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Venture Capital Funding and M&A Quarterly …

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Created: Wed Jun 4 18:16:03 2008

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Venture Capital Funding and M&A Quarterly

Biotechnology � Pharmaceuticals
Medical Devices

1st Quarter, 2008 � United States

Publisher
VentureDeal

Writer
David Hamilton

Contents
Summary 2

Funding Activity 2

M&A Activity 7

Notes 8

Sponsor:

This material has been prepared and issued by VentureDeal, LLC. The information contained herein is
based on current information that VentureDeal considers reliable, but we make no representation that it is
accurate or complete, and it should not be relied upon as such. It is provided with the understanding that
VentureDeal is not acting in a fiduciary capacity. � 2008 VentureDeal. Some Rights Reserved.

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

Summary The long boom in venture funding of life-science startups may have
finally peaked. In the first quarter, biotechnology, pharmaceutical and
medical-device startups raised a total of $2.4 billion in venture-capital
funding, a 9 percent decline compared to the previous quarter (see
Table 1). The number of companies receiving funding fell by 10
percent to 197.

M&A activity looked even more dismal, falling by 73 percent in value
terms since the fourth quarter (see Table 2).

Medical-device companies proved the most resilient during the
quarter, with 82 companies drawing $947 million in new funding �
both figures up one percent compared to the previous quarter. New
forms of glucose testing for diabetics, along with aneurysm-treatment
devices and oxygenation therapies, drew substantial venture interest.

Biotechnology funding, by contrast, plunged to $598 million, a 35
percent decline from the fourth quarter. Backers showed no clear
preference for any particular technology or disease orientation as they
pulled in their horns, instead backing an array of largely established
drug modalities � particularly antibodies � and common disease
targets such as cancer and inflammation. There were, of course, a few
exceptions, including investments in RNA interference and neural stem
cells.

In sharp contrast to both devices and biotech, pharmaceutical deals
grew larger during the quarter as VCs steered their funding toward
later-stage companies, although the number of companies funded
didn't change appreciably compared to the fourth quarter. Startups
focused on infectious disease and a few unique approaches such as
drug-mediated neuro-regeneration were among the quarter's big
winners.

Funding Activity

Biotechnology Notable biotechnology investments in the quarter included startups
with new techniques for addressing inflammation, RNA interference
and synthetic biology.

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

Taligen Therapeutics, for instance, is an Aurora, Colo., startup with a
novel approach to tamping down runaway inflammatory reactions. The
company, which raised $65 million in a Series B round � one of the
largest such fundings for a drug startup not specifically focused on in-
licensing activity � is taking aim at the "complement system," an arm
of the innate immune system that amplifies inflammatory response.
The company hopes that its drugs, which remain in preclinical
development, will eventually succeed as both systemic and local anti-
inflammatories.

A slightly unconventional drug-delivery play involved PhaseRx, a
Seattle biotech that raised $19 million in a Series A round. (That
funding will be tranched, so PhaseRx has so far received only $4
million.) The company's work lies in the hot field of RNA interference,
but unlike other startups such as Alnylam or Sirna Therapeutics (which
was acquired by Merck in 2006 for more than $1 billion), PhaseRx
doesn't aim to develop its own drugs. Instead, the startup appears
focused on synthetic polymers designed to help RNAi molecules cross
into cells, which has been a stumbling block for the technology.

Two other biotech startups represented interesting departures from
run-of-the-mill investments in oncology and autoimmune disease. Q
Therapeutics, a Salt Lake City biotech that raised $15 million in a
Series B round, is developing a neural stem-cell treatment for a form
of multiple sclerosis. The company hopes that the specially derived
cells can encourage the formation of new glial cells in damaged neural
tissue, shielding nerve fibers that have lost a protective myelin coating
to disease.

By contrast, Codon Devices, a Cambridge, Mass., startup, isn't
focused on treatments at all. Instead, the "synthetic biology"
company, which raised an $11 million extension to its Series B
funding, aims to design artificial genes that can "program" cells in a
variety of ways, including the production of drugs, chemicals and
biofuels.

Overall, Taligen drew the largest biotechnology funding in the quarter.
Close behind was Alder Biopharmaceuticals, a Bothell, Wash.,
startup that raised $40 million for the production of new antibodies in

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

yeast cells. Traditional antibody-based drugs are produced using an
older process that can take a year or more. Alder, by contrast, claims
to be able to make new antibodies in just a few months.

Pharmaceuticals Pharmaceutical deals also covered the waterfront in the first quarter,
although a few of the most intriguing fundings involved drug-mediated
neuro-regeneration and drug-device combinations.

The sector's fifth largest funding in the quarter, for instance, went to
BrainCells, a San Diego company whose in-licensed drug, it believes,
can help stimulate the re-growth of damaged neurons. BrainCells
raised $30 million in a Series B round, and plans to test its lead drug
candidate � which its previous owner had earlier tried as a potential
Alzheimer's disease therapy -- as a treatment for depression and
anxiety in phase II trials.

Two other startups focused on implantable devices that elute drugs in
order to reduce inflammation or other side effects. Such "drug-device
combinations" are fairly popular these days, particularly as devices
grow more sophisticated in their ability to release drugs in particular
locations or under specific conditions.

The first of these, Alimera Sciences, is an Alpharetta, Ga., startup
that raised $30 million in a Series C round. Although initially a reseller
of over-the-counter eye drugs, the company has now partnered with
the nanotechnology concern pSivida to produce its drug-device combo
Medidur. The treatment consists of a tiny structure designed for
implantation in the back of the eye, where it can emit small quantities
of a corticosteroid in order to control a blinding condition called
diabetic macular edema.

Next up is TyRx Pharma, which is focused on implantable surgical
pouches that are infused with antibiotics and other drugs intended to
prevent infection. Its current products include meshes used for hernia
repair or as pouches for implanted defibrillators.

The two largest pharmaceutical fundings both involved specialty-
pharma companies focused almost entirely on selling in-licensed drugs
� and occasionally acquiring the companies that make them. EKR
Therapeutics, of Cedar Knolls, N.J., raised $145 million in equity and

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

debt, although much of that was devoted specifically to acquiring
several heart drugs from the failing biotech PDL Biopharma (Nasdaq:
PDLI).

Similarly, the transatlantic specialty pharma EUSA Pharma raised $50
million in an undisclosed round. In a surprise twist, however, the
company spent $35 million of that sum to acquire the publicly traded
biotech Cytogen, which the specialty pharma went on to take private.

Medical Devices Oddly enough, new approaches to measuring blood glucose � essential
for diabetes control � garnered some of the most venture interest in
the still-robust medical-devices field.

Luminous Medical, for instance, raised $23.5 million in a Series B
round for a hospital-based glucose meter. The Carlsbad, Calif.,
startup's device aims to provide automatic and near-continuous
glucose measurements for hospitalized patients in order to prevent
sudden spikes or crashes that can produce serious complications,
particularly in diabetic patients.

IntelliDx, of Santa Clara, Calif., is producing a similar hospital-based
glucose meter. The company raised $21.5 million in a Series D round.

Another startup with intriguing device technology is PolyRemedy, a
Mountain View, Calif., startup with a robotic system for producing
customized wound dressings. The PolyRemedy device is intended for
hospitals and medical clinics, where it can be used to produce tailored
bandages for diabetic ulcers, particularly on the feet and other
extremities. The company raised $25 million in a Series B round.

The largest device funding of the quarter was also one of the most
interesting, as TriVascular raised $65 million as part of its spinout from
Boston Scientific. The twist here is that the Santa Rosa, Calif., startup
was acquired by Boston Scientific (NYSE: BSX) in 2005, and has just
been disgorged again to pursue its devices for repairing abdominal
aneurysms. (Thirty million dollars of the proceeds went directly to
Boston Scientific to pay for the spinout.)

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

Runner-up in the biggest-fundraising sweepstakes was TherOx, an
Irvine, Calif., startup that raised $30 million in an undisclosed funding
round (believed to be its tenth). TherOx makes a "hypersaturated"
oxygen system intended for heart-attack patients � the idea is that
loading up blood with oxygen and then infusing it near the heart will
help prevent damage to the muscle there.

Table 1

Venture Funding Activity� 1st Quarter 2008

Industry Total % Change Number of % Change
Amount Vs. Prior Companies vs. Prior
Funded Quarter Funded Quarter

Biotechnology $598 Million - 35 % 65 - 27 %

Pharmaceuticals $807 Million + 13 % 50 0%

Medical Devices $947 Million +1% 82 +1%

Total $2.35 Billion -9% 197 - 10 %

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

M&A Activity

Mergers and acquisition activity fell dramatically in the first quarter,
with only $569 million in transactions � a 73 percent drop compared to
the previous quarter. Only seven deals took place, less than half of
those previously reported for Q4, 2007.

By far the most significant deal in the quarter involved Teva
Pharmaceutical Industries' (Nasdaq: TEVA) $400 million acquisition of
CoGenesys, itself a spinout of Human Genome Sciences (Nasdaq:
HGSI). The generic-drug maker's acquisition of a protein-drug
developer probably had less to do with its interest in the CoGenesys
pipeline than in its biologics manufacturing capacity, which could be
turned to the manufacture of generic biologics � particularly if the U.S.
joins Europe in creating a regulatory pathway for biogenerics.

About the only other deal of note was Invitrogen's $57 million
purchase of CellzDirect, a Research Triangle Park, N.C., startup that
produces liver-cell-based products for screening and testing drug
candidates. Wright Medical (Nasdaq: WMGI) also shelled out $27
million to acquire InBone Technologies, a maker of spinal-fusion and
ankle-replacement implants.

Table 2

Venture M&A Activity� 1st Quarter 2008

Industry M&A % Change M&A % Change
Transaction Vs. Prior Number of vs. Prior
Amounts Quarter Transactions Quarter

Biotechnology $466 Million - 42 % 3 - 57 %

Pharmaceuticals $75 Million N/A 2 0%

Medical Devices $28 Million N/A 2 - 75 %

Total $569 Million - 73 % 7 - 59 %

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Venture Capital Funding and M&A Quarterly � 1st Quarter, 2008

Notes

This report was prepared by David Hamilton and the staff of
VentureDeal, LLC.

The information sources used were the VentureDeal.com database.
VentureDeal is a venture capital database that provides the latest
information about venture-backed technology companies, venture
capital firms and transactions in the United States.

The database obtains transaction and company information from a
wide variety of reputable public and private sources. While this report
is free of charge, users may view the individual transactions
supporting the totals herein by subscribing to VentureDeal for $25.

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commercial purposes, subject to the copyright notice herein.

While all attempts have been made to verify information provided in
this publication, neither the author nor the publisher assumes any
responsibility for errors, omissions or contrary interpretation of the
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