Data released this month by a pair of venture capital market observers offers some disappointing news about VC activity in the largest bioclusters so far this year, but better news about their ability to draw investment in 2007, as well as about the growth of smaller clusters in both timeframes.
For the second time in a month, a quarterly survey showed declines in the amount of venture capital invested in the nation’s three largest life sciences clusters — , based on investment stretching back to 2002 — during the first three months of this year compared with the same period a year earlier.
The New England region, which includes the Boston/Cambridge, Mass., supercluster, recorded a 22.6 percent year-to-year decrease in venture capital investment for the first quarter — to $254.7 million from $329 million — even though the number of deals showed a healthy increase to 27 from 19 during that time, according to regional data released online by the quarterly MoneyTree Report, prepared by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters and predecessor Thomson Financial. [See charts below].
The second-highest region was the San Diego region, which slid 21.6 percent to $230.5 million in 15 deals from $294 million in 16 deals in the first quarter of 2007.
The third-largest cluster — the Silicon Valley region, which includes San Francisco and its suburbs — attracted 26 percent less in venture capital in Q1 ’08 compared with Q1 ’07, falling to $226.6 million from $307 million, though the number of deals inched up during that time, to 25 from 24.
The dollar drop-offs in the top-tier clusters recorded by MoneyTree follow the same pattern as the declines seen last month in the quarterly VC numbers released by Dow Jones VentureSource.
The Q1 declines follow a year of greater investment and more deals for the nation’s top bioclusters.
During 2007, the San Francisco Bay Area region led the nation’s life sciences clusters with almost $1.4 billion invested, nearly double the $700 million recorded in 2006, according to Beyond Borders 2008, the annual global biotechnology report released last week by Ernst and Young.
The San Francisco region regained the lead from 2006 leader New England, even though New England also gained investment dollars, from $800 million in 2006 to about $1.1 billion last year.
“They’re going to switch positions relatively from year to year. Unless one would see a consistent trend over several years, I wouldn’t over-interpret that or make too much of that,” cautioned Gautam Jaggi, managing editor of Beyond Borders and biotech sector resident with E&Y’s Global Biotechnology Center.
While rankings may change year to year, observers said the top three regions will continue to drive life sciences industry activity and thus investment.
The largest full-year gain, however, was enjoyed by the San Diego region, where the amount of venture capital raised more than doubled in 2007, to just over $800 million, from less than $400 million the previous year. San Diego life sciences leaders hope to improve on those numbers since their city next month will host the Biotechnology Industry Organization’s 2008 BIO International Convention.
“That doesn’t surprise me in the fact that they are one of the more mature and robust clusters. In an overall positioning, they closed the gap on VC funding with the [Boston and San Francisco regions], but it’s hard to draw too much of an inference from one year,” said Glen Giovannetti, global biotechnology leader for E&Y’s Global Biotechnology Center.
While rankings may change year to year, he and Jaggi said, the top three regions will continue to drive life sciences industry activity and thus investment — echoing a conclusion in Beyond Borders.
“The sheer size of the biotech markets in these regions draws new companies — many of which derive their technology from, or were founded in, other regions,” E&Y concluded in its report. It cited the headquarters relocations to Cambridge, Mass., last year of two companies — Targanta Therapeutics, which moved from Montreal; and Logical Therapeutics, which bolted Pittsburgh.
“Despite higher operating costs, the attraction is simple — early-stage investors who like to keep an active hand in their investments are based in these regions, as is an ecosystem of qualified scientific and managerial talent, and service providers who are aware of the nuances of the industry,” the Ernst and Young report added.
The top three life sciences clusters accounted for more than half of the record high $5.5 billion in venture capital invested in biotech companies last year.
Giovannetti said 2007 was a spike year following several years of pretty solid investment in the $3 billion to $3.5 billion range, and that this year’s decline reflects more a VC market that is headed back into its customary range rather than a market in decline.
“I think the trend here is sort of a megatrend: Investments in healthcare technologies, and in particular the innovative new technologies coming out of biotech, present an attractive investment opportunity,” Giovannetti said. “The megatrends of pharma needing to access technology, and therefore being interested potentially in these [merger and acquisition] buyouts, the trends of an aging population, the reality of unmet medical needs due to increases in chronic diseases — all those things bring people toward the healthcare market.”
He said another factor likely to draw venture investment into US companies, albeit in the longer term, is a need for expansion into growing overseas markets, especially Asia: “Over time, the next couple of decades, I think we will see the gravitational pull of this industry, in terms of where the growth markets are, will be in the East.”
More immediately, another key factor that will continue to draw companies to venture capital, he said, is the declining stock market, which has prompted many early-stage businesses to eschew initial public offerings and instead pursue venture capital to sustain operations, as well as an alliance with a partner capable of merging with or acquiring their startup.
“If that matures into something where the big company decides they want to put an offer on the table for the whole enterprise, management teams and boards are certainly listening to that, especially in an environment where IPOs are increasingly challenging,” Giovannetti said.
“There is a point in time where venture capitalists can no longer fund a company for one reason or another. It might be the maturity of [the venture capitalists’] own funds. Or they’ve sort of put as much money as they can commit to a particular investment and play already. You will see companies look toward acquisitions, especially when it’s more difficult to look at an IPO,” he added.
A growing number of life sciences companies that have gone the IPO route and become public are based in the Los Angeles/Orange County region. It was the only region to grow significantly in its concentration public companies for 2007, to 21. That’s a 24 percent increase, the largest of any US region, over the 17 companies identified last year — a number that was re-counted after the release of last year’s report, which showed just 11 public companies in LA/Orange, after Ernst and Young found a larger number of smaller public companies than its initial count showed.
Jaggi said a long-term trend for LA/Orange cannot be projected until the future of that region’s largest life sciences company is settled. Amgen last year carried out a wave of cost-cutting measures that included elimination of 2,200 workers — including 675 of 8,300 workers based at the biotech giant’s headquarters in Thousand Oaks, Calif.
Giovannetti and Jaggi said they could not discuss the likelihood of Amgen’s layoffs last year generating a wave of new life science startups, since the company is a client of Ernst and Young.
Giovannetti did say — and the first-quarter MoneyTree numbers showed — that many of the fastest-growing regions for life sciences venture activity are emerging clusters that have yet to attain the critical mass of companies, research institutes, and universities seen in the top-tier clusters.
For example, investment in the South Central US nearly doubled in Q1’08 compared with a year earlier, MoneyTree found, though the total jumped to just $1.5 million. The New York Metro area, which includes VC recipients in New Jersey’s busy mini-cluster, drew $64.5 million in first-quarter venture dollars, compared with $35 million in Q1 ’07. And the $10.6 million awarded to southwestern companies put the region on the biotech VC map; a year ago it had no capital and no deals.
“They have an uphill challenge,” Giovannetti said. “They do have fairly robust clusters, but they’re not quite up to the scale in terms of number of companies or attracting capital. They do have a reasonable cluster of companies. You get below that and it becomes much more scattered.”
For these or other regions to join the ranks of the mega-clusters going forward, he said, they will need assets that go beyond a critical mass of companies, ready access to venture capital, and a network of top managers.
“Frankly, one of the challenges is workforce. We still see today, even though today there are high operating costs in areas like northern and southern California and in the Boston area, we’ll see companies get formed in other regions and then the VCs ask that they move to one of the more established clusters, simply to get access to an experienced workforce,” Giovannetti added.
Jaggi said concentration of workforce benefits employees: “there’s so much churn in this industry at the end of the day that it’s much more attractive to be working in an environment where you have a good cluster of companies. One, there’s a lot of professional networking that goes on. Two, if your company gets sold and you need another job, it’s much better to be in an established cluster. It feeds off its success a little bit.”