San Diego’s Metabasis Therapeutics (NASDAQ: MBRX), which warned in May that it might have to cease operations, says it has hired a financial advisory firm to help the company evaluate its strategic options. Metabasis said earlier this week that Mark Erion, the company’s CEO, chief scientific officer, and director, has resigned to join Merck & Co. as a vice president overseeing work on diabetes and obesity. Erion was among a handful of executives remaining at Metabasis, which named chairman David Hale as executive chairman.

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Sequoia Communications CEO Dave Shepard was out of town last week when the demise of the San Diego fabless semiconductor design company came to light. I was told he was furious over the shutdown, as Sequoia had finished its product, a chip for use in cellphones and wireless devices, had secured customers, and was roughly a year from breaking even. The explanation was that the eight-year-old startup had been unable to raise the additional venture capital.

But if he was upset, the semiconductor CEO had processed the news, so to speak, by the time I finally reached him yesterday. Instead of talking from Sequoia’s ground zero, Shepard spoke from a considerably higher altitude, saying, in effect, that the problems that swamped the San Diego startup chipmaker extend well beyond the company itself.

“The issue is bigger than Sequoia Communications,” Shepard says. “I think the venture-backed model for semiconductor startups is broken. The complexity of these chips has just gotten so high, it just takes so much money to fund a startup nowadays, that to the VCs, it’s just not worth it.”

In a nutshell, Shepard says semiconductor startups are getting squeezed by sharply higher costs and dramatically lower valuations. A new chip technology that would have required two to three years and $15 million to $30 million in startup funding to get to proof of concept a few years ago now requires five to eight years and something closer to $80 million. For that kind of startup capital, Shepard says VCs want to see semiconductor buyouts of $400 million to $500 million. But deal values have plunged. At a meeting organized earlier this month by CommNexus, San Diego’s non-profit wireless industry association, one presenter said the median value of 97 semiconductor M&A transactions in 2000 was $484.1 million. In 2003, there were only 47 deals and the median deal size was just $144.5 million. The trend has worsened with the economic downturn, and Shepard says valuations for semiconductor startups are now in the range of $75 million to $100 million.

Shepard says he was unable to sell Sequoia, even though the company had contracted with several customers in China and had a finished product—a sophisticated multi-mode transceiver designed to accommodate the burgeoning market for various 3G mobile phones. In addition to transmitting and receiving standard cell signals, Shepard says Sequoia’s transceivers perform multiple functions, such as translating analog RF signals into the digital code used by mobile devices.

After raising close to $75 million from VCs and other investors, Shepard estimates Sequoia was about a year away from breaking even. The company, which had about 30 employees, needed to raise an additional $10 million. Sequoia’s investors instead decided to cease operations in mid-July. (By last week, auctioneers were preparing to sell the company’s remaining assets and Shepard was taking a break in Lake Tahoe.)

“The VCs just got tired,” Shepard says. “Half of our VCs were out of money, and the other half had been in the company for a long time. So they were looking at a low return on their investment.”

He adds, “It’s not really anybody’s fault. I’m not mad at the VCs.”

He maintains that what happened to the San Diego startup “is not a Sequoia-specific problem.” The changing economics of semiconductor innovation have ramifications for the entire industry, he says, because the big chipmaking companies like Qualcomm, Intel, and AMD have traditionally counted on smaller startups as a key source of their innovation.

Worldwide, Goldman Sachs data shows semiconductor M&A transactions declining from 137 deals with a total value of $33.7 billion in 1999 to 86 deals with a total value of $2.2 billion so far in 2009. Semiconductor IPOs have been practically non-existent this year, with Goldman Sachs showing 10 deals worldwide with a total value of $43 million. The CommNexus meeting, which Shepard helped organize, was billed as “Endangered Species Alert: Fabless Semiconductor Startups Threatened With Extinction!”

Shepard says he not sure how the broader problem is going to get solved. It’s possible that China could move into the semiconductor R&D vacuum, although that could raise broader issues for U.S. economic policy. “The semiconductor industry is a sensitive area that touches everything,” he says.

Meanwhile, an online auction of Sequoia’s office furniture and electronic testing equipment is set to begin today.

The company’s most-valued assets, the design database for the chip and its intellectual property, including Sequoia’s portfolio of 20 issued U.S. patents and 15 patent applications, will be sold through a separate process. Proceeds will go to the investors. “I have no idea what the value is, but it will be under $10 million,” Shepard says. “It will be vastly less than what they put in.”

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San Diego’s Sequoia Communications, a venture-backed semiconductor company founded in 2001, has shut down—ending the startup’s effort to develop an innovative microchip for cellular phones. The company’s demise was reported yesterday by the website SoCalTech.com, which noted that Sequoia has raised more than $50 million from BlueRun Ventures, Cadence Design Systems, Gabriel Venture Partners, Huntington Ventures, Motorola, Nokia Venture Partners, Tallwood Venture Capital, and Third Point Ventures.

Rory Moore, CEO of CommNexus, the San Diego non-profit wireless industry group, confirmed the closure in a terse e-mail to me, saying simply that Sequoia’s VCs “pulled the plug.” Additional details were not available late yesterday, including the number of employees who lost their jobs. (The chipmaker had about 50 employees two years ago.) Sequoia’s former CEO, Dave Shepard, could not be reached for comment.

In a 2007 Q&A with the San Diego Union-Tribune, Shepard said the wireless chip under development at Sequoia was intended for the high-end phone market. “Our chip actually makes those high-end phones have much better battery life, much better cost, and much smaller form factor, so they get into a smaller phone size,” Shepard said at the time. He also described the wireless chip as “multi-mode,” saying, “It works in GSM, Edge and wideband CDMA, which are all the different phone modes.”

The Woodland Hills, CA, auction firm Cowan Alexander has scheduled an auction of Sequoia’s test and measurement equipment, computers, printers, flat-panel monitors, lab benches, and other equipment at the company’s headquarters. The auction, which begins at 11 a.m. PT Tuesday, is being webcast.

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It might be the dog days of summer, but San Diego’s life sciences companies kept up a busy flow of cool news over the past week. Get your update here.

—Isis Pharmaceuticals, the Carlsbad, CA, biotech that specializes in so-called antisense technology, is getting ready to test a new treatment later this year for patients with an aggressive form of amyotrophic lateral sclerosis (ALS), or Lou Gehrig’s disease. Isis (NASDAQ: ISIS) is planning the first clinical trial of a treatment known as ISIS-SODRIX, a drug designed to shut down the genetic RNA machinery that enables the production of disease-causing proteins. Luke reported the treatment also could pioneer a new way of delivering antisense drugs for a variety of neurological disorders.

—San Diego’s TorreyPines Therapeutics (NASDAQ: TPTX) has agreed to a reverse merger with Novato, CA-based Raptor Pharmaceuticals. To pull off the deal, however, TorreyPines must get its shareholders to vote to approve the deal. That sounds easy enough, but TorreyPines was unable to muster enough shareholder votes in July to approve a resolution to dissolve the company.

—A Boston-area researcher said a new drug developed by San Diego’s BrainCells Inc. could someday prove effective in treating depression. The drug known as BCI-952, which combines buspirone and melatonin, was not expected to work. But it’s getting a second look after Dr. Maurizio Fava, of Massachusetts General Hospital, presented promising results in a clinical trial of 142 patients diagnosed with major depression.

—San Diego’s La Jolla Pharmaceuticals (NASDAQ: LJPC) plans to seek shareholder approval for a liquidation plan. As Denise reported, the company disclosed in a recent SEC filing that it has discharged substantially all of its obligations to creditors and is working to satisfy those that remain. The biotech also said it has settled a lawsuit with former partner BioMarin Pharmaceuticals (NASDAQ: BMRN) of Novato, CA.

—San Diego’s Inovio Biomedical (AMEX: INO) has raised $30 million from the direct sale of 11.1 million shares and 2.8 million warrants to institutional investors. Inovio is focused on the development of vaccines to prevent or treat cancers and chronic infectious diseases. The company’s delivery solutions are based on electroporation, which uses brief, controlled electrical pulses to create temporary pores in cell membranes, which makes it easier for cells to take in a useful biopharmaceutical.

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TorreyPines Therapeutics (NASDAQ: TPTX) has found a new solution to its cash woes: a merger with Novato, CA-based Raptor Pharmaceuticals. To pull off the deal, however, TorreyPines must overcome an old problem: getting its shareholders to vote.

Few biotechs come to an end as embarrassingly as San Diego’s TorreyPines Therapeutics. When its board of directors called for liquidation earlier this year, shareholders displayed their apathy by failing to vote in sufficient numbers for the resolution to pass by the required margin.

So the board gave shareholders more time to turn in their proxies – until July 16. But TorreyPines still couldn’t muster enough votes, so it extended the voting until July 30. It looked like TorreyPines couldn’t even succeed at failing.

Now things could change. Last week, just before the polls “closed” for the third time, the company’s board endorsed a new proposal. TorreyPines announced plans to merge with Raptor Pharmaceuticals (OTC BB: [[ticker:RPTP.OB]]) of Novato, CA., a three-year-old company working on drugs for rare diseases or those with few treatment options. The merged company will be called Raptor and will be headed by Raptor’s current management team. Raptor shareholders will own 95 percent of the merged company. To learn more about the deal, I left messages for executives and PR representatives of both companies yesterday, but no one got back to me.

TorreyPines brings little to the table. It already has sold off much of its pipeline and is down to three employees. But it has something Raptor lacks—a NASDAQ listing. The companies say that when the deal closes, they will initiate a reverse stock split to keep the merged company in compliance with a NASDAQ requirement that shares list for at least $1. That will take some doing. Raptor’s shares have been trading over-the-counter in the 40-cent range. TorreyPines shares have been hovering around 13 cents.

The merged company faces a tough road. In its filing for the quarter ending May 31, Raptor said it anticipated receiving enough cash from deals already in motion to fund operations through the first quarter of 2010. But first, the two companies must persuade TorreyPines shareholders to weigh in on merger deal. Given recent history, that’s far from a sure thing.

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San Diego’s La Jolla Pharmaceuticals (NASDAQ:LJPC) plans to ask shareholders to approve a liquidation plan at a not-yet-scheduled special shareholders meeting, according to a recent SEC filing. The company says it has discharged substantially all of its obligations to creditors and is working to satisfy those that remain. Separately last week, the company disclosed that it settled a lawsuit with former partner BioMarin Pharmaceuticals (NASDAQ:BMRN) of Novato, CA. BioMarin had marketing rights to La Jolla’s only experimental drug, but abetimus sodium (Riquent) failed in a late-stage trial.

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What if a company called a special shareholder meeting and nobody voted? Executives at San Diego’s TorreyPines Therapeutics pondered the question today after failing to muster enough votes for a proposal to liquidate and dissolve the company. In a statement, TorreyPines said 62 percent of the biotech’s stockholders failed to vote on the issue, which the board unanimously approved in May. The measure to dissolve the company requires a majority of outstanding voting shares for approval. In a bid to collect enough votes, TorreyPines adjourned its meeting until July 16th at the company’s corporate offices.

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San Diego’s Advanced Tissue Sciences tried for 14 years to develop living-tissue patches for healing burns, wounds and chronic sores. But the business went into bankruptcy liquidation in late 2002, a victim of regulatory delays and more than $300 million in debt.

Since then, former CEO Gail Naughton says she’s been invited to speak many times about the hurdles that Advanced Tissue Sciences was unable to overcome and what she would have done differently. “After talking about what I would do differently a number of times,” Naughton says, “I decided to go out and actually do it.”

The result is Histogen, a San Diego-based life sciences company that Naughton founded last year. Naughton says the technology underlying Advanced Tissue Sciences has been reborn—with significant advances—and that Histogen intends to avoid the business pitfalls that crippled the predecessor company.

“Many of us worked for Gail at Advanced Tissue Sciences,” says Robert Kellar, Histogen’s vice president of research and development. “So we joke around by saying ‘We’re putting the band together again.’ ”

After raising more than $5.3 million from private investors in May, Naughton says Histogen plans to raise another $1.4 million from investors by the end of the year. The startup also has secured a $1.4 million loan.

A key difference at the new company is the creation of a subsidiary, Histogen Aesthetics, which is adapting the in-house expertise in fibroblasts, the cells that form connective tissue, to develop skin and hair care products. By focusing at the outset on the cosmetics, dermatology, and plastic surgery industries, Naughton says Histogen can generate immediate revenue to support the long-term development of living tissue skin grafts and other medical products that require a protracted regulatory approval process.

The company’s first cosmetics product is called ReGenica, a liquid made from fibroblast-secreted proteins, growth factors, and other products. It is intended for use in anti-aging skin treatments and to promote healing after cosmetic laser skin resurfacing.

Last week, Histogen said it also plans to evaluate whether ReGenica injected into the scalp will stimulate hair regrowth in a clinical trial of 24 patients. “Our hypothesis is that it helps to stimulate resident stem cells to become hair follicles,” Kellar says.

Naughton says Histogen already has used its expertise in culturing and growing fibroblast cells to develop products derived from human tissue cells that can be used as a growth medium by stem cell researchers. With such products already generating sales, she says Histogen can generate cash to offset at least some losses it expects to endure while it spends years working toward getting approval to sell its therapeutics products.

It was that prolonged march through the desert that eventually killed Advanced Tissue Sciences, which endured a three-year FDA delay amid mounting debts in getting the company’s Dermagraft skin patch for diabetic ulcers to market. Even after getting regulatory approval, Naughton said the reimbursement rate that insurers set for the treatment covered only a fraction of the company’s actual cost to make the patch. Today reimbursement rates are more favorable, Naughton says.

Histogen intends to use its same proprietary human “extra-cellular matrix” to develop a variety of other medical products—coatings for orthopedic implants and stents, patches for repairing torn shoulder ligaments and other tissue, and even “retentive” enemas for treating sores in the large intestine and Crohn’s Disease.

“So basically we’ve learned and we’ve brought the best and brightest people back at Histogen,” Naughton says. “The team that did it before is back together again, with decades of experience.”

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