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’07 VC Spending Shines on Life-Science Behemoths San Fran, Boston/Cambridge

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The nation’s top life-science clusters continued to dominate venture-capital investment during the fourth quarter of last year and all of 2007, according to a pair of annual surveys — one by Dow Jones VentureSource, the other by PricewaterhouseCoopers and the National Venture Capital Association, using data from Thomson Financial.
 
Broadly, the surveys found that the nation’s two largest biotech clusters, the San Francisco Bay Area and Boston/Cambridge, Mass., led all VC comers in the fourth quarter 2007 and all of last year.
 
In particular, they found that financing rounds for medical-device firms last year outpaced investments in the biopharma market for shops in the San Francisco Bay Area and Boston/Cambridge, Mass.
 
In any event, venture capitalists threw more cash at companies based in the San Francisco Bay Area than those located in Boston/Cambridge.
 
According to Dow Jones VentureSource, formerly VentureOne, VC spending in biotech companies located in four sub-regions of the Bay Area swelled 35 percent during the fourth quarter of 2007 to $329.7 million in 20 deals, from $244.2 million in 11 deals year over year.
 
By comparison, the survey conducted by PwC/NVCA, which write the quarterly MoneyTree Report, showed that VC investment in biotech companies based in the San Francisco Metro Area’s two principal metro areas — San Francisco/Berkeley and San Jose — declined 5.5 percent to $346.6 million among 32 deals from $367 million in 24 deals.
 
But when medical-device companies were included, private-equity financing in Bay Area shops swelled by more than 15 percent to $727.6 million among 60 deals from $631.7 million in 47 deals year over year, according to MoneyTree.
 
Click here to check out MoneyTree’s national and regional surveys.
 
The MoneyTree report also showed that VC spending on biotechs and pharmas located in the San Francisco/Berkeley and San Jose regions increased around 10.8 percent to $1.17 billion among 92 deals from $1.06 billion in 89 deals. That total jumps to $2.5 billion in 192 deals from $2.03 billion in 179 deals when medical devices are accounted for.
 
By comparison, VentureSource found that private-equity spending last year in Bay Area biotechs, including medical-device makers, more than doubled to $2.3 billion among 192 deals from $995.96 million in 137 deals in all of 2006.
 
When biopharma alone is measured, the Bay Area took in nearly $1.3 billion in 70 deals in the fourth quarter of 2007, or 26.4 percent better than the $941.3 million it picked in the year-ago quarter.
 
“The Bay Area has done extremely well,” said Tracy Lefteroff, global managing partner of PwC’s venture capital practice. “You look at the Bay Area as well as places like Orange County, San Diego, Seattle, Raleigh, North Carolina, the Washington-through-New York corridor. We’re seeing good activity in a number of those markets also.”
 
The Boston/Cambridge region came in a close second, according to the surveys.
 
VentureSource showed that VC investments in Boston/Cambridge biotech companies rose nearly 70 percent in the fourth quarter in 2007 to around $382.2 million among 17 deals from $225.2 million in 13 deals year over year.
 
But when medical device investments were included, VentureSource found that fourth-quarter investment in the region’s broader life-science industry jumped nearly 79 percent to $473 million among 97 deals from $264.95 million in 76 deals a year earlier.
 
But according to the MoneyTree Report, fourth-quarter private-equity investment in Boston/Cambridge rose around 13 percent to $208.7 million among 20 deals from $184.9 million in 15 deals in the year-ago period.
 
When including medical-device manufacturers, the MoneyTree Report found that VC spending in Boston/Cambridge increased 8.5 percent to $261.8 million in 25 deals from $241.2 million in 23 deals. But for all of 2007, medical-device spending in the region jumped 35 percent to $352.3 million from $260.9 million one year ago.
 
Lefteroff said VC activity in these two large coastal clusters has been driven by the factors propelling life sciences investment growth overall:
  • An aging population creating a growing market for drugs and medical devices;
  • Investors in early-stage life sciences companies who are more confident they can recoup their VC investments; and
  • Increased economic-development funding by state and local governments, as well as public-private regional groups.
Nationwide, biotech investment accounted for 129 deals totaling almost $1.29 billion during the fourth quarter of 2007, according to MoneyTree — up 17 percent from $1.1 billion and 106 deals nationwide for the final three months of 2006.
 
“We’re seeing activity both at the early stages and the later stages,” Lefteroff said.
 
He said the growth in medical-device investment reflected investor interest in the shorter amount of time it takes returns to mature due to quicker government decision making on new device applications compared with new drug applications.
 
“There are a number of good ideas and unmet medical needs out there,” Lefteroff said. “Money follows returns, and the returns have been good in the medical device space, so money tends to gravitate toward that.”
 
According to VentureSource, VC investment nationwide in biopharmaceutical companies last year increased 12 percent to $5.4 billion among 327 deals — a record — while spending on medical-device makers surged 37 percent to nearly $3.7 billion among 251 deals. MoneyTree’s numbers were even more glowing: Its total life science nationwide figure for all of 2007, which includes medical devices, listed an all-time high $9.1 billion in 862 deals, compared to $7.6 billion going into 786 deals in 2006.
 

“Money follows returns, and the returns have been good in the medical device space, so money tends to gravitate toward that.”

Overall VC activity in 2007 was pegged at record highs: MoneyTree recorded $29.4 billion in 3,813 deals in 2007, up 10.8 percent from the previous year; VentureSource recorded $29.9 billion in 2,648 deals, up 8 percent from 2006.
 
VentureSource’s figure included 650 deals and $7.3 billion invested during the fourth quarter, up 6 percent in deals and 15 percent in capital over Q4 ’06. MoneyTree recorded 963 deals and $7 billion in capital, up 5 percent in deals and 11.5 percent in capital from 918 deals totaling $6.3 billion in the final three months of 2006.
 
“Although we saw some great numbers for the fourth quarter of 2007, even with a perceived slowdown in the economy, I think you’ll see that trend continue for capital to be deployed,” said Jim Dayton, a vice president who runs the life-sciences group of Safeguard Scientifics, a venture capital firm in Wayne, Pa. “I think you’ll see a strong market continue over the next couple of years. There’s plenty of capital out there, as evidenced by what’s been raised and deployed nationwide.”
 
Some of that capital may be migrating from biopharma companies to medical devices, Dayton said. “There may be some shifting within the segments” — but not as much as from other more sluggish technology sectors such as telecommunications and information technology.
 
And while IPOs today aren’t as vibrant as those of recent years past, Dayton said that “people look at IPOs today as a way to raise capital, not a liquidity event. It’s still a strong marketplace out there.”
 
Also making life sciences companies attractive to investors are larger returns compared with the Standard & Poor’s 500 Index — 20 percent versus 7 percent for the market as a whole, according to Dayton.
 
Mark Heesen, president of the National Venture Capital Association, told BioRegion News last week the VC growth reflects another factor as well: Life-science investors have a growing number of options to choose from as a result of the doubling of the National Institutes of Health budget nearly a decade ago: “Research, like venture capital, is very long term,” he said. “It takes a while to see what bang you’re going to get for your buck.”
 
While the NIH budget has plateaued for most of this decade, however, Heesen said the research that came during the previous 10 or so years could keep life-sciences VCs from following suit and flattening out. He said established life-science clusters are likely to benefit the most.
 
“You have states like California and Massachusetts that are very aggressive in saying, ‘We’re going to be a center for biotechnology and clean technology,’ and they put their money where their mouths are,” Heesen said in an interview. “On top of that they have very good colleges and universities, and have very good research facilities.”
 
“That doesn’t mean that other states cannot take part. People have to be realistic in that they aren’t going to become a major hub in competition with Boston or California, either northern California or southern California,” Heesen added.
 
Valerie Foo, research manager for VentureSource, said it’s too early to tell if the clustering of biotech and pharma companies will be repeated by biofuels and other alternative energy technologies: “It is a little bit hard to see where it is going to be housed.”
 
A rush to invest in those companies may result in smaller capital financing totals for a variety of regions in coming years, Foo said.
 
“When we look at the development stage and round class of these companies, we are seeing investors putting a lot of their money in earlier companies,” Foo said.

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