In vogue with venture

peptidase 4 (DPP4) inhibitor for type 2 diabetes. The compound looked to be safe and efficacious from the phase 2 trial results. However, it was barely differentiated from Merck’s (Whitehouse Station, New Jersey) Januvia (sitagliptin) and AstraZeneca’s (London) and Bristol-Myers Squibb’s (Princeton, New Jersey) Onglyza (saxagliptin). The company had a partnership already announced with a specialty pharmaceutical company, but MPM was concerned that the partnership might dissolve, as the phase 3 trial costs loomed. That would have required the venture investors to fund the trials, and diabetes products require large, expensive studies. Thus, this compound failed to meet our innovation criteria, and MPM passed on funding. The company subsequently lost its commercial specialty pharmaceutical partner and faced the prospect of funding its own phase 3 studies. It could not find investors willing to take this bet. The company had a perfectly good drug, but in today’s world the bar is set higher and the compound was insufficiently differentiated to attract the interest of big pharma. Even five years ago, it’s likely many major pharmaceutical companies would have seen the value in building a diabetes franchise, and even a modestly differentiated new entrant, such as this, would have been of interest to several of them. traditionally have sustained multiple entrants (for example, the hypertensive drug classes, beta blockers, angiotensin-converting enzyme (ACE) inhibitors and classes of antibiotics such as cephalosporins) are not doing so with newer drug classes; thus, innovative first-inclass therapeutics are highly attractive. Biotech companies that bring the promise of new therapies through proprietary new targets and new biological pathways are highly attractive to big pharma and, consequently, to the investment community. There have been two recent examples of attractive exits for innovative companies. The first is Calistoga Pharmaceuticals (Seattle), which was purchased by Gilead (Foster City, California) for $375 million upfront and an additional $225 million in potential milestone payments. Calistoga was bought for its highly innovative phosphatidyl inositol 3-kinase (PI3K) inhibitor program in oncology. The second example is Plexxikon (Berkeley, California), which was acquired by Daiichi Sankyo (Tokyo) for $805 million upfront and $130 million in potential milestone payments. Plexxikon had a first-in-class oral small molecule BRAF inhibitor for melanoma. Both of these buyouts show there is a market for companies working on new therapeutics. At the other end of the spectrum, MPM Capital (San Francisco) was invited to invest in a company developing a new dipeptidyl T current financial and regulatory environment is posing challenges to investors and entrepreneurs in the healthcare sector. Fewer dollars are going into venture capital and fewer venture capital companies have money to invest. There is a dearth of pharmaceutical acquisitions, the traditional exit for healthcare investors. The pace of pharmaceutical deals has slowed, and the deals that are getting done are often structured buyouts (Box 1). Although initial public offerings have been happening, only a select few companies have attained expected valuations. Coupled with political pressure to emphasize drug safety and ever more stringent regulatory hurdles, life science enterprises are faced with several challenges due to the current market environment. Yet big pharma continues to require assets from biotech to fill both its ever-increasing development pipeline deficit and the gap in their offerings as products face patent expiry. What’s more, first-round biotech pre-money valuations are lower than ever—an average of $3 million last year compared with an average of $21 million between 2005 and 2009— enticing more investors into doing deals. So what are some of the key criteria that these venture capitalists (VCs) are looking for in a potential business?