Bioscience startups struggle to find financing

When Clovis Oncology founder Pat Mahaffy went looking for money to start his latest company a little more than two years ago, he had no trouble finding $146 million.

That’s because Mahaffy is a top biotech star in the region, previously starting Pharmion Corp. in Boulder in 2000 and selling it to Celgene Corp. in 2008 for $2.9 billion, among other companies. Clovis focuses on anti-cancer drugs.

It is “serial entrepreneurs” like Mahaffy who draw biotech money to the Boulder Valley, said Kyle Lefkoff, partner at Boulder Ventures, a venture capital firm that manages more than $300 million in five separate funds. Boulder Ventures is not invested in Clovis.

“They’re the special sauce in the business,” Lefkoff said.

He also points to folks like Bill Marshall, who raised $12 million for Boulder-based MiRagen Therapeutics, which started in 2007; Boulder’s Marvin Caruthers, a founder of Amgen Corp. based in Thousand Oaks, California; and Larry Gold, founder of NeXagen Inc., which became NeXstar Pharmaceuticals Inc., which merged with Gilead Science Inc. in 1999 in a transaction worth $550 million.

If such a heavy concentration of biotech serial entrepreneurs work and live in the Boulder Valley, does their star power also attract more general biotech money to the Boulder Valley market?

As it turns out, successful serial entrepreneurs able to snap their fingers to get millions in venture capital funding actually are the exception to the rule. For the majority of startup biotech companies here, the story is much different.

John Dunning, chief executive officer of Clarimedix Inc., a medical-device company in Boulder, points out that FDA approvals are a huge question mark for investors when he goes looking for funding.

For example, a company may spend $10 million to $30 million on studies required by the FDA, then have to do the studies all over again, just slightly differently, to meet the federal agency’s requirements Dunning said. Clarimedix makes an Alzheimer’s drug that has not yet been tested in humans.

The sometimes seemingly arbitrary FDA decisions make investors skittish, Dunning said.

“Some companies have been burned,” Dunning said. “There’s a level of uncertainty for investors and the entrepreneurs, and it’s not that they’re bad folks, there’s just a level of risk averseness.”

Investors seem to be loosening the purse strings slightly, but they’re more interested in later-stage companies, not startups, said Mark Lupa, a principal at High Country Venture in Boulder, another VC firm here with about $50 million under management. High Country helped Clarimedix get recent funding.

Across the country, funding went down 21 percent in 2010 for young biotech companies in the United States, according to a report released June 14 by Ernst & Young. Such companies most often get funding from venture capital firms, stock sales and partnerships, the report said.

But there’s also a relatively new funding trend in the biotech world in which investors call for companies to meet drug development “milestones” to minimize investor risk. The “milestone” payments, as they’re called, can cause an even greater capital squeeze on small biotechs, even ones that are apparently successful.

That squeeze certainly may have been responsible for the layoff of 70 workers in discovery research and support jobs at Array BioPharma announced June 13.

As Array cuts back on some discovery jobs, it will retrench in its focus on partnered programs with Amgen, Celgene and Genentech Inc. in San Francisco, Array’s CEO Robert Conway said in a statement.

For fiscal 2012, the company anticipates using about $40 million for operating costs, including money it expects from such milestones.

In light of industry funding woes, companies are getting creative about where they get money, said Holli Riebel, formerly Baumunk, executive director of the Colorado BioScience Association in Denver.

For example, company founders may be more be willing to take private equity financing deals these days, even though they may lose some control over products, Riebel said.

“Take any money as soon as you can, whenever you can,” Riebel said. “This is not a time to be really picky. Venture capital is very tough.”

Beth Potter can be reached at 303-630-1944 or email bpotter@bcbr.com.

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