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Biotechnology startups struggle as venture capitalists seek quick hits

When biotechnology companies and venture capitalists meet these days, they talk about the changing landscape of financing. Early-stage innovative companies are struggling to get venture capital, despite the seeming end of the economic downturn.

At the recent BayBio 2011 biotechnology conference in Burlingame, venture capitalists painted a somewhat grim picture of the future and called for new approaches to funding, including corporate partnerships and reaching out to Big Pharma.

“These are not cyclical changes,” said Jonathan MacQuitty, partner at Abingworth Management, a venture capital company. “We're never going to do business the way we used to do,” he said.

Angel investor Robert Behl said that big funds have been investing throughout the recession. The change he sees now is that the angels and early-stage investors are being excluded from deals as mid-range funds that have been inactive are re-entering the game.

“We're starting to see a surge of investment from these mid-range funds but they're looking for quick pops, things that can turn around rapidly,” Behl said. “They need quick hits to pump up their returns.”

Major roadblocks stand in the way of quick returns. MacQuitty said initial public offerings no longer work for biotechnology companies as a source of investment equity.

“It is impossible to overestimate how much the IPO market sucks,” MacQuitty said. “The pricing is atrocious and the aftermarket performance is worse.”

Venture capitalists also see the U.S. Food and Drug Administration as another big problem. In addition to being bureaucratic and risk-averse, MacQuitty said that the FDA doesn't know how to properly regulate things. “They can no longer answer the question 'what should I do to get regulated'.”

The extensive clinical trials the FDA wants companies to do are partly to blame for the third problem, reimbursement – or the lack of it. Getting a possible return of investment in 17 years doesn't make investors flock to small biotech companies.

The investors pointed out that the FDA is not alone to blame. According to them, some politicians believe that by impeding drug development, rapidly rising healthcare costs can somehow be reduced.

“We can complain about the FDA but in the end they're serving their Congressional masters,” MacQuitty said. “There is no amount of slowing down the process that Congress is currently going to object to, and the FDA is well aware of that.”

Venture capitalists are trying to get their message across on Capitol Hill by, for example, referring to companies – and jobs – that have moved to Europe in search of less rigid regulation.

Funding for a biotechnology startup can come in other ways, for example corporate partnerships and teaming with big pharmaceutical companies. Big Pharma is fighting a lack of innovation, declining earnings per share and rising costs of clinical trials. They are trying to get research expenses off their balance sheets by cutting their own research and externalizing it to small and innovative companies.

Shauna Farr-Jones, academic coordinator from the University of California, San Francisco, reminded the companies of a variety of government grants that are available to startups. Companies working on infectious diseases or treating issues that soldiers face have an especially good chance of getting funding without diluting their ownership. One example of such a startup is Menlo Park-based Cantimer that developed its dehydration meter with government grants.

Farr-Jones said that a startup company that receives government grants doesn't need a commercialization plan, as venture capitalists expect. They just need to address a recognized medical need. “You should be able to raise money to make yourself more interesting to an angel or a venture capitalist.”

Indeed, startups must differentiate themselves from the rest of the pack. MacQuitty said that his company gets 900–1,000 offers yearly. This year they'll proceed with nine or 10.

And that's a lot – usually the number is five.

Local firm aims to save lives by identifying deadly dehydration

Dehydration is one of the primary causes of preventable hospitalizations in the U.S. A Bay Area biotech company is working to solve the problem with a relatively low-tech approach.
 
In California alone, more than 16,000 preventable hospitalizations were caused by dehydration in 2008. Infants and the elderly are particularly vulnerable. Promptly diagnosed, dehydration is easily treatable but untreated it can lead to seizures or death.
 
Until now, no simple test has been available to measure dehydration. Doctors look for sunken eyes, low blood pressure, rapid heart rate and poor skin turgor when trying to diagnose dehydration. Tests are feasible but involve laboratory tests like checking blood electrolytes, urine specific gravity or blood urea nitrogen.
 
Cantimer, a Menlo Park-based company, wants to change this. It has developed a device that measures hydration from a drop of saliva. The device is still being tested, but the company hopes to have it on the market in the first half of 2012. Robin Stracey, the company’s president and chief executive officer, said that considering what it can achieve for public health, there’s nothing too complicated about the technology:
 
How does your device work?
It uses a specific biosensor we developed. We measure saliva osmolality, which, simply put, is the concentration of saliva. The principle is that as you dehydrate your saliva becomes progressively more concentrated. It's logical but we've demonstrated in clinical studies that that correlation is linear across the entire clinical range of interest (that is relevant to humans). Our sensor-based device combines silicon micro-cantilever and a hydrogel sensing polymer (see picture) to measure osmolality.
 
How would you describe the importance of the device?
It's a new paradigm, in that the technology is very simple. The device is very simple. It's about the size of a cell phone. It's pretty inexpensive to make and buy (Cantimer estimates that the device could be sold for $150–$200). For the first time, clinically dependable field assessments of hydration status are possible. Picture users such as high school athletes, frail elderly, mothers with small children, people with chronic illnesses and firefighters or emergency personnel susceptible to heat-induced illness, for example. For the first time the testing can be put in consumers' hands. Our expectation is that eventually hydration assessment will become a routine vital sign measurement — just like body temperature is.
 
What other applications does the technology have?
What we have done so far are proof-of-concept type of experiments. The same basic sensor technology platform can be applied to detect and measure a broad range of different things. Eventually we expect to be active in bio-defense, in point-of-care diagnostics, consumer health applications, environmental monitoring — all large, growing markets. The sensor technology is the same, each application will just require a slightly different polymer component in the sensor.
 
When do you expect to have the dehydration application on the market?
This device, all being well, will be on the market in the first half of 2012. We will go through a Food and Drug Administration approval process. We expect to have that complete by the end of 2011 and we’ll scale up the production of the sensors and (are) planning to launch in early 2012.
 
Are other companies developing similar devices?
This is a first in the sense that there are many approaches to hydration measurement but nothing on the market can yet measure total body hydration from a saliva sample. We think we’ll be the first.
 
How have you funded your work until now?
It’s been a combination of corporate partnerships and government grants. Because of the relatively anemic venture financing environment over the last couple of years — due to the financial crisis and so on — we found it more productive to fund the company through collaboration with corporate partners with an interest in applying our technology to their specific challenges. Typically those companies will invest in Cantimer, take an option to a license, fund research to develop an application and then, if it’s successful, take an exclusive license to the application and commercialize or help us commercialize the end product. We’ve also been fairly successful with government grants and contracts with the Department of Defense.
 
What is the DOD’s specific interest?
The military and first responder communities want to prevent heat illness, heat exhaustion and heat stroke in military personnel in places like Iraq and Afghanistan. Firefighters are obviously in extreme environments. A firefighter wearing heavy protective clothing with a self-containing breathing apparatus can lose a liter of body fluid in 20 minutes, making them susceptible to heat exhaustion and heat stroke. The firefighting community wants to measure or monitor the hydration status of firefighters in the field, as with the military personnel.
 
Which do you think will be the bigger market, the consumer market or healthcare professionals?
Ultimately we think the consumer opportunity will be larger. We see low-hanging fruit in terms of opportunities in the athletic community. Among the medical applications and large markets will certainly be the elderly, the skilled nursing facilities, the assisted-living centers.

Muni operators vote to approve strike authorization

Transport Workers Union 250-A, which represents Muni drivers, has voted to approve a strike authorization, a spokesman for the San Francisco Municipal Transportation Agency said. The vote allows union leaders to call a strike if labor negoiations with the city reach an impasse.

Charlie Goodyear, who is the spokesman during the labor negotiations for Muni, issued a press release Friday afternoon which said the union informed the transit agency that a strike authorization was approved.

He also said that “both management and the union continue to discuss details of a new labor contract and the talks are progressing.”

Since the passing of Proposition G by voters in November last year, the agency is able to negotiate with the union on items such as wages and work rules.

City Attorney Dennis Herrera also issued a statement, saying the Memorandum of Understanding – work rules agreement between the agency and union workers - prohibits a strike. 

The union did not respond to a request for a comment on the vote or Herrera's statement.

Twitter tax breaks could mean tough breaks for mid-Market's low income residents

A payroll tax exemption for Twitter that was preliminarily approved Tuesday night by the San Francisco Board of Supervisors on a 8 - 3 vote has unleashed a flurry of public debate, media commentary and even a pair of dueling petitions over the revitalization of mid-Market Street in San Francisco.

Touted as a way to keep jobs and the growing tech company Twitter in San Francisco, the SF Public Press is investigating how providing a six year payroll tax exemption, which includes eliminating taxes on the anticipated employee stock options when the company goes public, could have unintended consequences on low-income housing units and residents living in the area.

With thousands of new workers expected to flood mid-Market as Twitter and other businesses move in, employees will likely look for affordable housing close to where they work, increasing property values in one of the last low-income neighborhoods downtown — a boon for residential landlords that currently rent studio apartments for an average of around $1,000.

Tenderloin Housing Clinic’s Randy Shaw, a proponent of the tax breaks, posed the question of “whether neighborhoods must tolerate open drug dealing and vacant storefronts in order to avoid ‘gentrification’”, today on his news site BeyondChron, and said that the tax exemption would benefit low-income residents who live in many of his own buildings without displacing them because of San Francisco’s “many anti-displacement laws.”

Still, inflated housing costs in buildings without designated low-income housing would lie in stark contrast to the SRO’s and limited commercial use buildings that will remain.

Among the listed benefits of the tax exemptions, the promise to lure a supermarket to the neighborhood where there currently is none, could be one of the few that actually serve current residents. Yet increased police patrols, upscale retailers and commercial spaces targeted to serve young spenders could alienate low-income residents that do not fit the “young, artsy, and urban” demographic targeted in the city’s proposal.

Read the city’s proposal here

Burning Man to ignite Sixth and Market

Burning Man LLC is relocating its offices to the heart of the blighted mid-Market area.

Mayor Edwin Lee announced the move via his Twitter account this morning. Burning Man looked at several office spaces, including the Warfield Building, before deciding to relocate its offices to 995 Market Street. Curbed SF  is reporting that a lease for 19,000 square feet of office space in the David Hewes Building will be signed at any moment.

SF Toasted said the steel-frame 15-floor David Hewes Building was erected in 1906. The building was named after David Hewes who donated the golden spike used to complete the Transcontinental railroad in 1869.

"Burning Man embodies innovation and will lead to the creation of new jobs, a sense of community, and services to an underserved area," Lee said  in an interview with NBC Bay Area.

Investigation into Muni train door left opened while moving hints at cause

Muni continues to probe how a light-rail vehicle door was open on an outbound L-Taraval while the vehicle was moving between Van Ness and Church stations during the evening commute last Friday.

The door had been placed “out of service” by the operator at Van Ness station, but may have forgotten to use a pin to lock the door shut, according to John Haley, transit director of operations.

A Muni rider, Alex Merenkov, caught the incident on video and posted it on YouTube. A familiar face captured on the video was Supervisor Scott Wiener, who was in the vehicle looking at the opened door.

Wiener said that he did not pull the emergency lever because he was afraid the train would stop immediately and throw passengers around. He said the operator had made an announcement to stay away from the door, but passengers clearly remained next to the open door.

Merenkov, though, does not recall the operator making any announcements until they arrived at Church station, where passengers were told to get off the train.

Haley said it was a rare occurrence and has only heard of it happening one other time since becoming the transit director of operations in 2010.

There were no injuries and the operator was placed on non-driving status pending the outcome of the investigation.

Haley said that if there is an emergency on the train, passengers should pull the emergency lever located near the door. Passengers can also talk to the operator through an intercom near the front and back of light-rail vehicles.

Muni's chronic lateness and frequent 'switchbacks' draw community ire

From high school students to senior citizens and advocates for the disabled, angered San Francisco residents vented their frustrations about the ways that the city’s Muni transit system is failing them last week.

Delays in getting to class on time, and a high number of “switchbacks” — in which Muni light-rail vehicles and buses turn around before they reach their scheduled final destination, forcing riders to walk the remainder — were key points of contention at the March 28 Board of Supervisors public hearing.

Mission High School sophomore Alexandria Edwards, who was one of more than a dozen students attending the hearing, complained that chronic lateness on the J-Church light-rail line is damaging performance at school.

“It causes truancy,” she said. “Many students are late, so then we have to make announcements over the intercom, which takes away from class time.”

Raymond Leung, who does community development work with the Mission-based Neighborhood Vision Project, also slammed the reliability of the J-Church line. “Last Monday, when I was supposed to conduct a meeting with youth leaders, the J was 25 minutes late,” he said.

Transit director John Haley countered that J-Church service improved to a record 76.8 percent between July and September of last year, up from its 50 percent on-time performance the previous quarter. The fact that the J — which is scheduled to arrive every seven to 13 minutes — has to share a line with the N and the F at Balboa Park was partly to blame for the delays, he said.

Muni’s frequent switchbacks drew ire as well. B Bob Planthold of the Senior Action Network said that seniors and the disabled are disproportionately impacted when buses and light-rail vehicles make unannounced turnarounds.

“I sometimes hear Central Control tell an operator to switch back. But neither Central Control nor the operator ever asks, 'Does anybody on a wheelchair need the ramp?’ ” said Planthold, noting that not all of Muni’s stops have ramps.

Supervisor John Avalos, who chairs the City Operations and Neighborhood Service committee that held the hearing, announced his frustration with the switchbacks.

“If this is a common occurrence, it means that I have no real leverage in my district to encourage people to get out of their cars and use Muni,” he said.

According to the Metropolitan Transit Agency, which operates Muni, the J-Church line made 348 switchbacks this year through Mar. 25, out of a total 103, 272 trips.

More hearings on Muni’s switchbacks, as well as its reliability status, will happen in the coming months, said Avalos.

Muni service on the decline again

For the last three months of 2010, Muni on-time service was down for a second consecutive quarter, according to a service standards report by the San Francisco Municipal Transportation Agency released on Friday.

The report states that Muni's on-time performance fell from 72 percent to 71.1 percent in the October to December quarter last year.

On-time performance has been a regular topic of discussion with Muni riders and transit officials since a voter-approved city mandate in 1999 required the agency to meet an 85 percent on-time performance goal – something that Muni has never done.

The agency has reached its best on-time performance of 75 percent in the first quarter of 2010, and has been declining ever since.

Transit officials will discuss the report at Tuesday's board of directors meeting at City Hall, Room 400, at 1 p.m.

Best and worst performing lines (Second quarter of 2010-2011 fiscal year), according to MTA:

Best:81X-Caltrain Express (100 percent), 88-BART Shuttle (100 percent), 90-Owl (100 percent), 38L- Geary Limited (96.9 percent) and 67-Bernal Heights (94.7 percent).

Worst: 8BX-San Bruno Express (42.3 percent), K/T – Ingleside / Third (44 percent), 22-Filmore (46.6 percent), 49-Van Ness/Mission (46.9 percent) and 5-Fulton (47 percent).

City transit agency springs Muni fare increase

Industry optimistic about Bay Area biotech future, educators worry about benefits to community

Even in the midst of a recession, the Bay Area remains the leading biotechnology hub. But other areas both in the U.S. and worldwide are making serious efforts to catch up. Can the area hold its position in the next 20 years? That was the question at a recent panel discussion at the University of California, San Francisco hosted by Xconomy.

Industry representatives seemed optimistic about biotech's future locally, in synergy with Silicon Valley's information technology companies. In addition, the abundance of laid-off pharmaceutical professionals gives them a chance to hire top-notch people for individual projects.

“We have access to incredible talent and experience,” said Peter Hirth, co-founder of Plexxikon, a Berkeley-based pharmaceutical company. “These are the senior people who've been there and done that and know exactly what needs to be done.”

Genomic Health co-founder Randy Scott agreed about the Bay Area's massive talent pool. He said that Genomic Health has been successful in hiring “tons of young, bright people.”

“I can't think of any place I'd like to be hiring in at the moment, even with the cost of the Bay Area,” Scott said. “I would not want to compete against the Bay Area in the next 20 years.”

But not everyone was as confident. Jeff Bluestone, UCSF executive vice chancellor and provost, was worried about the local and national education system and about lower-level jobs moving to other areas. Bluestone said that the biotechnology community should figure out a way to maintain a sense of community in San Francisco.

“We need a mechanism by which we can provide not just a livable situation for everybody and an economy that works, but something that is inclusive,” Bluestone said.

He thinks that the area is at risk of losing out by failing to support diversity. “If we say that all we're going to be are the high-end centers, we lose the manufacturing and we lose the innovation that happens by being full-service,” he added.

Bluestone is not alone in his concerns. As the Public Press reported last week, City College of San Francisco students have a hard time getting into big biotech companies. In an interview with the Public Press, Laurence Clement, internship coordinator of the Bridge to Biotech program at City College, compared the current situation of biotech industry to the dotcom boom.

“When the dotcom boom arrived, nobody in the low-income neighborhoods benefited from it. Biotech is doing the same thing,” Clement said. “A lot of the biotech companies have good revenues but they are leaving out this entire San Francisco population.”

As far as science education goes, there is reason to worry, especially in California. The U.S. ranked 23rd in science and 31st in mathematics in the Organisation for Economic Co-operation and Development's 2009 rankings of international secondary-education performance. Nationally, California ranks 46th both in fourth and eighth grade science skills according to the National Center for Education Statistics. With four states left out of the report, only Mississippi ranked worse than California.

This is why there are initiatives such as Bio-Community developed by BayBio, Northern California’s life-science association. The network supports science, technology, engineering and math education in under-resourced, grade 4-12 classrooms.

We will report on these initiatives during the spring.