Nobody will ever confuse San Diego’s Sorrento Valley for Sand Hill Road. And that’s not a bad thing if you’re one of the guys at Avalon Ventures.

“The story is really that Avalon is now one of just two really active life sciences venture funds in San Diego, which is the third largest biotech hub in the world,” says Jay Lichter, a managing director with Avalon.

I sat down with Lichter, one of four managing members at Avalon, to talk about this phenomenon during my visit to San Diego in December, and followed up with him again a couple weeks ago. A lot was being written then, and still is, about the decline of the entire venture capital industry, and its impact in particular on San Diego’s longtime stalwarts of the life sciences community.

San Diego’s Forward Ventures, which has shed several partners, has shifted its strategy to an ultra-lean model, as Bruce recently reported. Enterprise Partners Venture Capital hasn’t said for sure what it plans to do when it is time to raise a new fund. While other national firms have individuals who are well-connected on the ground in the local life sciences scene—Venrock Associates’ Bill Rastetter and Sofinnova Ventures’ David Kabakoff come to mind—the only two firms left with sizable operations in San Diego and do a lot of local investing are Avalon and Domain Associates, Lichter says.

(Drew Senyei, a managing director for Enterprise Partners, challenged the assertion that his firm has gone quiet. “We have made small investments in seed companies this year. We have two companies in registration for an IPO and four companies in active M&A process at venture multiples. Yes, we are busy.”)

Still, new venture funds have been hard to come by. Domain, spearheaded by partners Eckard Weber and Jim Blair, is one of the rare VC success stories of the past year, having raised a new $500 million life sciences fund back in August. It has flexed its muscle through a string of sizable investments, including VentiRx Pharmaceuticals, Meritage Pharma, and Sequel Pharmaceuticals.

While Domain often seeks out specialty pharma companies moving through the middle stages of clinical trials, Avalon has carved out its niche in the really early-stage, startup phase. It has placed smaller bets on companies like Zacharon, Otonomy, and aFraxis. Back in December, Lichter told the story about how Avalon flew in some top biologists for a retreat at The Lodge at Torrey Pines, just to talk about some of the big problems in biology, and some elegant experiments to test new concepts.

Jay Lichter

Lichter is fully aware this runs against the current in venture capital, where funds are scrambling to gin up some quick returns in late-stage companies to spruce up their balance sheets just in time to hit up pension funds and endowments for another round of fundraising. This isn’t a trend that Avalon is seeking to follow, Lichter says.

“We get involved at the cocktail napkin stage,” Lichter says. “It’s pure venture investing. Early stage. High-risk. High-reward. Most people don’t want to do it anymore.”

A poster child for the popular style of venture funding is Cambridge, MA-based Gloucester Pharmaceuticals, which was a story I covered last fall. I recounted for Lichter how Gloucester raised $29 million in August, just a week before it was scheduled to go before an FDA advisory committee hearing with pivotal clinical trial data for a new cancer drug. The panel vote was a slam dunk in favor, the FDA approved the drug as expected a couple months later, and Gloucester was acquired for $340 million in December by Summit, NJ-based Celgene (NASDAQ: CELG).

Presto, it was a return on investment inside of six months for biotech VCs, who ordinarily would have to wait a decade or more for an early investment to bear fruit.

It’s almost like venture capitalists woke up one day and decided they wanted to become fast-money hedge funds, I said. Lichter didn’t disagree. “Good for them. But … Next Page »

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Most drugs act by interfering with signaling proteins in cells or receptors on cell surfaces. San Diego-based Zacharon Pharmaceuticals has a different idea, by trying to interrupt the complex carbohydrates known as glycans, that can alter the function of proteins.

This concept has been around the biotech industry a number of years, without a whole lot to brag about. But Zacharon was able to raise $3.5 million in venture capital for the idea a few weeks ago, while also getting a $2.2 million research grant from the National Institutes of Health. So I stopped by to hear more about it a few weeks ago from Charles Glass, the co-founder and senior vice president of research.

Zacharon thinks it has overcome some of the challenges that tripped up companies like San Diego-based Cytel and Alameda, CA-based Glycomed in the 1990s, Glass says. Instead of directly trying to target these complex structures, Zacharon has found a way to inhibit them by blocking easier-to-hit enzyme targets that make the glycans in the first place. It plans to do it through conventional small-molecule pills, discovered through highly-efficient screening methods, Glass says. These methods are common in the pharmaceutical industry, but no one has yet applied them systematically to blocking glycan targets, he says.

“There are a whole class of targets that are being ignored,” Glass says. “We think the time is right for glycans.”

Zacharon got its start in 2004, founded by Glass, a former scientist at Johnson & Johnson Pharmaceutical Research Insitute in La Jolla, CA, and Jeff Esko, a researcher at the University of California, San Diego. The company now has eight employees, led by CEO Jay Lichter, who joined last month in connection with the venture financing from San Diego-based Avalon Ventures.

The company’s first drug candidate is for mucopolysaccaridosis (MPS), a rare genetic disease in which faulty or missing enzymes cause a buildup of complex carbohydrates (glycans) in children’s bodies, leading to nerve damage, physical deformities, and slowdowns in mental development. Shire’s idursulfase (Elaprase) and another drug, BioMarin Pharmaceuticals and Genzyme’s laronidase (Aldurazyme), are enzyme-replacement therapies that are FDA approved for forms of MPS. One weakness of these large-molecule drugs is that they can’t cross the blood-brain barrier, which means complex carbohydrates still build up in the brain, harming mental development and causing behavior problems.

A small-molecule drug from Zacharon could be taken orally, and have a good chance of crossing the blood-brain barrier and mitigating those cognitive effects, Glass says.

Lots of work still needs to be done to prove this hypothesis is true in humans. The work hasn’t yet advanced into its first clinical trial. The trials should be pretty straightforward, though, because researchers will be able to see whether glycans are being blocked by the drugs and tell early on if they are working or not, Glass says.

Before heading out the door, I had to ask about the name. Glass rolled his eyes a tiny bit, since he’s heard this one before, from people who ask if it was inspired by guys named Zach and Ron.

The actual name has meaning connected to the goal of the company. It comes from the Greek root word saccharo, which means sugar. Those sugars can make glycans. If Zacharon figures out how to block these glycan targets that other pharmaceutical companies haven’t, it could be a pretty sweet little company.

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