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Difficult VC Funding Market Extends to 'Omics, MDx

NEW YORK (GenomeWeb News) – Venture capital investing into the 'omics-related and molecular diagnostics space remains challenging and is unlikely to improve in the near-term, according to some VC fund managers.

Last week, PricewaterhouseCoopers and the National Venture Capital Association reported a sharp decline in venture capital funding to life science firms during the second quarter, the fourth consecutive quarter in which VC funding to life sciences retreated. Investment into the life sciences, the report said, dropped by 39 percent in dollar amount year over year, and by 22 percent on a deal-number basis.

While the report did not drill down to the level of funding to 'omics firms, anecdotal evidence suggests that the VC landscape was just as bleak for companies operating in the genomics and related fields as it was for the broader life science industry.

"What we see is consistent with" last week's report, Joshua Phillips, a managing partner at Catalyst Health Ventures, told GenomeWeb Daily News. "We see a significant tightening in investment in these types of companies. We don't see a shortage of those companies, but we see that it is getting more and more difficult to find financing for those types of companies."

While the stagnant broader economy can be blamed for some of that, life science firms, including 'omics and molecular diagnostic firms, have built-in drawbacks that are causing investors to pause. Such companies are often black holes of cash consumption and carry significant science and technology risks.

On the MDx side, even if a company is successful in developing a product, they may then have to face regulatory uncertainty, clinical risks, adoption challenges, and payor difficulties, Phillips said. And on the omics' tools side, the number of investors is small in size, and they tend to "wait and wait to see which companies succeed before they come in to buy."

For both 'omics and MDx firms, "exits are far and few between," he said, "and so it's a very difficult space to go out in a very traditional manner."

Indeed, 2012 has seen a moribund IPO market. While Atossa Genetics refiled for an IPO in February, and Cancer Genetics filed documents in late 2011 to go public, not one company in the 'omics or MDx space has completed an IPO so far in 2012.

Without a viable IPO market, the only other viable exit strategy is to get bought, but like IPOs, M&A activity has been sluggish. Through the first half of this year, acquisitions were off almost 30 percent compared to a year ago.

As consolidation within the 'omics and molecular diagnostics spaces continues, the number of potential buyers for such companies gets smaller and smaller. For example, if a firm is developing new PCR technology, there are only a few options as potential buyers — firms such as Life Technologies, Illumina, Bio-Rad, and Qiagen.

And as buyers align themselves with specific technologies, opportunities for acquisitions shrink.

"I think what you're seeing now is people are looking at it and saying [that] because of all the risks and the timelines associated with developing these companies, and the amount of capital required, we just can't get an exit that makes sense," Phillips said.

Because exits are difficult right now, the focus is on those firms that are "ultra capital efficient" and require only a few million dollars in investments rather than tens of millions, so "we can prove the big breakthrough in value on a very small amount of money," he said.

Such companies "are very, very hard to find," though — and Phillips noted that his firm has not invested recently in an 'omics firm.

Some companies, of course, bucked the trend and were able to attract large investments. Agendia, for example, said in the spring it raised $65 million in private equity financing. Also, Astute Medical pulled in more than $40 million in June, and Roka Bioscience started the year by capturing $27.5 million in a Series D financing round.

Such deals were aberrations, however, and rather than investing in such high-risk businesses, signs are that VC firms — even those that have been dedicated to the life science space — are looking outside of life sciences for other investment opportunities. According to the PwC-NVCA report, life sciences captured 20 percent of all venture funding in the second quarter, the lowest share in almost a decade.

Steve Gullans, a managing partner at Excel Venture Management, told GWDN that many investor funds are once again migrating back to tech firms, seduced by the deafening buzz that has surrounded the IPOs of such firms as Facebook, Groupon, and LinkedIn.

Never mind that some tech firms are struggling after the initial excitement around their IPOs have worn off. "The bottom line is if you can get into the great tech funds, that's the best place to be," while those who can't get into the tech funds are putting their money, instead, into liquid markets, such as the stock market, Gullans said.

In the genomics space, the firms that are getting VC interest are the ones that offer something truly differentiating. For example, cancer biomarker companies are a dime a dozen, and to get a syndicate of investors willing to open their wallets to one particular company, it needs to demonstrate that it essentially has few, if any, competitors.

"So when you're talking about 'omics, we're open to 'omics, but it really needs to be a unique solution," Gullans said.

Phillips said that companies today must present products with disruptive potential, rather than incremental improvements to existing technology, in order to get noticed. Researchers are wedded to certain methods and technologies and in order to get them to change their buying habits, just proving a new technology works is not enough.

"You have to create a very big change in value for them to force that move, and there aren't a lot of companies that do that," he said.

As weak as VC funding has been, it may not be until 2013 — after the US presidential elections — or later before any significant improvement occurs. By then, Europe's economy may also be stabilized, said Gullans.

Some also anticipate the JOBS Act will encourage investments into the biotech industry. The legislation, signed by President Obama in April, loosens regulatory requirements for small firms looking to go public, and more importantly allows small firms to seek investments through a mechanism called crowd-funding in which companies can seek investment through the sale of small amounts of equity to many individuals.

For early stage companies, crowd-funding could prove to be a financial lifeline. The PwC-NVCA report found that first-time funding for the life sciences was hit particularly hard in the second quarter. Year over year, initial investments in the life sciences market was slashed 61 percent, while follow-on funding was sliced 35 percent.

The JOBS Act, Gullans said, "should make investing, in terms of angel investing, more attractive."

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