January 15, 2007 (Vol. 27, No. 2)

Overcoming Negative Perceptions Among Investors Is the First Step

When it comes to biotechnology innovation, gene therapy and genetic medicine led the way in the early and mid 1990s. The concept of gene therapy was viewed as the arrival of tomorrow’s medicine today. The excitement surrounding the first gene therapy trials were the catalyst for creating regulatory bodies at the NIH and other agencies. It appeared gene therapy was ready to change the face of medicine.

Then clinical events and other developments (most notably the death of a patient at the University of Pennsylvania in 1999) precipitated an industry-wide moratorium on this exciting and potentially promising area of research. There was heavy criticism of the technology and many people began to doubt whether gene therapy would ever achieve its potential. Since then we have learned a great deal and have refined the technology to the point that the use of gene therapy for the treatment of serious diseases is once again a realistic possibility in the foreseeable future.

Unfortunately, gene therapy still has a major obstacle. Scrutiny of the technology contributes to development and clinical delays, which in turn have dampened investor enthusiasm for gene therapy.

The industry’s entrepreneurs, however, have kept their eyes firmly on their goal of bringing gene therapy to bear on the world’s most serious diseases. In his 2000 Senate testimony on behalf of the Biotechnology Industry Organization, H. Stewart Parker, CEO of Targeted Genetics (www.targen.com), noted that “Gene therapy has great potential to provide treatments to the millions of Americans who suffer from genetic diseases. This research must go forward.”

Even in the current environment, the recent progress of gene therapy has clearly impressed some investors, facilitating even more progress in the field. Some investors recognize that the commercial opportunity in gene therapy to treat rare or life-threatening diseases can be substantial. A 2005 report from Frost & Sullivan forecasts revenues from gene therapy at $125 million in 2006, and states they are expected to grow to more than $6.5 billion in five years.

Major Financings

Due to this type of speculation, some investors’ perceptions have improved in recent years, as revealed by three major financings in 2005 for companies in the gene therapy space. Celladon (www.celladon.com), a company focused on developing gene therapy for congestive heart failure, received $30 million in a Series B round. Ceregene (www.ceregene.com), a San Diego-based firm focusing on several prevalent central nervous system diseases, such as Parkinson’s, Alzheimer’s, and ALS, received $32 million. And Virxsys (www.virxsys.com) raised a total of almost $52 million in 2005/2006 financings.

So, in addition to exciting technology, what does it take to raise money in the gene therapy space? I believe there are several key factors that a gene therapy company must have, including an effective technology and market positioning, the capacity to manufacture the product, and professional fundraising assistance by a qualified placement agent.

Virxsys is developing a lentiviral vector gene delivery technology that will initially be applied to HIV/AIDS. During its recent fundraising round, having effective technology and market positioning in place impressed many potential investors and was a key to attracting their support. Additionally, lack of manufacturing capability and capacity can hinder advancement through clinical trials and product commercialization. Sophisticated investors understand this and want to know a target company can overcome these challenges before investing large sums of money.

Financings are necessary for every biotech company, but they require a huge amount of management attention. Because the management resources in any biotech company are scarce, it is essential to use placement agents to drive the fund-raising process. Finding the right placement agent could mean the difference between raising the money you need and having a fund-raising bust on your hands.

Placement Agents

When evaluating placement agents, many companies often focus on the cost, with the more expensive firms being several percentage points higher on each cash compensation and warrant carry. However, in my experience, biotech companies would serve themselves well to find a placement agent with true biotech expertise and a sincere commitment to your company. If you can find that, it will be worth the additional cost.

Placement agents come in all forms, but they generally draw on their network of funding sources to raise the required money. When evaluating placement agents, it is useful to understand their fund-raising success rate, as well as the success rates of the companies for whom they have raised money. This will help you develop some insight into the capability of the placement agent and the investment appetite of their investor base.

Even with a placement agent, management should be closely involved with the fund-raising, working with the placement agent to prepare the private placement memorandum, identifying target audiences, and getting out on the road and meeting your prospective investors.

Virxsys has used Signature Capital as its placement agent for a number of years. We found that many venture capital funding sources tend to be negative on gene therapy. However with Signature spearheading our financings, we have been successful in identifying high-net-worth individuals, family offices, and selected hedge funds that were enthusiastic about gene therapy and our story. Our placement agent was critical to identifying them and executing this fundraising strategy.

Gene therapy eventually will deliver safe and effective treatments for serious and life-threatening diseases. This is the vision that attracted many of us to this industry in the first place. It represents a genuine revolution in medicine and it looks like we are on the verge of clearing the final obstacles and making this a reality. Successful financing is one of those obstacles. With the right approach, more companies will be able to secure financing and continue to move gene therapy technology forward.

According to the title of an article by Arlene Weintraub that appeared in the December 5, 2005, issue of Business Week, “Gene therapy is respectable again.” The article observed that “Recent success stories in clinics and labs add to the sense that gene therapy is moving back into the mainstream. ‘We’ve been in gene therapy a long time, and we’ve seen the ups and downs,’ says Richard Gregory, Genzyme’s (www.genzyme.com) senior vp of research. ‘But we’re optimistic.’”

We are optimistic too. With recent fund-raising successes like Virxsys’, there will be more advances in the field, which in turn will drive more investment money to gene therapy. This will be good for the entire industry and for modern medicine.

Riku Rautsola, Ph.D., is the president and CEO of Virxsys. Web: www.virxsys.com. E-mail: [email protected].

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