Early stage pharma deals drop

In a year that has been tough for every sector, few entrepreneurs have had as tough a time raising funds as the founders of pharmaceutical startups.

Just ask entrepreneur Nolan Sigal.

Sigal says that he has been trying to raise between $12 million and $15 million in a first round of financing for allergy drug startup Tunitas Therapeutics for more than a year. He says he has pitched some 60 VCs and was hoping to use the funding to help push the company through clinical trials.

However, the number of first-round pharmaceutical and biotech companies financed have fallen by nearly 70% to date in 2009, according to Thomson Reuters (publisher of PE Week). Some 49 drug companies managed to raise $513 million in venture capital during the first 11 months of this year, compared to 159 startups that raised $1.13 billion throughout all of last year, according to Thomson Reuters data.

In comparison, first round financings in all industries have fallen by 50% from 2008.

The problem isn’t a lack of market opportunity, or technical innovation, or even great teams to shepherd early stage compounds through development. The problem, at least in the eyes of Sigal and other entrepreneurs, has less to do with Lehman Brothers and the economic downturn and more to do with a fundamental shift in the perception of the industry as a risk-laden money loser.

“It’s just not clear how innovation will be financed in the future. People do what’s safe rather than what’s innovative,” Sigal says.

This is not the first time Sigal has tried fund-raising, just the most daunting. Sigal is a medical doctor turned executive who ran Merck’s immunology business before jumping into venture-backed biotech startups in the mid 1990s. He’s run research at two now-public pharma companies and was previously the CEO of privately held Trellis Biosciences before launching Tunitas.

The technology Tunitas has developed could change the way allergy sufferers develop immunity and eliminate the need for a multi-year course of allergy shots, Sigal says.

“I clearly thought this was something that should have been funded rather easily,” he says. “I have a lot of connections in the VC industry, but the whole risk profile of startup venture capital has changed dramatically during the past 15 years.”

He says that one stumbling block for his company has been its lack of clinical data in humans. “Investors want more data and the problem is that those clinical trials are extremely expensive,” he says.

Sigal is looking to put through the most basic trials he can via tests in Australia, which has restrictions that are more flexible for the kind of trial tests that Tunitas needs.

Meanwhile, there are a handful of pharmaceutical startups that have managed to raise cash in first-round financings this year.

The largest single investment round recorded this year, a $145 million Series A, went to cancer treatment startup.Clovis Oncology, which is looking to buy six or seven drug candidates to commercialize, says investor Brian Atwood, a managing director at Versant Ventures. The company plans to spinout technology from large and medium-sized pharmaceuticals, as well as universities and other startups, that may have been abandoned during development. It will likely see hundreds of potential candidates, Atwood says.

Other notable pharmaceutical companies to collect first-round financing this year include:

• FORMA Therapeutics, a Cambridge-based developer of small molecule drugs, with applications in cancer treatment. FORMA raised $25 million in initial funding in January from Novartis Venture Fund and Bio*One Capital.

• Aragon Pharmaceuticals, a San Diego-based drug company focused on treating hormone-resistant cancers. Aragon raised $8 million in a Series A round from The Column Group and OrbiMed Advisors.

• Kolltan Pharmaceuticals, a New Haven, Conn.-based developer of cancer treatments based on the research of a Yale School of Medicine professor, closed a $40 million Series A round from Purdue Pharma, HBM BioCapital and the Pritzker/Vlock family.

But for Sigal and others, finding funds is scarce.

“I’ve been steered away from firms that just aren’t making new investments,” says entrepreneur Peter Heinecke, who is trying to raise $7 million for neuropathic pain medication startup Xalud Therapeutics. “I had one VC tell me that they can’t invest in something this early at this time because their fund is three years old and they need something with a shorter path to liquidity.”

Heinecke, a former lawyer with Wilson Sonsini Goodrich & Rosati, has been fund-raising since August. “A lot of VCs are tending to their own portfolio and just not making new investments,” he says.