Who says you can't teach an old drug new tricks?

As many life-science funds tire of bankrolling the long march of biotech R&D, they look to invest in companies with drugs either on the market or close to it. One way to bypass the early stages of development is the pharmaceutical equivalent of dumpster diving.

The preferred name is "repurposing" ò find an existing drug and aim it at a new target. If done right, a company will have the low costs of a startup but an advanced product that could reach the market in a few years instead of the typical decade or more.

Sofinnova Ventures general partner Jim Healy characterizes the investment opportunity as "late-stage products at early-stage prices." That's because repurposed drugs ò or "retooled," Healy calls them ò can be cheap to acquire and, if blessed with a good safety record in previous lives, have fewer hurdles to gain Food and Drug Administration approval.

A few VCs like Healy are catching on, but not many. Repurposing is part of a larger industry niche known as "specialty pharma," a catch-all term for companies that shun early R&D or focus on a specific disease area. But even specialty pharma investments are rare, with five totaling $167 million in 2005 and so far five more this year totaling $108 million, according to Dow Jones VentureOne. (Older data were not available.)

Of the 16 pure-play drug IPOs in 2005, three were specialty pharmas. This year, two of nine so far are specialty: Vanda Pharmaceuticals Inc. and Novacea Inc., a Sofinnova investment. (Healy is a board member.) Healy says two-thirds of Sofinnova's portfolio is specialty pharma, with "the top of the list" devoted to repurposing.

Dumpster divers are an even smaller niche, looking for drugs whose original owners went deep into human testing but for various reasons ò other than safety ò dropped them.

One company that sees new gold in old threads is Somaxon Pharmaceuticals Inc. of San Diego, one of the most successful biotech issues in the past twelve months. It debuted Dec. 15 at $11, has topped $20 twice, and now trades near $15. The company's lead drug, a sleep aid called Silenor, is a lower dose of the antidepressant doxepin, in use since the 1960s. It is in Phase 3 testing, a fast track for a company that formed in 2003.

"It's all about capital efficiency," says Lou Bock, managing director of BA Venture Partners in Foster City, Calif., and, until April, a Somaxon board member. Bock says getting Silenor to an NDA ò shorthand for asking the Food and Drug Administration for the OK to sell a drug ò will cost $150 million, five times less than rival sleep drug Indiplon, which ran into approval snags this summer.

BAVP joined Somaxon's $23 million B round in June 2004 and re-upped for the $60 million C round a year later. It did not lead in either round but kept enough leverage to own 15% at the initial public offering. Its post-IPO share was 11%.

Entrepreneurs or VCs looking to build startups around repurposed drugs have a big pool from which to choose. There are about 5,000 discontinued drugs in the public domain, with about 150 added each year, says Andrew Reaume, chief executive of Melior Discovery Inc. of Exton, Pa. Melior is working farther down the pipeline than Somaxon and has a more unusual approach to repurposing.

Reaume and his team have built a special testing system to cull the pool into candidates worthy of carrying forward again into clinical trials. (His count only includes small-molecule drugs made through chemical synthesis; the boom in biologics such as proteins and antibodies is too recent.)

With a well-regarded industry chemist on its advisory board, Melior is taking a different tack than other repurposers. Instead of trying to pop a drug back into clinical trials in Phase 2, as Somaxon did with Silenor, Melior aims to streamline preclinical work, get FDA permission to enter the clinic, and speed through early trials. He wouldn't cite numbers, but he says it's "so much cheaper and faster" that the company hopes to have two compounds in Phase 1 trials by the beginning of 2008. Melior received its seed funding in January 2005 that included $500,000 from BioAdvance, a greenhouse fund for the Philadelphia region.

"It's a flexible business plan they can tune up or down," says BioAdvance managing director Barbara Schilberg. "They can develop for their own pipeline, they can do service deals, they can outlicense. And it's risk-adjusted because they select compounds that have shown safety at least through Phase 2."

Safety is the sweet spot for most investors looking to fund repurposers. If a drug has made it to Phase 2 or 3, there's a much better chance it won't cause adverse effects even when targeted at a new disease. And the further the drug has progressed, the more data it has accumulated, which leads VCs to "the idea of using drugs with years of safety databases and thousands of patient exposures," Bock says.

If a drug has made it that far without safety problems, it's probably been dropped for other reasons: It isn't proving much better than similar drugs on the market, or the parent company is changing its own therapeutic focus. Like movie scripts that never quite get it right, discontinued drugs can sit on a shelf for years.

Once it's off the shelf, however, a repurposed drug can move fast. Investors hope the companies producing them do the same. "Our target is to get [our companies] public in three years or less," Healy says. Seventy million dollars is the pre-IPO investment target, he says, "but we prefer it closer to $50 million."