Investors head for the central nervous system

Image courtesy Northstar Neuroscience

In the second of two articles on neurotechnology, Lori Valigra assesses how US investors are reacting to these two trends.

Neurotech Reports interviewed two dozen venture capital companies and concluded that many of them are open to funding neurotech device makers, where they see the main window of opportunity over the next three to five years.

In part, this is because devices companies are perceived as lower risk than companies developing central nervous system drugs. But it is also based on the recent trade sales of central nervous system (CNS) devices companies such as Advanced Bionics and Advanced Neuromodulation Systems, as well as the stock market success of firms like Cyberonics, a medical device maker aiming to treat epilepsy, depression and other chronic CNS disorders.

VC firms that are most likely to fund neurotech device ventures are those that have previously backed medical device start-ups. Venture capitalists are already funding biotech and pharmaceutical companies that are developing drug treatments for CNS diseases, because there have been more requests from such companies to date. But that is changing, as more data from neurotech device trials surfaces, according to Neurotech Reports.

According to Casey Crawford Lynch, of Neuroinsights, a San Francisco-based research and consulting firm, medical devices are one of the best investments in neurotech because the principles behind the technology are well established. "The technology is old and proven for pacemakers, or devices for cardiovascular disease, but it's being applied to neurotech," she said. "So there is less of a likelihood of toxic side effects than with new pharmaceuticals."

But devices companies do have to navigate the hurdle that implants are seen as more invasive than drugs. Despite this, recent IPO exits for venture capitalists have been better in the devices space than in pharmaceuticals.

Mergers and acquisitions, even in the biopharma space, are more lucrative, with the recent agreement of Pfizer Inc to acquire CNS drug development specialist Rinat Neuroscience Corp. of South San Francisco, California, likely to be worth hundreds of millions of dollars. "That's a good exit for investors. Big pharma had been licensing products, but now it is making acquisitions, which is good for venture capitalists," said Lynch.

Still in the medical devices area, Northstar Neuroscience Inc., of Seattle, Washington, made a strong showing with its recent IPO. Its initial investigational product is for stroke. On 6 May Northstar priced its IPO of 7.1 million shares at $15 per share. Its exit valuation was $370 million. The company's initial investors include Boston Scientific Corp., Johnson & Johnson, which owns about 19 per cent of Northstar, and VC firm the Mayfield Fund, which owns about 20 per cent.

While Northstar has a market capitalisation of $370 million, four neurotech pharma IPOs this year came in at $70 million to $220 million: Acorda Therapeutics Inc., of Hawthorne, California, at $70 million; Vanda Pharmaceuticals Inc., of Rockville, Maryland, at $375 million; Targacept Inc., from Winston-Salem, North Carolina, at $140 million; and Alexza Pharmaceuticals Inc., of Palo Alto, California, at $193 million.

Specialty VCs focus on neurotech

VC investments in all types of neurotech companies totalled $1.5 billion in 2005, up from just over $500 million in 1999, according to NeuroInsights. There's even a VC firm in Charlottesville, Virginia, called NeuroVentures that is focused on central nervous system investments. Among its 12 investments is neurotech drug discovery and development company BrainCells Inc. of San Diego, California, which in 2005 closed a $17.7-million Series A round. Technology Partners and Oxford Bioscience Partners also were participants.

NeuroVentures, which started up in 2000, manages $15 million. Its managing partner, Mark Cochran, has a PhD in molecular biology, and formerly worked for Toronto-based VC firm  MDS Capital Corp. NeuroVentures targets investments ranging in size from $200,000 to $2 million, but it also considers development stage companies.

Already, two of its investments have made exits. Proxima Therapeutics Inc., Alpharetta, Georgia, a medical device company focused on treating brain tumours and other cancers, was acquired for $160 million in March 2005 by woman's health company Cytyc Corp., of Marlborough, Massachusetts. And Cyberkinetics Neurotechnology Systems Inc., based in Foxborough, Massachusetts, merged with Trafalgar Ventures Inc., which was folded into Cyberkinetics, and the combined company went public in October 2004. Cyberkinetics makes neural sensors.

NeuroInsights also plans to start a venture capital fund focused on neurotech according to Lynch. "It will be called the NeuroInsights 'Science Futures' fund. We hope to start it in a year, and manage about $50 million," she said. The fund will focus on backing small companies.

Looking forward

In addition to releasing the recent industry report, NeuroInsights held a neurotech conference in San Francisco on 18 May. One goal that came from the conference was an effort to start an international neurotechnology industry organisation. Part of the organisation's mission would be to work with government to get increased funding and t tax credits for companies investing in or doing research in the field.

The US National Institutes of Health recently launched the Neurotechnology Research, Development and Enhancement initiative, which involves funding multidisciplinary research on “novel tools and approaches for the study of the development, structure and function of the brain”, including hardware and software technologies. The programme could fund cutting-edge research areas like micro-electro mechanical systems (MEMS) devices, better electrodes for implantation, biosensors, and tools for early detection of imminent epileptic or other seizures.

Getting more government funding is important to university spin-outs and early stage companies. “It’s still a high hurdle to get Series A funding,” said Lynch, who also consults with scientists early on in their work and works to introduce them to companies that can license their technology, or to venture capitalists.

Universities such as Purdue of Layfayette, Indiana, are taking a more aggressive approach. Purdue’s Office of Technology Commercialisation holds road shows to match its innovations, which have been brought to the proof-of-concept stage, with venture investors and an entrepreneur who can run a spin-out company. The aim is to cut the time it takes to commercialise technology.

One example is Andara Life Science Inc., an Indianapolis, Indiana, start-up founded in 2005 with Purdue technology called the “Andara Oscillating Field Stimulator”, which can be implanted into a patient’s back within a month of a spinal cord injury to stimulate the regeneration of nerve fibres. About a year after its founding, Andara was sold to Cyberkinetics Neurotechnology Systems in a stock deal worth about $4.5 million.

Andara's device address a market for neural stimulation devices that tops $1.6 billion annually, and that analysts expect to top $10 billion within 10 years. The acute spinal cord injury market portion of that alone is currently estimated to be more than $500 million worldwide.