Domain Associates, Aisling Capital, Sofinnova Ventures, and Canaan Partners. Dalbavancin is a long-acting, injectable, lipoglycopeptide antibiotic. It is being tested in Phase III as a treatment for acute bacterial infections of the skin and skin structures. The drug has pharmacokinetic properties that enable once-a-week dosing and offers activity against Gram-positive bacteria including MRSA, according to Durata.

Private Equity HubDecember 21, 2009Durata Therapeutics Launches, Buys Virucon Pharma

Durata Therapeutics Inc., an antibiotic development platform recently formed by five venture capital firms, has acquired Vicuron Pharmaceuticals, developer of an antibiotic drug candidate called dalbavancin, from Pfizer. No financial terms were disclosed. Durata’s backers are New Leaf Venture Partners, Domain Associates, Aisling Capital, Sofinnova Ventures and Canaan Partners.

Mentions

BioWorld InsightJanuary 4, 2010Experts Predict More Attrition, But More Opportunities As Well

By Trista Morrison Staff Writer

The beginning of every new year brings an inevitable desire to dust off the old Magic 8-Ball and make predictions about what's to come.

There's no question as to the fallibility of such predictions: In early 2008, no one could have fathomed just how bad things would get, and in early 2009 no one dared hope things would rebound as well as they have recently. But that doesn't make mankind any less eager to guess what fortune has in store - especially this year, when the biotech industry is surrounded by so many unknowns.

Is the current economic recovery sustainable? Will there be more attrition, or has the industry right-sized itself? Will there be an IPO window? What's the health of the venture sector, and what kind of deals will they be funding? Will there be money for innovation?

These are just a few of the financial issues weighing heavily on the minds of biotech executives interviewed by BioWorld Insight. Below, a panel of experts offers their predictions.

Is the Darwinian Attrition Over? Outlook Not So Good.

BioWorld reported on 11 biotech bankruptcies late last year and 22 more this year. Between liquidations and last-resort mergers, the industry lost some well-known names, among them Altus Pharmaceuticals Inc., Genaera Corp., Metabasis Therapeutics Inc., Oscient Pharmaceuticals Corp. and many more.

Yet one buy-side investor said what's really amazing is how many companies didn't disappear that probably should have. Those borderline biotechs were saved by a retail frenzy, in which the surprise success of companies like Vanda Pharmaceuticals Inc. and Vermillion Inc. created a rush into microcap stocks. The momentum allowed many struggling companies to raise money and literally buy themselves a respite.

That respite is likely temporary, however. Unfavorable financing terms, such as heavy warrant coverage, could make future fundraising difficult. And investors warned that when a company raises just $5 million after claiming this is the last cheap entrance to a stock everyone wants, it's a difficult sell the next time around. (See BioWorld Insight, Dec. 14, 2009.)

Michael Ross, managing partner at SV Life Sciences, agreed that the industry hasn't right-sized itself yet. "There are a lot of companies that are going to need funding over the next year or so," he said.

But continued attrition is good, according to Bob More, general partner with Frazier Healthcare Ventures. More noted that biotech always has been an "exceptions business" - the folks that succeed are the exception rather than the rule - so attrition is inevitable.

"I don't think there's anything wrong with that," More said. "That's the great thing about entrepreneurship - everyone has a right to take a shot at it, even if not everyone has a right to succeed."

Will There Be an IPO Window? Most Likely.

With initial public offering paperwork on file from 10 biotech companies and three drug stocks already out the door, execs are wondering, "Is it all wishful thinking or is an IPO window really going to happen?"

The consensus seems to be that there will be a limited window for quality companies, particularly those "within an arm's length of commercialization," according to Ross. More pointed to recent filer Ironwood Pharmaceuticals Inc., which already has good Phase III data with its bowel drug, as an ideal candidate.

Yet buy-siders tend to dislike all the focus on whether or not the window is opening because it "makes the IPO seem like something special and it's not - it's just a financing event," according to one portfolio manager. Good companies will be able to raise money, and whether they do it through a venture round, an IPO or a follow-on offering is immaterial.

Nicholas Galakatos, managing director at Clarus Ventures, disagrees. He argued that the prospect of an IPO window - "something we couldn't even begin to think about last year" - indicates renewed interest in the biotech sector.

And even though IPOs have represented a financing event rather than an exit for quite some time, they offer VCs the ability to recoup some money, which can be passed back to limited partners and then redeployed in the sector. This "capital recycling" is critical to supporting VC investment in new companies, according to Steve Gullans, managing director of Excel Venture Management.

More added that ultimately, if a newly public biotech continues to perform well, an IPO eventually can offer a path to liquidity.

Bankers, investors and venture capitalists alike worry that in addition to rock solid IPO contenders, the window will attract struggling firms that have failed to find money through private investors or partners and that view the public market as their final option.

"What would be sad to me is if an IPO window opened and everyone got funding," More said. "I don't think that will happen, but we just can't lose the discipline we've built over the last two years."

Will Venture Firms Fund New Deals Again? Signs Point to Yes.

Regardless of whether or not an IPO window opens, biotechs need a way to generate the large sums of money required for Phase III trials. Partnering is the obvious answer, but Ross warned "you have to have a way to say, 'If we get a low-ball offer from pharma, we can take it all the way.'"

Some companies are already doing just that. Gloucester Pharmaceuticals Inc. funded lymphoma drug Istodax (romidepsin) through FDA approval without public money or a partner (though the firm later was acquired by Celgene Corp.). Although Gloucester was the first privately held biotech to achieve such a feat in at least five years, Ross predicted more will follow. (See BioWorld Insight, Nov. 16, 2009.)

As venture investors prepare to fund companies farther, the traditional venture model is starting to evolve. Ross said the Series A-Series B-Series C-IPO approach, in which each round adds a new investor and offers an uptick in valuation, has almost disappeared. "When you start a company, you better have the folks around the table who can finish the job," Ross said. (See BioWorld Insight, Aug. 24, 2009.)

More agreed the initial syndicate must be prepared to carry the company all the way to an exit, and he noted that's one of the biggest changes in the venture world. But he also senses that

some venture firms are finally starting to look at new investments, after a year of focus on internal rounds and sustaining portfolios.

"I think there will be third party-led transactions this year," More said.

Finding new investors and pulling together syndicates may be harder with fewer VCs to choose from. Many venture firms that postponed fundraising in 2009 will have to start pounding the pavement this year, and the experts don't expect all of them to find a favorable reception with their limited partners.

At a conference last fall, Dennis Purcell, senior managing director with Aisling Capital, predicted the venture industry will shrink by half in the next 10 years.

Are VCs Going to Pony Up for Innovation? Don't Count on it.

Fewer investors means a higher bar for investments. Who's going to get the money? Ross said it will go to experienced management teams, as always - particularly those developing mature assets.

Some of those assets might be licensed failed companies, such as how Alnara Pharmaceuticals Inc. spun out the Phase III cystic fibrosis drug liprotamase (formerly Trizytek) from Altus Pharmaceuticals Inc. Others might get divested in the wake of mega-mergers, such as how Pfizer Inc. outlicensed dalbavancin and other antibiotic assets to start-up Durata Therapeutics Inc.

Ross also believes venture firms will remain interested in distressed assets, which he defined as "good companies with lower pre-money valuations." Such investments have historically provided solid returns for VCs, he noted.

More agreed VCs will look to invest in experienced management teams, and he predicted an uptick in diagnostics investment as well as funding for "people who can do more with less and projects that can be validated fairly quickly." Gullans, too, believes capital efficiency will remain critical, with virtual business models continuing to replace the idea of building a full-fledged company.

But what about funding for early stage companies? More predicted that some money will start to trickle into innovation, but he said there probably won't be a return to the old "put some smart scientists in a pot, add money and mix" approach.

Gullans believes the lack of funding for innovative companies is transient and may ease up once the IPO window opens. If some of the later-stage companies can exit, their low-priced, de-risked models will cease to temp VCs away from earlier-stage, riskier investments.

Yet Ross noted that, in the end, VCs are hired to make money for their limited partners, not to fund the biotech industry. "If we can't make money in early stage stuff, we won't do it," he cautioned.