With venture capitalists focused on biotech companies that have products in or near clinical trials right now, startups may have to resort to creative financing schemes.

That was one conclusion by panelists considering “Biotech’s Challenge: Financing Drug Discovery and Drug Development in Uncertain Times” at A.M. Pappas’ fifth annual life science symposium. The symposium brings together investors, executives and entrepreneurs once a year to take a broad look at the state of the industry.

Panel members were moderator Larry Pickering, global chairman of healthcare private equity for CSFB; Nick Colangelo, managing director of Lilly Ventures; Russ Ray, managing partner at HLM Venture Partners; Marina Bozilenko, senior managing director with Bear Stearns; and George Milstein, senior managing director for Pacific Growth Equities; and Paul Truex, chief executive officer of Peninsula Pharmaceuticals.

The discussion ranged from new models for financing drug discovery to lack of venture capital interest in bioinformatics tools right now and the lack of a strong initial public offering of stock market for biotech or drug discovery companies.

Pickering asked the panel: “Does the difficult IPO market reflect a shift away from high risk drug discovery toward development? Can a small biotech company succeed in this environment competing against big pharmaceutical companies with 10,000 sales people?”

Focus a key

Truex, CEO of California-based Peninsula Pharmaceuticals and the only entrepreneur on the panel, said one way smaller biotechs can do business is by focusing on niche products that are reasonable in size and reasonable in return to investors with a clear development path. “They’re not blockbuster drugs,” he said.

Peninsula develops drugs to fight specific infections. “A small sales force can compete because your sales people are experts,” he said. Truex spoke fluently and at some length on the topic, sparking a tongue-in-cheek response from moderator Pickering.

“You can tell he’s been in a fund-raising cycle,” Pickering joked. “You pull a string and it all comes out.”

Pickering noted the high level of merger and acquisition activity in the biotech and pharmaceutical industry and asked the panel, “What happens after the initial synergies that prompted the merger fades?”

Colangelo of Lilly Ventures said, “Our chairman is vocal about saying mega mergers don’t work.” Lilly does look for acquisitions that may improve productivity, though, he said.

“We just acquired Applied Molecular Evolution in a productivity play,” noted Colangelo. “We tried their technology and liked it and wanted to bring it in house.”

Back to early stage?

Pickering asked if the current VC and Wall Street focus on companies with drugs in development and less spending on discovery means there are opportunities out there.

Colangelo replied: “Funding of only clinical stage companies has to change eventually. At some time, people are going to have to come calling on discovery companies. At some point, you have to return to where innovation takes place.”

Ray, a venture capitalist, said investors prefer the business model in which small biotech discovery companies innovate, but then partner with big pharmaceutical companies to get products to market.

“That’s a business model that makes sense from a VC standpoint. Drugs in our lifetime,” he said. “It’s tough to support building the infrastructure needed to develop and sell a drug.”

Predicting blockbusters

Bear Stearns’ Bozilenko pointed out that “every biotech and every big pharma company I talk to wants to in-license products.” She said, “We’re also seeing many partnerships in which the large company contributes a lot of capital.”

Bozilenko also noted that some large drug companies made bad guesses about the potential of some discovery companies and their products, passing up ones that later did very well. “No one really knows what will be a blockbuster,” she said.

Ray recalled that during the market boom years.”We couldn’t print stock fast enough for a company like Human Genome Sciences,” he said. “Those days will return.”

“The question is when?” Pickering injected.

Truex said small drug discovery companies have to be creative in finding ways to increase the market for their drugs. He said his company “turned a $100 million drug into a $400 million drug” by finding a new way to administer it. “Innovate around products,” he said. “Innovation does not have to stop at the clinical stage.”

Milstein of Pacific Growth Equities noted that “things are always in or out of fashion in investing.” During the boom years, investors sunk dollars in promising early stage companies. Then, after the bust, moved to late stage companies with products in clinical trials.

“Now we’re seeing the beginning of people starting to invest in earlier stage companies again,” he said. “I counted ten pre-clinical stage companies that did rounds over $30 million this year.”

Out of favor

One thing venture capitalists, bankers, and entrepreneurs agreed upon was that bioinformatics tools are a tough sell in the current environment.

“I never saw a bioinformatics company with a business plan that got me excited,” said Bozilenko.

Pickering said that he fears the failure of bioinformatics tools to lead to products “could be one of the great disappointments of science.”

Milstein added that “when a company starts talking about how fast they do something, my eyes glaze over. They may actually leave out critical parts of the discovery process that could produce even better leads. But the big question is what happens at the end of the story?”

Truex noted that one problem bioinformatics companies have is that “they didn’t convince the U.S. Food and Drug Administration” that they could speed up drug discovery. He added that the FDA is holding its first meeting to consider bioinformatics tools April 15. “It should be an interesting day, apart from taxes,” he said.

Pickering, however, nailed the concerns of venture capitalists and bankers by quoting something Bozilenko told him.

“She said she went into a meeting where they were talking about proteomics, and genomics and other -omics, and one person finally said, ‘Yes, but where’s the economics?'”

Bozilenko added, “One of the problems is that people expected proteomics and genomics to produce exponential returns and science doesn’t work that way. Expectations were set too high.”

Ray mentioned that his firm is looking at products that might make a difference in a clinical setting rather in the drug discovery process. “We’re looking at risk averting sorts of things rather than drug discovery platforms,” he said.

Right now, Ray said, “there’s too much data. We’re on the verge of discovering the molecular basis of disease and one day that will translate into better medicines. But the data hasn’t yet been translated into something useful.”

A.M. Pappas: www.ampappas.com