Vaccines get the credit for some of the biggest public health gains of the past century, but they are notoriously tough to develop. The required clinical trials take years, cost many millions, and even the slightest safety warning will attract droves of litigators. That’s all for a product that can’t usually command monopoly prices, like, say, a cancer drug.

So why exactly did Cambridge, MA-based Genocea Biosciences raise $23 million in venture capital earlier this year, before it even has a single vaccine candidate showing value in clinical trials? Why would people largely responsible for the two best-selling vaccines ever—Merck’s human papillomavirus vaccine (Gardasil) and Wyeth’s pneumococcal vaccine (Prevnar)—get involved with this startup in its early days? That’s what I delved into with Genocea CEO Staph Bakali when we talked the other day.

There are financial reasons why venture capitalists have suddenly gotten more interested in vaccines like those promised by Genocea, and it isn’t all about impulsive reactions to the latest scary headline on swine flu. Vaccines, which once languished in the pharma industry backwaters, made up a $13 billion market in 2007, according to Lehman Brothers. Sales of vaccines are expected to grow at an 18 percent annual clip through 2011, compared with 4.4 percent projected growth for the drug industry as a whole during that period, according to Lehman. Both Gardasil and Prevnar have proven that vaccines don’t have to be commodities anymore—they can garner high prices and create new billion-dollar markets.

“It’s the fastest growing segment of the pharmaceutical industry,” Bakali says.

Looking through that lens, the work of microbiologist Darren Higgins at Harvard Medical School suddenly appeared to have more than academic interest when the company was started in 2006. Genocea has built its foundation on a technology that’s supposed to mimic the human immune system in a lab dish, which helps researchers identify the most important antigens for inclusion in vaccines, Bakali says. These antigens—substances that spark an immune reaction—are supposed to help the body do more than just stimulate the production of the usual antibodies, or B-cell response, that traditional vaccines are known to provoke.

Staph Bakali

Instead, Genocea, with the help of proprietary computer algorithms, is looking for antigens that can stimulate the second major element of the immune system—T-cells—that are widely predicted to be necessary players if researchers hope to develop effective vaccines for major sexually transmitted diseases, or infectious agents like tuberculosis and malaria, Bakali says.

To uncover ways to alert these T-cells, Genocea is drilling deep …Next Page »

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Just three months ago, San Diego-based Inovio Biomedical looked like one of the many biotechs with big ambitions that were headed for the dustbin of history. The company has been burning cash for 15 years and it was down to its last $5 million in working capital. Inovio tried to merge with another little biotech company from Pennsylvania for 11 months, before finally closing the deal on June 1.

Investors didn’t give it a New York minute of attention: Shares closed at 63 cents that day.

But Inovio wasn’t done. The company (AMEX: INO) pounced on a new opportunity to treat the latest public health scare. On July 29, Inovio said its “universal” DNA-based vaccine was able to protect pigs and mice who were directly exposed to current circulating strains of the H1N1 “swine” flu. That evidence added heft to an earlier finding, which said Inovio’s approach offered the same blanket immunity to mice that were exposed to the deadly strain of flu that killed 40 million people around the world in 1918.

This time, Inovio struck a nerve. The obscure little company’s stock more than quadrupled in value, rising that day from 74 cents a share to $3.18 a share on huge volume of 32 million shares. Inovio cashed in that exact same day—raising $28.5 million of new capital—enough to keep its doors open until the second half of 2011, according to its latest quarterly report.

While Wall Street reacted on the usual primal emotions—fear and greed—I wanted to dig a little deeper into the fundamentals when I spoke recently with Inovio’s new CEO, J. Joseph Kim.

J. Joseph Kim

Time will tell whether Inovio really deserves its lofty new market valuation (currently about $92 million), but it’s worth noting that the vaccine field as a whole is hot—and H1N1 vaccines are incandescent. The vaccine industry made up a $13 billion market in 2007, according to Lehman Brothers. What’s more, vaccine sales are expected to grow at an 18 percent annual rate through 2011, compared with 4.4 percent projected growth for the drug industry as a whole during that period, according to Lehman. Merck’s human papillomavirus vaccine, Gardasil, as well as Wyeth’s pneumococcal vaccine, Prevnar, have proven that new generations of vaccines can sell at high prices-and create new billion-dollar markets.

So there’s a business case for a lot of vaccine companies. But what about the science at Inovio, or the newly-combined Inovio to be more precise, That might give the San Diego company a new lease on life?

The rationale for the merger …Next Page »

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Vaccines produced some of the biggest advances in medicine over the past two centuries, but for most of that time, scientists couldn’t say for sure how they worked to rev up the immune defenses. “You would close your eyes and hope,” says Rick Klausner.

That era is coming to a close, says Klausner, a former global health leader at the Bill & Melinda Gates Foundation and former director of the National Cancer Institute. Vaccines in coming years will be specifically designed to do what scientists want, Klausner says. They will stimulate certain cell types that you want to prevent an illness, fight off an existing infection, or possibly kill tough cancer cells.

The vaccine wave is one of several big ideas Klausner, 57, is pursuing in the latest chapter of his career as a venture capitalist. He’s now a managing partner with The Column Group, a San Francisco-based venture firm with about $260 million under management, and a team that includes three Nobel Laureates dreaming up the best ways to apply cutting-edge biology to vaccines and other areas. Klausner helped get the firm started from his home base in Seattle, but I spoke to him last week by phone from San Francisco. He moved to the Bay Area this month to be closer to his fellow partners, and most of his portfolio companies. But he insists he’ll be back on a plane once a month to the Northwest to keep tabs on his firm’s hot vaccine prospect, Seattle-based Immune Design.

“For the first time I’ve seen, we have a path forward to use vaccines against chronic diseases and as therapeutics,” Klausner says.

Immune Design, as we have written about in these pages, was born at an auspicious moment in both the science and business of vaccines. This business is pretty straightforward: these products, which once languished in the pharma industry backwaters, made up a $13 billion market in 2007, according to Lehman Brothers. What’s more, vaccine sales are expected to grow at an 18 percent annual rate through 2011, compared with 4.4 percent projected growth for the drug industry as a whole during that period, according to Lehman. Merck’s human papillomavirus vaccine, Gardasil, as well as Wyeth’s pneumococcal vaccine, Prevnar, have proven to the industry that newer vaccines can sell at high prices—and create new billion-dollar markets.

But when we spoke, Klausner mostly wanted to talk about why the science will lay an important foundation for this industry in the future.

Immune Design, albeit still in its early days, represents some of the exciting new advances in immunology that will make for better vaccines, Klausner says. The company was formed by combining two fundamental technologies. One was a delivery system, known as a vector, from the lab of Nobel Laureate David Baltimore at Caltech. That new tool makes it possible to precisely stimulate dendritic cells, which are known for sending sentinel warning signals about pathogens to other cells of the immune system, Klausner says.

The other component came from the lab of Steve Reed at the Infectious Disease Research Institute in Seattle, Klausner says. That’s where scientists have developed …Next Page »

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Clear, a five-year-old biometric passenger identification service intended to speed air travelers’ passage through security checkpoints, shut down last night. According to the service’s website, parent company Verified Identity Pass of New York, NY, was unable to obtain credit to continue operations. Boston’s Spark Capital led a $44.4 million Series C venture funding round for Verified Identity Pass last August. Syncom Venture Partners, Lockheed Martin, Baker Capital, GE Security, and Lehman Brothers also joined that round, which brought the company’s total funding at the time to $116.4 million.

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George Milstein is a survivor. Lots of peers in his line of work, biotech investment banking, have vanished from the scene with pink slips in hand. Yet after 15 years in the business, living through the mid-90s health reform bust, the genomics collapse of 2001, and now this mortgage-fueled catastrophe, Milstein is still doing what he has always done, flying in from San Francisco to scout emerging companies in the Northwest. Some of these people might need his merger-and-acquisition service, or maybe, someday when the clouds lift, even help with doing an IPO, he figures.

Milstein, head of healthcare M&A for Wedbush Pacific Growth Life Sciences, will be in Seattle tomorrow as one of the featured speakers coming to Invest Northwest, the area’s biggest annual life sciences investing conference of the year. I spoke to Milstein by phone on Friday to get a sense for how his firm is doing, and his outlook for the sector.

Pacific Growth Equities has longstanding ties to the Seattle area, namely through underwriting a couple of significant life sciences IPOs of the past—ZymoGenetics (NASDAQ: ZGEN) in 2002, and Trubion Pharmaceuticals (NASDAQ: TRBN) in 2006. Those deals have certainly inflicted pain (Zymo’s IPO price was $12, and Trubion’s was $13, while the stocks closed Friday at $3.83 and $1.60, respectively.) Even so, Pacific Growth had the relative good fortune —or foresight—of not getting wound up in mortgage-backed securities that have killed off bigger firms like Lehman Brothers.

Still, the investment bank is not completely independent anymore. In January, Pacific Growth was acquired by Los Angeles-based Wedbush Morgan Securities. To hear Milstein tell it, this deal has kept the firm “well-capitalized,” with no exposure to toxic mortgage-backed securities, and Wedbush said at the time it planned to keep all of the firm’s 75 bankers, analysts, traders, and staff. Milstein can’t support this activity from the once-lucrative fees generated from IPOs, so he’s positioning the firm to make a living on advising companies about mergers, acquisitions, divestitures, and other restructuring deals they will likely need to adopt to live through this recession. Plenty of companies will need to make moves—an estimated one-third of public biotechs are operating with less than six months of cash in the bank.

“We’re over the shock of it all,” Milstein says. “The long-term prospects for this industry are still there. We’re not making cars nobody wants to buy, we’re making drugs that improve peoples’ quality of life. I’m confident things will improve, it’s only a question of timing.”

He used two headline-grabbing deals from the past week to buttress his point. Swiss drug giant Roche agreed to buy the remaining minority stake in South San Francisco-based Genentech it didn’t already own for $95 a share, or about $46.8 billion. Down the road in Foster City, CA, Gilead Sciences agreed to acquire CV Therapeutics, a small maker of a drug for chest pain, for $1.4 billion in cash. The muscle being shown by Gilead, the world’s largest maker of HIV drugs, is remarkable, Milstein says. “Gilead was a small-to-mid-sized company when I was getting started,” he says. He sounded optimistic there will be more deals like this for him and his peers in biotech investment banking to stay busy.

There has been plenty of armchair quarterbacking …Next Page »

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Lobbying for the biotech industry in Washington DC doesn’t sound like fun now. The industry is being left for dead by Wall Street, the IPO market has closed down, and about half of the 370 public companies are reporting they have run down to less than a year’s worth of cash on hand. Many of the 900 member companies in the Biotechnology Industry Organization are laying off workers, being forced into shotgun mergers, and shelving once-promising product candidates.

Inside the Beltway, a new President and Congress have a host of policies in mind that would upset the status quo for the pharmaceutical and biotech industry. There’s universal health care and cost control, for starters, and then the perennial threat of laws to make it easier to develop cheap, generic-like biotech drugs seems more real than ever. Patent law changes might discourage investors from making big bets on new drugs. This week, President Obama said he wants to spend a billion dollars for studies that compare the effectiveness of brand-name drugs against cheaper alternatives. (Doctors might discover that an over-the-counter heartburn drug is just as good as a branded pharmaceutical that Americans spend $6 billion a year on! Horrors!)

I live in Seattle, 3,000 miles away from where all this DC political hardball occurs, but I joined in on a press conference this morning with Jim Greenwood, the president of the Biotechnology Industry Organization, to get up to speed on how these issues will affect members in our Xconomy network cities of Boston, Seattle, and San Diego. Greenwood, a former Republican congressman from Pennsylvania, tried to maintain an upbeat tone, but the news wasn’t encouraging.

“Our companies are pretty resourceful,” Greenwood said, when I asked how many companies will die. “They’re pretty good at crunching down their burn rates to get it as lean as possible until the sky clears and they can go back to investors. These are committed people. They’re not quitters.”

The numbers from BIO itself paint a pretty dark picture, including:

—About one-third of all publicly-traded biotech companies (120 out of 370) now have less than six months of cash on hand. The number of companies living with this dangerously thin amount of cash has climbed 90 percent in the past year, BIO says. Almost half of the companies have less than a year of cash on hand at last count.

—Companies can’t lean on actual product revenues to float their ships, because only about one in 10 public biotech companies have positive income, BIO says.

—That’s why Wall Street’s willingness to swing for the fence, in the high-risk, high-return world of biotech …Next Page »

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Ask Ironwood Pharmaceuticals CEO Peter Hecht what he’s trying to accomplish in the next six to 12 months, and he doesn’t tiptoe around. “We’re trying to build the next great pharmaceutical company,” Hecht says. “I know that sounds ludicrous, but I thought I’d just start out with our ambition first.”

It’s an open question whether he will achieve that, but it’s clear that Ironwood is serious. It’s a private biotech company with 150 employees in Cambridge, MA, that changed its name from Microbia in April. The company has raised a total of $231 million in its 10-year history, including a $50 million private round announced on Oct. 1, led by Morgan Stanley, right when Lehman Brothers and much of Wall Street was crumbling around it. Other investors include notable names like Venrock Associates, Polaris Venture Partners, and Fidelity Biosciences.

The investors are mainly betting on Ironwood’s lead drug candidate, linaclotide. It’s a novel compound for chronic constipation and for constipation from irritable bowel syndrome. One week after the financing announcement crossed the wire, Ironwood and its partner, New York-based Forest Laboratories, said a study of 420 patients showed the drug significantly improved constipation symptoms and reduced abdominal pain. Researchers reported no serious side effects related to the drug, although 1 percent to 7 percent of patients on the medicine dropped out of the study because of diarrhea, according to a presentation at the American Society of Gastroenterology. These results were promising enough for Ironwood and Forest to start up a program of four final-stage clinical trials, encompassing a total of 2,500 patients, to amass enough evidence to potentially bring this drug to the marketplace.

To hear Hecht tell the story, Ironwood didn’t start down this path because it had narrow expertise in a specific disease like diabetes, or in a particular technology platform, like RNA interference drugs. “We don’t have any of that,” he says. “I know it sounds hokey and trite and incredibly naïve, but we have really talented people and enormous passion.”

The strategy at Ironwood, Hecht says, is to look for great areas of medical need and work to develop drugs for them. Constipation from irritable bowel syndrome was one such area. The numbers of patients diagnosed with this condition is fuzzy, but Novartis tegaserod maleate (Zelnorm) reached $561 million in peak sales for treating this condition in 2006, despite “modest efficacy,” Hecht says. The drug was pulled from the market in March 2007 after the FDA found it raised cardiovascular risks.

The Ironwood drug has been designed to work differently than the Novartis product. …Next Page »

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These are grim times for many industries, and the life sciences are no exception. Most of these enterprises depend on the ability to raise fresh investment capital on a regular basis, so when investors turn cautious, things can get ugly fast.

To get a sense of just how big of a bruising San Diego biotechs are heading for, I combed through the balance sheets of 23 publicly-traded companies. My main questions are the most vital ones to any biotech company—how much cash does the operation have, and how fast is it burning through it?

This, of course, is a national story that will reverberate locally. Profitable industry powerhouses like Amgen and Genentech aren’t in trouble, but about half of the 248 unprofitable biotechs that are publicly traded have less than a year’s worth of cash on hand, according to an October report by Eun Yang, an analyst with Jeffries & Co. Of the 23 publicly traded companies I analyzed in San Diego just three are what could be called consistently profitable: Invitrogen, Illumina and Genoptix. Of the 23 sampled, just 10 have more than $100 million of cash and investments socked away in the bank.

If the markets don’t turn around by the middle to late 2009, it’s clear that a lot of these companies will be suffering. “A considerable amount of companies will have to consider drastic measures or go out of business. It is indeed not pretty,” says Kleanthis Xanthopoulus, CEO of Regulus Therapeutics, in an email. (Xanthopoulus, an Xconomist, runs a private company that spun off two relatively healthy companies. Both have more than $500 million in available cash: Carlsbad, CA-based Isis Pharmaceuticals and Cambridge, MA-based Alnylam Pharmaceuticals.

This isn’t a comprehensive list, and it’s in no particular order. My hope is this covers most of the major publicly traded players in the region. If you have any suggestions for companies to add, please send me a note at editors@xconomy.com. (For the real masochists out there, I did a similar analysis in Seattle last week, so you can see which region is worse off.)

—Amylin Pharmaceuticals (NASDAQ: AMLN). This San Diego-based company made headlines when it cut 340 jobs at its local headquarters. The move was made to cope with a double whammy of declining demand for its best-selling product, exenatide, (Byetta) and an FDA delay in approval of a more convenient once-weekly form of the medicine. The company had $806 million in cash at the end of September, and says the cuts should enable it to preserve $80 million in 2009 and turn cash flow positive by the end of 2010.

—Somaxon Pharmaceuticals (NASDAQ: SOMX). This San Diego company has an important FDA deadline coming up on Dec. 1 for the review of an insomnia medicine. Any delays, which have become common at the overworked agency, could spell trouble. Somaxon had $22.6 million in cash and investments at the end of September, and ran up a net loss of $10.3 million in third quarter.

—Arena Pharmaceuticals (NASDAQ: ARNA). This San Diego drug developer, working on medicines for obesity and diabetes, has more cash than most. It expects to end the year with $115 million in cash on hand after paying off some debt. It reported a net loss of $56.2 million in the third quarter. One worrisome stat: Arena started the year with $398 million in cash and investments. Let’s hope for shareholders’ sake the company has turned off that gusher in spending. …Next Page »

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Lots of people have been selling Boston Scientific stock, and that includes the co-founders of the company. The Natick, MA-based medical device company (NYSE: BSX) said today that co-founders Pete Nicholas and John Abele (an Xconomist) sold off about 13 million of their shares in the company yesterday, during frenzied volume of 38 million shares for the day, about triple the three-month trailing average.

These sales were triggered by an automatic share-selling plan related to collateralized loans of Nicholas, Abele, and a trust for Abele’s children, the company said. It was ignited by the recent turmoil in the financial markets, and the inability of the co-founders to get access to their assets because of the bankruptcy of Lehman Brothers.

The real reason for the unusual press release, of course, is to make sure the masses of investors don’t get the idea that Nicholas and Abele have lost faith in the company. The flood of available shares for sale in the market drove it down to a 52-week low of $8.72 yesterday, before it closed at $8.95. “These automatic sales are disappointing and beyond our control,” said Abele, in a company-issued statement. “My confidence in the Company and its long-term prospects remains undiminished.”

The worst may still to be come, however, the company warned, because there may be more involuntary selling of the founders’ stock today or in the near future, it said. This morning, the stock seemed pretty stable at $9.04 at 9:44 am Eastern time, but it’s definitely worth keeping an eye on.

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Even before events like 9/11, the Madrid train bombings, and the London Underground bombings, governments and corporations were busy blanketing outdoor and indoor spaces with networked cameras, reasoning that video surveillance can help security professionals spot criminal activity in progress, or at least get it on tape. But there’s one big problem with the blanket approach: the more cameras an organization installs, the more people it takes to watch them, and the more recorded video there is to review if an incident occurs. It’s a classic case of information overload.

Many analysts have predicted that this problem will eventually be solved by moving some of the intelligence in a video surveillance network to its edges: that is, by building “smart” cameras that can determine on their own whether the events they’re observing are suspicious, then alert human operators in real time, or store the video stream differently, so that there’s more information to help investigators later.

And now a Bedford, MA, company called VideoIQ—a 2007 spinout of General Electric’s security division—is taking the first steps in that direction. The company is set to release its first smart digital surveillance cameras in August, and it announced today that it has more than doubled its venture financing pot, raising $10 million in a Series B round led by Lehman Brothers Venture Partners. (Existing investors Matrix Partners and Atlas Venture, both headquartered in Waltham, MA, were also in on the round.)

VideoIQ’s new camera, the Intelligent IP Surveillance Camera with Video Recording, or iCVR, has a built-in Linux computer with video analytics software that can identify events of interest—for example, a person approaching the perimeter of a power plant—and notify a security guard. It also has a hard drive that’s smart enough to save digital video data at full resolution when there’s something interesting going on within the camera’s field of view, but compress it when there’s nothing happening, meaning that it can store up to two months’ worth of data, compared to the week or two stored by many older systems.

“This is the first generation of a very powerful technology that we believe will revolutionize surveillance, because the vast majority of all video systems are not monitored at all,” says VideoIQ president and CEO Scott Schnell, a former Atlas entrepreneur-in-residence who is a veteran of RSA Security, Photonics, Apple, McKinsey, and Chevron. “The primary purpose is to enable the delivery of forensic information quickly and efficiently, if something does happen.”

The iCVR isn’t the first surveillance camera with built-in hard drive and video compression software, but it’s one of the first to add video analytics software to the mix. Currently, adding motion-detection or object-tracking capability to an existing surveillance network can cost $1,000 to $2,000 per camera, according to Schnell. But because VideoIQ’s analytics software runs on the same built-in processor used for compression and storage management, customers essentially get it for free.

And if an organization replaces or upgrades its existing surveillance systems with VideoIQ cameras—a project that will cost about $1,800 per camera, Schnell says—it also gets a distributed storage system that doesn’t rely on a central recording device (a collection of VideoIQ cameras functions, in essence, as one big networked DVR), as well as cameras with state-of-the-art sensors from Mountain View, CA-based Pixim that are capable of seeing in both bright sunlight and low-light, nighttime conditions.

The biggest initial customers for the system, Schnell believes, will be large facilities with extensive outdoor perimeters that need protecting. “The larger the perimeter, the more costly it is to have manned patrols, and the more monotonous it is” to monitor video cameras visually, Schnell points out. But if the cameras themselves are tuned to …Next Page »

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It’s not just pollen in the air these days. Renewable energy projects are blooming throughout New England. Now, Noble Environmental Power, a fast-growing wind-power company based in Essex, CT, has filed for an initial public offering worth up to $375 million. (On the heels of yesterday’s IPO filing by Lexington, MA-based web management services firm Gomez, maybe the market for IPOs really is coming back).

According to its filing with the SEC, Noble Power is “focused on developing, financing, constructing, owning and operating windparks in attractive energy markets in the United States.” The company’s plan is to sell energy and energy-capacity generated by its wind parks. Its first three parks have been up and running in New York since March, and the firm hopes to quadruple its total power capacity by the end of 2009, with more parks under construction in New York and Texas. By 2012, it may expand to Maine, New Hampshire, Vermont, and other states.

To date, the company has not yet generated significant revenue—it reported $72 million in net losses as of the end of 2007. It is also dependent on state policies and regulations that support wind parks—not always the easiest projects to push through.

Founded in 2004, Noble Power has more than 150 employees and a total capitalization of $1.1 billion. JPMorgan Partners, Lehman Brothers, and Credit Suisse are leading the underwriting. The principal shareholder is JPMorgan. When the time comes, Noble Power intends to trade on the NASDAQ market under the ticker symbol NEPI.

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Nick Sinai, a rising senior associate star at Polaris Venture Partners, will be leaving the firm at the end of the year to become a vice president in the newly created Boston office of Lehman Brothers’ venture capital arm. Sinai, just 31 years old, will also be stepping down from his position as interim vice president of corporate development at GreenFuel Technologies, the Cambridge-based energy firm where Polaris general partner Bob Metcalfe stepped in as interim CEO this summer.

While he didn’t want to be quoted directly, Sinai did confirm his move this morning. He will be joining at least two others in the Boston offices of Lehman Brothers Venture Partners, which opened late this summer when Brian K. Paul moved over from the firm’s Menlo Park office, where he was managing director, to open and manage the new arm. Before joining Lehman Brothers in 1994, Paul worked as an associate at First Boston.

Sinai has an undergraduate degree from Harvard (where he was on the crew and boxing teams–did someone say VC Varsity?) and an MBA from the University of Chicago. He’s been at Polaris three years, working closely with Metcalfe and concentrating on information technology and energy investments. Among the Polaris investments he’s worked on: Mintera, Integrian, Emo Labs, LogMeIn, RoundBox, Dataupia, Confluence, GreenFuel Technologies, and Infinite Power Solutions. Before Polaris, he concentrated on telecommunications investments for Madison Dearborn Partners, and was a manager at strategy consulting firm Cambridge Strategic Management Group.

Lehman Brothers, the famous New York investment bank, formed its venture arm, which is focused on technology investments, back in 1995. According to its web site, the venture business doesn’t target any one particular industry, but rather focuses its investments on companies in any industry that are “capable of rapid growth through the provision or implementation of innovative technology.” Lehman’s latest venture fund—the $365 million Lehman Brothers Venture Partners V announced in September—is focused on mid- to late-stage investments in high-growth technology companies.

In addition to Boston and Menlo Park, the venture group has a New York office. The Boston operation has made at least one investment so far—taking the lead in a $20 million financing round announced last month by ExaGrid Systems, a disk-based data protection company based in Westborough, MA. Lehman joined existing investors Highland Capital Partners and Sigma Partners.

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Magnetic tape may seem so 20th-century in an era when a single iPod Classic can carry 160 gigabytes of data on its tiny hard drive, but tape is still a key technology in the world of corporate data management, where it’s a cheaper way to store large volumes of data over long periods than disk drives. Lately, though, disk technology has begun to overtake tape even for some corporate backup applications. ExaGrid, of Westborough, MA, is one of the companies making disk-based backup more economical, and the company announced today that it has pulled in an additional $20 million in Series C funding to help it market its backup servers more widely in North America, Europe, and Asia.

ExaGrid, founded in 2002, makes disk-based servers that hold from 1 terabyte to 5 terabytes of data. (A terabyte is 1,024 gigabytes. ExaGrid’s name leaves the company plenty of room to grow its technology: an exabyte is 1,024 x 1,024 or 1,048,576 terabytes.) By yoking together four 5-terabyte servers, customers can buy up to 20 terabytes of backup space—and thanks to the servers’ built-in compression and “de-duplication” algorithms, that 20 terabytes can function in place of even larger backup systems.

(For the nerds among you, it works like this: ExaGrid’s devices keep a full copy of the most recent backup, compressed to about half its size. Older backups are de-duplicated, meaning that everything is erased except for the information that changed from copy to copy—usually about 2 percent of the data, according to the company. So, say your company has a 20-terabyte data set and makes weekly backups. A 20-terabyte ExaGrid system could store a full copy of the most recent version of the data set, and would still have 10 terabytes of space left over, enough store about 50 weeks’ worth of older backups.)

“Tape is cheap; disk-based storage used to cost 50 to 100 times more,” says Bill Andrews, CEO of ExaGrid. “But about four or five things have changed to finally get disk-based backup down to where it’s only about 30 percent more expensive than tape, instead of 10,000 percent.” In addition to the development of efficient compression and de-duplication algorithms, which cut way back on the amount of data that needs to be stored, Andrews cites the advent of low-cost “serial ATA” or SATA drives and low-cost business servers based on processors such as Intel’s Xeon 2.

ExaGrid targets small enterprises with 300 to 10,000 employees and between 1 and 60 terabytes of data to back up every week. The company says its sales have been growing at about 40 percent per quarter since the fourth quarter of 2005 and that it’s gaining ground against competitors such as Data Domain and Quantum among key customers in areas like healthcare, financial services, manufacturing, and the federal government.

The lead investor in the $20 million round is New York-based Lehman Brothers Venture Partners, the venture capital group of global investment bank Lehman Brothers (NYSE: LEH). Also on board were Highland Capital Partners of Lexington, MA, and Sigma Partners of Boston.

“ExaGrid’s unique approach to disk-based backup with post-process byte-level data de-duplication and a grid-based architecture for scalability is clearly giving customers what they need as they move from tape to disk for backup,” Lehman Brothers managing director Brian Paul said in a statement. “We are excited to participate in the company’s ongoing success.”

ExaGrid has 91 employees and has raised a total of $65 million since its inception. Andrews says the new cash infusion will be used to double the size of the company’s sales and marketing operation. “We’ve got product, the pedal is to the metal, and we win far more than we lose” against competing backup providers, he says. “It’s all a sales and marketing game now.”

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