There was a time when young life science companies in the Greater Philadelphia region either sputtered or went bankrupt for lack of seed money. That situation has improved, judging by the 400 life science companies that now call the region home. More risk capital and programs for start-up companies are still needed, however, according to a 2005 Milken Institute report, which ranks the area's life science cluster third in the nation for economic impact and innovation, right after Boston and San Francisco.¹

Chris Cashman, president and CEO of Protez Pharmaceuticals, a Malvern, Pennsylvania, maker of new antibiotics to fight drug-resistance, recalls the 2001 to 2002 "washout period," when the market for biotech and many small-capital companies fell apart. "Raising money was very difficult. Lots of companies failed," he says.

For Cashman and other biotech entrepreneurs, the recovery began with Pennsylvania's move in 2001 to use its tobacco settlement funds to create capital for life science companies. Thus BioAdvance, the "greenhouse" for southeastern Pa., was launched in 2002 with $33.8 million. One of its key programs, the $20 million Greenhouse Fund, provides seed and preseed investments of $250,000 to $1 million per company to life science startups, says Ellen Semple, BioAdvance's director of marketing and communications. Since its first investments in 2003, BioAdvance has pumped more than $11.5 million into 21 biotechs and nine academic projects, which have then raised $200 million more. In 2004 BioAdvance sponsored BioAdvance Ventures, a fund that Quaker BioVentures manages. Quaker BioVentures is one of the area's leading early-stage venture capital firms.

The state's strategy to support the life sciences has been profitable. At a time when funds were scarce, the decision to leverage tobacco money boosted investment in small biotechs, Cashman says. In 2003 he was raising money for Protez Pharmaceuticals, a new company he cofounded with Klaus Esser and Luigi Xerri. By June 2004 they had raised $1.6 million, partly with tobacco money, partly with government money from Ben Franklin Technology Partners (a Philadelphia-based, state-financed, nonprofit economic development organization), and partly with venture capital funds from BTW International in Conshohocken, Pa.

That cash enabled Protez to hire 20 people and to focus on the next generation of antibiotics. In May 2005 the company struck a deal to in-license an early-stage carbapenem antibiotic from Dainippon Sumitomo Pharmaceuticals of Osaka, Japan. That deal raised another $15 million from S.R. One Ltd., Quaker BioVentures, and BTG International, all in the Philadelphia area, L Capital Partners in New York City, and Birchmere Ventures in Pittsburgh. These five funds, plus Easton Capital Investment Group in New York City, were obtained again in 2006. By April of that year, Protez capped second-round financing at $21 million, and by the end of 2007, it was scaling up for Phase II studies.

"We had a continuum of fundraising from the washout period to early recovery," says Cashman, "so even though we started small, we've grown and even brought in money from outside the region. It's a real-world snapshot, and it's worked the same way for other companies in the same space."

Peter Sears, venture director at BioAdvance Ventures, thinks Protez is a good example of how the system works. "At the same time," he says, "venture funds focusing on the life sciences have grown in size. That means the people who manage these funds must put greater amounts of money to work, which means a seed company with a limited appetite for capital at the outset doesn't get the attention of the big funds. Having said that, if you work hard enough and your technology is attractive enough, you can get seed-stage financing. It's just tougher than a couple decades ago."

According to Dan Conley, managing founder of the New Jersey Angels Networks, a Somerset, NJ-based angel group, hosts of entities want to help the best life science companies, but oftentimes bioentrepreneurs run into problems. They don't have enough proof that their science works, their actual revenues don't match the revenue projections, or they fail to follow the advice of those who do support them.

Andrew Reaume, president and CEO of Melior Discovery in Exton, Pa., a company dedicated to drug repositioning using its proprietary platform, says initial seed money from BioAdvance enabled him and cofounder Michael Saporito to launch the company two-and-a-half years ago and establish early proof of concept. This made it possible to secure additional venture money from a small syndicate of early-stage VCs, including Osage Venture Partners in Bala Cynwyd, Pa., Cammeby's Capital in New York City, and Andhra Pradesh IDC in Hyderabad, India, as well as additional angel investors. The company then leveraged this initial equity investment and attracted significant revenue from pharmaceutical partners such as Pfizer, Johnson & Johnson, and Merck to fund its continued growth. "With relatively little money invested, the company has created significant value relative to investment capital. It's a good bang for the investment buck," says Reaume.

"VCs manage for return on investment in a short period of time, so it translates into [the VCs] going into later-stage companies with less risk," says David P. Holveck, former president of Johnson & Johnson Development Corp. (Johnson & Johnson's internal venture capital group). That's where corporate venture capital comes in, he says. "We believe we can support and offset the countering trend of VCs investing in later-stage companies. Johnson & Johnson looks for early-stage technologies where we can invest, and bring not just dollars to the table but expertise. The company doesn't invest in products, but in platforms that would span across Johnson & Johnson - from pharmaceuticals to device makers and consumer companies."

Marc Ostro, managing director of Devon Park Bioventures, a venture capital firm in Wayne, Pa., and a biotech-oriented spinout of TL Ventures, bears out Holveck's theory. Ostro says the earliest-stage company his VC would invest in, either alone or in a syndicate, is a company less than a year from clinical trials. "I would guess that the vast majority of biotech venture firms have the same investment profile we do - not getting in really early ... it's much harder to make a return when you get in that early," he says.

Nevertheless investment in Greater Philadelphia area biotech and medical device companies is growing, according to the results of a 2007 MoneyTree Survey, published by PricewaterhouseCoopers (PWC), Venture Economic, and the National Venture Capital Association. From 2005 through the first half of 2007, overall investment (in venture capital deals greater than $10 million) totaled $887.8 million in area biotech companies and $235.4 million in medical device companies. While the totals were much higher for other top US biotech hot spots, the percentage invested in biotechs and medical device companies - 65% of investments in the Greater Philadelphia area - exceeded the percentage invested in the Silicon Valley (24%), New England and Boston (36%), or San Diego (61%) areas.

Kristen Vieira Traynor, a partner at PWC, says the data show steady growth. "Of total VC deals greater than $10 million, biotechnology and medical device companies are getting the majority of investments," said Traynor. "Relative to other areas, the total dollars might be smaller, but the percentage going to biotechnology and medical device companies is larger."

Conley agrees that the biotech bust is over. "The macro view is that the telecom bubble burst, the dot.com bubble burst, the biotech bubble burst, and then 9/11 took the wind out of our sails. That resulted in the nuclear winter of venture capital, and we're coming out of that."