Few things in the biopharmaceutical sector grabbed more headlines last year than the legal troubles involving Merck & Co.'s painkiller Vioxx, and venture capitalists are taking their own steps to offset the scrutiny placed on drug-safety concerns.

Investors are increasingly eyeing repurposed drugs - essentially the use of already approved or clinically tested products for new therapeutic indications - as well as diagnostics used to reduce the occurrence of side effects. A renewed focus on medical devices is also taking shape.

"They [pharmaceutical companies] wanted everyone and their mothers to be taking Cox-2 inhibitors," Alex Barkas, a managing director at Prospect Venture Partners, said of the family of drugs of which Vioxx is a part. He said the aftermath resulted "in part by how many people got let down by it."

One response is a move towards opportunities in the repurposing of existing drugs.

Lou Bock, a managing director at BA Venture Partners, said his firm's portfolio includes several companies using repurposed drugs: IPO candidate Somaxon is pursuing a Phase III insomnia trial for a drug previously used to treat depression; and closely held Orexigen is combining two existing drugs to create a weight-loss agent.

Bock said safety concerns are important in large emerging markets such as sleep, obesity and pain - all chronic conditions in which the tolerance for side effects is lower compared to traditional areas such as cancer. Giving any patient a drug over the course of decades as opposed to years means that drug would have to be exceedingly clean.

As a result, any pre-existing safety data for a clinical candidate becomes hugely beneficial in order to determine the safety of a compound that could be prescribed to patients over longer periods of time.

It could also lessen the money and time spent taking a drug through large and expensive clinical trials. "If you can find a drug whose mechanism is previously defined...than that's probably the shortest path," said Seth Rudnick, a general partner at Canaan Partners. CombinatoRx Inc., a publicly traded company in Canaan's life science portfolio, focuses on the discovery of synergies among existing drugs and the development and delivery of those drugs in tandem.

Rudnick said he finds previously tested compounds more attractive as the firm moves away from early-stage investing. In fact, many prominent investors have started to invest further down the drug development chain because of the weak biopharmaceutical IPO market, a trend that is itself partly related to drug safety concerns amid public investors.

Another area of interest to Rudnick is the use of diagnostics to reduce side effects and create personalized medicine approaches that could lessen the risk profile of clinical candidates and marketed drugs. Many drugs lead to adverse side effects only in patients with a particular genetic makeup. Diagnostics have the potential to identify those patients genetically predisposed to experience these side effects. Immunicon Corp., a public company originally backed by Canaan, is a good example. It develops cell and molecular-based diagnostics for rare cell analysis associated with cancer.

Rudnick said if Vioxx was tied to a genetic marker program, Merck might have avoided much of the safety and side effect problems it eventually encountered when the marketed drug was used to treat large patient populations.

Several other VCs noted an increased emphasis on medical device investing, a trend also emerging from a belief that they often present safer solutions to biopharmaceuticals.

"If there's an area that's going to increase for us in the next five years, it's probably going to be the device area," James Garvey, a managing general partner at SV Life Sciences, said. Investments in medical devices are already showing strong signs of life. The $569.8 million invested in VC-backed medical device companies during the third quarter was the highest since the fourth quarter of 2000, according to VentureOne. Investments in the first three quarters of 2005 totaled $1.36 billion, up from $1.25 billion invested during the same period a year earlier.

Medical technologies tend to have less dangerous - or at least more consistent and better understood - side-effect profiles. They can take on a more consumer-orientated approach because they more often involve a one-time implant or procedure. Meanwhile, Garvey said therapeutic devices are "actually sometimes getting at the root cause of things instead of just treating the symptoms."

Prospect Venture Partner's Barkas, agreed and noted several reasons for his firm's increased interest in the device space: acquisitive large device companies; strong public markets for revenue generating device developers; improvements in device-related technologies; and movement of devices into therapeutic areas such as diabetes and neurostimulation.

"Sometimes it's easier to tell a device story than a drug story," Canaan's Rudnick said.

Whether Merck wins or loses its court cases -- last year, the firm lost one and won another, with a third ruled a mistrial -- safety concerns associated with Vioxx and the broader market for biopharmaceutical products will remain of paramount importance in 2006.