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Biotech Companies Enter Tough Venture Environment

Last month, Dr. Ivan Vesely received a free lesson in venture capital that plenty of his peers would envy. Vesely is the head of one of dozens of companies that attended the 2006 SoCalBio Investor Conference held on March 29 and 30 at the Wilshire Grand Hotel in downtown Los Angeles. While working as a physician at the Cleveland Clinic Vesely developed a device that makes replacement surgeries for bioprosthetic heart valves easier. The device turns what is usually a 90-minute surgery into a 26-second operation, Vesely said. Further, he’s secured technology license and patents from the clinic to develop the product. “Because we’ve done all the idea development and testing, we’re less than two years away from clinical trials,” said Vesely. The market for his product could be more than a billion dollars by the time it’s fully developed, but before he can crack that market, his business, Tarzana- based ValveXchange Inc., needs more than $17 million to complete development over 15 years. Prior to the conference, Vesely worked with patent attorneys on a pitch strategy, which was acted out for three potential investors in front of over 200 conference attendees. While San Francisco and San Diego are more well-known for biotech businesses, the Los Angeles region, which includes parts of Los Angeles, San Bernardino, Riverside and Orange counties, attracted almost a billion dollars in federal research money last year, behind only Boston and New York, to finance biotechnology and biomedical device businesses. Los Angeles Mayor Antonio Villaraigosa has made biotechnology a key part of his economic plan for the region, and actively supports the creation of a biotech research park on the USC campus. G. Steven Burrill, who founded Burrill & Company and has been recognized by Scientific American magazine as the biotech investment visionary, said the experience of ValveXchange illustrates the challenge for biotech startups. “The success and failures in this industry will be based on (entrepreneurs’) ability to find access to capital, not access to patients, because they may not see patients for five to 10 years,” said Burrill. Long-term strategy Dr. Allan Wolfe, a general partner with UV Partners, an early-stage private equity investment group, echoed Burrill’s thoughts when critiquing Vesely’s presentation. “This would seem to be a big challenge for you, convincing investors like us to go down the road with you for 15 years,” said Wolfe. “It almost seems to me that it might be to your advantage to find a company like St. Jude that might want to fund something like this more than a shorter-term venture capital fund might want to.” “Believe me, when we hear 12 to 15 years (before profitability) it scares us,” added Michael Sweeney, a general partner with Interwest Partners in Menlo Park. Burrill, although he spoke mainly about drug development businesses, said that large corporations will be more and more willing in the coming years to buy early-stage companies in order to use their technology. “We’re seeing pre-clinical deals, and they do come with some risk-sharing, at $300 million and $500 million, and there are lots of them,” said Burrill. David Baltimore, president of the California Institute of Technology, said in a speech at the conference that there is a large gap between the research being financed by venture capitalists and university projects, and that gap needs to be at least partially closed. “The biotech world is working on a much shorter time table,” said Baltimore. Baltimore said that venture capitalists are looking for a return on their investment long before most biotech companies can even finish clinical studies. Universities, he said, can help by taking on more “medium-term” projects that can develop licensable biotechnology to be successfully used in the private sector. The United States remains a leader in the biotechnology field, he said, but that standing will be at risk unless the country’s schools start producing more graduates with a passion for science and technology. “If we don’t focus on that as a national goal as much as everybody else, we really do have a problem,” Baltimore said.

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