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In Venture Capital Slump, Genomic Sector in 2001 Blasts Past Last Year s Growth: Oct 2, 2001 (rev. 2)

NEW YORK, Oct. 2 – Young, private genomic companies in the US anxious about a constricting venture capital market can breathe easy.

Despite sharp drops in the stock market, a receding overall venture capital tide, and the economic uncertainty brought on by the terrorist assault on the US three weeks ago, industry analysts believe that the private equity environment for early-stage genomic companies remains robust, has been outperforming the overall VC market, and shows signs of growth in the new year.

“Biotech remains a pretty solid target area for venture capitalists,” said Ken Andersen, editor of VentureWire , a newsletter that tracks the VC industry.

Saying that overall VC investment this year “should be no surprise,” VentureWire  on Monday reported a 60 percent drop in total funding so far in 2001 compared with the same period last year. That means that US-based VC funds that invested nearly $77 billion on 5,191 companies during the first three quarters of 2000 had spent only $29 billion on 2,360 firms for the same three quarters in 2001. Anemic third-quarter financings—some $6.7 billion for 540 US-based companies—capped the report.

To be sure, the third quarter is traditionally the slowest of the year, and the biotech sector, like other industries, took it on the chin from its relative second-quarter high: There were 37 biotech deals totaling $684 million during the third quarter, compared with 67 deals totaling $977 million in the second quarter, according to VentureWire . But VC financing for the sector—which comprises genomic, bioinformatic, proteomic, and bioarray companies—grew by nearly 50 percent during the first nine months of this year compared with the first nine months of 2000. And investors and analysts are betting that the biotech trend will continue.

“There is more money available in private equity [for life science companies] than there ever has been,” Michael Lytton, general partner of Oxford Bioscience Partners, an early-stage investor, said in an interview. “And for [genomics-based] drug discovery, there is a tremendous amount of private equity available.”

Lytton, who will be participating in a two-day venture capital conference sponsored by the Biotechnology Industry Organization in Washington, DC, that begins on Wednesday, said that the current financial malaise, made more acute by the events of Sept. 11, “have not changed in any way the fundamentals of VC investing in biotech in any respect.” And although he recognizes that virtually all stock prices were adversely affected in the wake of the terrorist attacks, “I don’t think there will be any long-term effect on biotechnology investment,” he stressed.

“I think that there’s now a huge opportunity for any company with a technology that can translate genomic information into elite compounds and ultimately a drug,” he said.

According to VentureWire ’s Andersen, the fourth quarter may reset the dip in third-quarter investment. He said that several venture capital funds created recently for biotech—led by Prospect Ventures, which has closed $500 million, Lytton’s Oxford Bioscience, with $450 million, and New Enterprise Associates, which said that it plans to spend 30 percent of its $2.2 billion VC budget on biotech companies—portends a healthy fourth quarter for the sector. 

“There’s definitely been a lot of money raised that has been earmarked for [biotech],” Andersen said. “With all this money available for biotech deals, I think we may see some pick-up in some numbers in the fourth quarter.”

Bryan Roberts, general partner of Venrock Associates who focuses on life-science investing, said he more uncertainty in the short term. Although the trend toward early-stage biotech financing had been “reasonably strong” before Sept. 11, the shaken investor environment following the attacks has reverberated down into private equity channels.

Roberts, who will also participate in the BIO venture forum, said he believes that VC investors nowadays are going to be more selective. “People are more judicious now,” he said, but quickly added: “I don’t think anybody’s retreated to the bunker.” 

“Because of the distractions and uncertainty in the public markets putting things on hold, people have slowed down the processes” of VC investing, said Tracy Lefteroff, global managing partner of the venture capital practice of PricewaterhouseCoopers. “And that has resulted in not much getting done in the past three weeks.”

“So now the markets are settling down, and we’ll see more of a resumption of activity,” Lefteroff said in an interview. Although PricewaterhouseCoopers does not yet have data for VC investing over the third quarter, Lefteroff said he expects “a significant decrease from the second quarter across the board.”

“Whenever you have an upheaval in the public markets, its makes venture capital investors very nervous, and causes them to pause and rethink whether they should be putting money out there now,” he said.

Still, he said, health care and the life sciences have been “a bright spot in the public markets,” Lefteroff added. “Companies in these areas have been hit a lot less than other stocks.” And that, too, he said, reverberates in the VC community.

“Don’t forget,” Lefteroff said. “There is still in excess of $30 billion that’s already been raised in VC funds that have to be invested. I think that things will settle out there in a few months, and it will be a much better environment to be raising capital than it has been.”

For insight into what analysts say young genomic companies should do to make themselves more attractive to VC funds, click here.

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