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Boston, Cambridge, San Fran Outpace Their Suburbs in Q2 VC Cash Flow, Study Shows

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Cities in Massachusetts and California, the core of the nation’s two largest life-sciences clusters, recorded greater year-to-year gains in venture capital than their nearby suburbs during the second quarter, but a regional venture-capital leader warned last week that the gains may be short-lived.
 
Boston- and Cambridge-based life-science companies saw VC financing leap tenfold during the three months ended June 30, which swelled to $72 million from $7.1 million during the year-ago quarter — the second-quarter showing was almost three times greater than the previous 5-year high of $25 million recorded during the second quarter of 2002.
 
Despite the jump in VC funding, the number of Boston-Cambridge deals stayed steady at two, according to figures released last week by Dow Jones VentureSource.
 
By comparison, venture capital generated by suburban Boston biotechs, or those based in the “Route 128” sub-region, fell 16 percent to $143.7 million during the period this year from $170.8 million in Q2 ’07. Also, the number of deals fell from 16 to six.
 
Longer-term, the Q2 figure for Route 128 biotechs has stood as high as $220.8 million in the second three months of 2002, and as low as $110.6 million awarded in Q2 ’06.
 
San Francisco-based life-sci shops showed similar city vs. suburb strength, albeit to a smaller extent: VC investments in city-based biotechs doubled to $52.3 million in three deals during the second quarter, compared with $26 million in two deals a year earlier, according to VentureSource.
 
By comparison, biotechs located in the Bay Area’s three suburban regions declined both in the amounts of capital awarded and in the number of deals completed. The Peninsula/South Bay region saw $156.4 million in nine deals, compared with $229 million in 12 deals in the second quarter of 2007. The East Bay recorded $23 million in two deals in Q2 ‘08, down from $64.1 million in four a year earlier.
 
Deal volumes in Peninsula/South Bay and East Bay declined, while the North Bay hasn’t recorded a second-quarter biopharma VC deal since 2005.
 
Between 2002 and 2004, VC spending in San Francisco life-sci startups yo-yoed from $18 million in the second quarter of 2002 to $2 million during the period in ’03, and back up to $9 million in Q4 ’04 before hitting zero in the second quarter of 2005 and 2006.
 
However, the performance recorded by Boston, Cambridge, and San Francisco is unlikely to carry into the second half of this year, the president of the New England Venture Capital Association told BioRegion News last week.
 
Michael Greeley, general partner with the Boston venture capital firm Flybridge Capital Partners, said the spike in VC awards shown by the cities reflects a wave of startup formation — and thus more activity by investors — over the past two to three years. That wave appears to have crested in recent months due to the economic downturn, he said, with the number of biopharma companies nationally skidding to about 260 from 340 a year ago.
 
“The venture capitalists are increasingly, given the turmoil of the market, focused on their commitments to their existing portfolio companies. It looks like they are making fewer new commitments, but the dollars look strong because they’re investing in their existing companies,” Greeley added.
 
Industry VC Decline
 
If Greeley is correct, Boston, Cambridge and San Francisco can expect more of the declines in VC activity that the nation as a whole saw during the second quarter.
 
VentureSource recorded a 15.4-percent dip in nationwide venture investment in biopharma companies, to $1.07 billion among 70 deals, compared with nearly $1.3 billion among 92 deals in the year-ago quarter. Medical device investments showed an even bigger 24.5 percent drop to $797.6 million invested among 60 deals compared with $1.06 billion among 72 deals in Q2 ’07.
 
Gina Chan, a research manager with VentureSource, told BRN she attributes the declines in deal activity for biopharma and medical devices more to the weak economy than to issues with the life-sci industry.
 
“In the past, we’ve seen that [for] a lot of the biopharmaceuticals, their method of exit is the [initial public offering]. And because the IPO market is just not favorable at this point, it looks like investors are just holding back,” Chan said. “They are waiting and seeing.”
 

“Even within the life sciences, there’s more of an orientation toward more predictable businesses, services and devices. … That obviously is not pharma.”

That hesitancy by investors is also reflected, she said, in the drop seen nationwide in later-stage VC deals in the biopharma and medical-device categories. That decline resulted in smaller overall dollar figures for the value of deals that were completed compared with last year, Chan added — even as the median size of second-quarter biopharma deals rose to $13.4 million from $9 million in Q2 ‘07, typically a sign of a the fewer startups being created due to the declining economy.
 
The median size of medical-device deals nationwide also rose, though not by much, to $10.2 million in the second quarter from $9.9 million a year earlier.
 
“Even within the life sciences, there’s more of an orientation toward more predictable businesses, services and devices. Anecdotally, it feels like within the life sciences [investors] are focusing more on businesses that have a near-term revenue and product potential,” Greeley said. “That obviously is not pharma.”
 
Also showing sliding biotech VC numbers was the quarterly MoneyTree Report issued last week by the National Venture Capital Association and PricewaterhouseCoopers, which used data by Thomson Reuters.
 
The $1.08 billion among 111 deals recorded by MoneyTree’s “biotechnology” category placed the industry at number three — the first time it has not placed first or second since the second quarter of 2003. Biotech VC activity fell 14 percent from the nearly $1.3 billion invested in 130 deals in the year-ago quarter.
 
By comparison, medical-device investment dropped nearly 19 percent to $833.4 million in 98 deals from $1.03 billion in 109 deals in Q2 ’07.
 
‘Absolutely Expected’
 
“There’s been such a large amount of money, and a large number of deals going into both biotechnology and medical devices for literally two years, that a little dip was absolutely expected. It has been such a strong sector for so long that it’s more of a question of how much money can go into the space,” Mark Heesen, president of the National Venture Capital Association, told BRN last week. “I don’t see a dramatic decline or increase in the space over the next couple of quarters.”
 
One reason, he said, is because the life sciences represent one of the few industry sectors where investors are relatively assured of recouping their money through an exit — not IPOs, but through mergers and acquisitions. Another is the continued effects from a decade-old spike in research funding by the US National Institutes of Health.
 
“You continue to see some extraordinary ideas come out of NIH as a result. You’re finally starting to see the results of that research coming out,” he said. “You continue to see venture capitalists excited about things in personalized medicine, oncology, obesity — all of these areas continue to receive interest from the venture capital community.”
 
That interest remains, Heesen said, despite uncertainty over whether a new US president next year will succeed in restructuring the nation’s health-care system, and the effects of such a restructuring on the profitability of new and existing biopharma companies.
That interest especially remains, Heesen said, among entrepreneurs and investors in the nation’s top two bioclusters, San Francisco and Boston/Cambridge. New companies have been drawn there in recent years, he said, by the development of new facilities like Alexandria Real Estate Equities’ Mission Bay in San Francisco and BioMed Realty Trust’s Center for Life Sciences in Boston.
 
“When it comes particularly to biotechnology, you go to where the lab space is,” Heesen said.
 
Another reason for the tilt toward urban areas, he added, is demographics: “In the biotechnology area, [there are] very often younger, more affluent, more educated individuals who just may be more geared to city living than suburban living at that stage of their lives,” he said. “Because biotechnology companies are small in the beginning, [entrepreneurs] may have a better opportunity to locate near where those employees are, where they want to live.”
 
One sign of the urban shift: Boston has taken steps in recent years to woo early-stage life-sciences companies to its side of the Charles River and away from Cambridge. Earlier this month, the city credited that effort with decisions by three biotech companies to expand their businesses in Boston. Cogito Health, Paratek Pharmaceuticals, and Soadco have promised to nearly triple their current combined work force of 94 by hiring another 200 over the next three years [BRN, July 14].
 
In return, the companies will receive different forms of help from the Boston Redevelopment Authority’s LifeTech program. Among them:
  • Cogito has been approved for a loan from the LifeTech Finance Committee;
  • Paratek has received site assistance and a $14 million tax-exempt empowerment zone bond from Boston Connects, the nonprofit group charged with implementing the city’s Strategic Plan; and
  • Soadco is working with LifeTech staff to locate additional space for a manufacturing facility.
Soadco agreed to assistance from LifeTech after its principals met BRA representatives last month at the Biotechnology Industry Organization’s 2008 International Convention in San Diego.
 
Boston Mayor Thomas Menino launched LifeTech in 2004 in hopes of growing the cluster of more than 40 companies now based in the city — compared with more than 100 companies in neighboring Cambridge. The LifeTech initiative includes site selection and permitting assistance, help with linking employees to commuting options, and financing programs for entrepreneurs.
 
The LifeTech Finance Program, for example, assists startups by awarding loans at below-market interest rates for capital equipment purchases, real estate related costs such as tenant buildout, and in some cases the refinancing of debt. Businesses can qualify for loans up to a maximum amount of $250,000 per company. More information is available here.
 
“We are a one-stop shop for life-sciences businesses, offering the whole gamut of skills and services,” said Sonal Ghandi, who oversees LifeTech for the authority. “In many cities, one of the biggest frustrations that people have is, ‘How do you navigate the permitting process, and where do you go for help?’ We answer everything from, ‘How do you proceed with the Zoning Board of Appeals?’ to ‘How do you actually get the mayor to come to your ribbon-cutting?’”
 
The city also draws on an advisory board of life sciences industry leaders, venture capitalists, and heads of research institutions.
 
In San Francisco, the city’s uptick in VC funding reflects several factors that have made the city more welcoming to startup life-sci businesses, according to the head of the region’s industry association.
 
Matthew Gardner, president and CEO of BayBio, cited the presence of more lab space, though the construction of the Mission Bay complex and plans for additional complexes; as well as economic incentives available to startups such as the suspension of city payroll tax collections. San Francisco exempts biotech companies from payroll taxes for up to seven and a half years
 
Gardner also cited another factor: The rise of “virtual” startups that look elsewhere for laboratories and other needs.
 
“It might just as much reflect a changing business model that makes it easier for biotech companies to move into center cities. The virtual-management business model means you’re not dependent on wet lab space,” Gardner said.
 
At Mission Bay, Alexandria has completed one building — the 158,000-square-foot 1700 Owens St. — and is constructing another two. Also within Mission Bay, developer Shorenstein Properties is completing the 450,000-square-foot 409 and 499 Illinois St., and FibroGen of South San Francisco is expected later this year to move its headquarters and its R&D operations to 239,000 square feet it has agreed to lease at 409 Illinois.
 
When Mission Bay and Shorenstein’s project fill up with life-sci tenants a few years from now, the city hopes to offer another option for startups seeking space.
 
San Francisco officials have given support to a development concept by Miami developer Lennar to build at least 2 million and possibly up to 5 million square feet of space for life sciences employers and “green” technology businesses focused on solving environmental problems. The space would be part of a $1 billion mixed-use redevelopment plan for the former Hunters Point Shipyard, a former Navy outpost on San Francisco Bay [BRN, June 2].
 
City voters allowed Lennar’s concept to advance last month, when they approved one ballot proposition allowing the city to begin detailed reviews of the plan — and rejected a second proposition that would have forced Lennar to abide by stipulations that included marketing half the project’s residential units as below-market “affordable” housing [BRN, June 9].
 
Not all the region’s potential future space is envisioned outside the suburbs, however. Shorenstein has begun talks with officials in the city of South San Francisco, in hopes of gaining support and eventual approvals to expand a life-sci campus on San Francisco Bay. Shorenstein hopes to expand the Oyster Point Business Park — which it purchased with partner SKS Investments, in an $84 million deal that closed earlier this month — from the current 404,125 square feet to as much as 1 million square feet.

Region by Region Charts

Biopharmaceutical Venture Capital Investment ($M)
Region
Q2 2008
Q2 2007
% Change
The following regions are ranked by their percentage change in venture capital investment in biopharmaceutical companies:
Cleveland Metro
8.0
65.0
- 87.7
Philadelphia Metro
10.7
44.6
- 76.0
Denver-Boulder
8.0
24.7
- 67.6
East Bay
23.0
64.1
- 64.1
Kentucky
16.5
37.2
- 55.6
Peninsula/ South Bay
156.4
229.0
- 31.7
New Jersey South
9.0
12.9
- 30.2
Madison/ Milwaukee Metro
2.3
3.0
- 23.3
Indianapolis Metro
25.0
30.3
- 17.4
Route 128
143.7
170.8
- 15.9
Los Angeles Metro
44.1
41.3
+ 6.8
Detroit/Ann Arbor Metro
56.0
49.0
+ 14.2
Research Triangle
66.2
53.9
+ 22.8
San Diego Metro
122.5
99.7
+ 22.9
Seattle Metro
88.5
61.7
+ 43.4
San Francisco
52.3
26.0
+ 100.0
Baltimore Metro
10.7
3.6
+ 300.0
Boston
72.0
7.1
+ 914.0
New Jersey North
14.0
0.9
+ 1,456.0
Other Georgia
19.2
0.4
+ 5,386.0
The following regions recorded no venture capital investment in Q2 2007:
Rhode Island
35.0
0.0
New York City
25.5
0.0
Other Michigan
12.5
0.0
Other Tennessee
3.0
0.0
Chicago Metro
1.5
0.0
The following regions recorded no venture capital investment in Q2 2008:
Alabama
0.0
0.9
Maine
0.0
1.5
Atlanta Metro
0.0
5.0
St. Louis
0.0
8.7
Dallas-Fort Worth
0.0
20.6
Connecticut
0.0
25.8
Central Florida
0.0
27.0
Orange County
0.0
37.7
Pittsburgh Metro
0.0
38.7
Other Virginia
0.0
63.2

SOURCE: Dow Jones VentureOne, Equity Financings for US Venture-Backed Companies, by Financing Type (2002-Q2 2008).

Medical Device Venture Capital Investment ($M)
Region
Q2 2008
Q2 2007
% Change
The following regions are ranked by their percentage change in venture capital investment in medical device companies:
Santa Barbara/ Ventura
3.5
85.0
- 95.9
Connecticut
4.8
75.0
- 93.6
North Bay
1.0
10.0
- 90.0
Twin Cities Metro
18.0
115.1
- 84.4
Route 128
54.5
121.4
- 55.1
Baltimore Metro
11.5
25.3
- 54.5
San Diego Metro
28.6
58.8
- 51.4
Seattle Metro
35.0
45.3
- 22.7
Cleveland Metro
7.3
8.0
- 8.8
Peninsula/ South Bay
177.2
184.8
- 4.1
Orange County
137.9
72.0
+ 91.6
East Bay
83.5
36.0
+ 132.0
Research Triangle
18.4
7.0
+ 163.0
Houston Metro
28.0
1.3
+ 205.0
Philadelphia Metro
6.8
1.0
+ 580.0
Albuquerque- Santa Fe Metro
40.5
1.1
+ 3,582.0
New York City
45.0
1.0
+ 4,400.0
The following regions recorded no venture capital investment in Q2 2007:
Phoenix Metro
43.7
0.0
Los Angeles Metro
15.5
0.0
St. Louis Metro
9.8
0.0
Other Illinois
1.7
0.0
Madison/ Milwaukee Metro
0.8
0.0
Indianapolis Metro
0.4
0.0
The following regions recorded no venture capital investment in Q2 2008:
Other North Carolina
0.0
0.5
New Jersey South
0.0
3.0
New Hampshire
0.0
6.3
San Antonio Metro
0.0
6.3
Other Massachusetts
0.0
8.5
Atlanta Metro
0.0
9.7
Oklahoma
0.0
15.0
Denver-Boulder Metro
0.0
22.5
Austin Metro
0.0
32.0
New Jersey North
0.0
33.1
Salt Lake City Metro
0.0
47.3

SOURCE: Dow Jones VentureOne, Equity Financings for US Venture-Backed Companies, by Financing Type (2002-Q2 2008).

 

Boston and San Francisco Area Charts

Biopharmaceutical Venture Capital Investment ($M)
Region
Q2 2008
Q2 2007
Q2 2006
Q2 2005
Boston Area:
Boston
72.0
7.1
0.0
23.7
Rt. 128
143.7
170.8
110.6
122.7
Other Mass.
0.0
0.0
0.0
11.0
Bay Area:
San Francisco
52.3
26.0
0.0
0.0
Peninsula/ South Bay
156.4
229.0
261.4
150.2
East Bay
23.0
64.1
100.1
6.1
North Bay
0.0
0.0
0.0
37.0

SOURCE: Dow Jones VentureOne, Equity Financings for US Venture-Backed Companies, by Financing Type (2002-Q2 2008).

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