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Despite Financial Turmoil, Biotechs Still Able to Secure Venture Capital in Q3 ‘08

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The recent upheaval in the credit and equity markets has had no apparent affect on the ability of growing biotechs to secure venture capital in the third quarter, while medical device investment is harder to glean, according to figures released by two trackers of VC market trends.
 
The reports also showed that the San Francisco Bay Area extended its dominance as the nation’s largest cluster for both biotech and medical devices during the period, both by dollars raised and numbers of deals.
 
According to MoneyTree, the Bay Area racked up $555 million in 26 deals during the third quarter, almost double the $239 million it attracted in 18 deals a year earlier. Dow Jones VentureSource recorded a similar spread, with biotech venture capital in the region climbing to $556.7 million from $303.9 million, and the number of deals jumping to 19 from 13.
 
But the trend in the Bay Area’s medical device VC activity varied by tracking firm. MoneyTree recorded $295.5 million during Q3, up 18.7 percent from $249 million year over year, while the number of deals stayed even at 25. Dow Jones VentureSource, however, showed a drop to nearly $228.1 million from about $291.4 million, even as the number of deals grew year-to-year to 15 from 11. The decrease didn’t change the Bay Area’s top rank in the volume of medical device capital raised, however.
 
Valerie Foo, research manager with Dow Jones VentureSource, told BioRegion News last week that the dip in med device capital recorded by her group in the Bay Area and elsewhere was not necessarily a sign that investors had cooled to the sector.
 
She cited a 5-percent rise in financing raised by medical device companies in pre-revenue stages, a factor in the near steady number of med device VC deals year to year, slipping to 55 from 56 deals, even as total financing in the sector fell 17 percent to $727 million from $876 million.
 
“There are still signs of strength in this group,” Foo said.
 
MoneyTree counted a 2-percent year-to-year rise in VC capital flowing into medical device companies, to roughly $911 million from $893 million, and an increase in deals to 93 from 83.
 
The two firms agreed, however, that biotech investment has inched up year-to-year in recent months. MoneyTree showed investment jumped about 18 percent to just over $1.3 billion in Q3 ’08 from slightly above $1.1 billion in Q3 ’07, while deals rose from to 114 from 111. Dow Jones VentureSource showed a 3.6-percent, or nearly $41 million, increase, to $1.17 billion from $1.13 million, though it showed the number of deals dipped to 70 from 72.
 
Nationwide, across all industries, Dow Jones VentureSource recorded about $7.4 billion in 583 VC deals, 7 percent below the $7.9 billion in 673 deals generated during the same period last year and the second straight quarter of year-over-year declines.
 
MoneyTree, a collaboration of PricewaterhouseCoopers and the National Venture Capital Association, using data by Thomson Reuters, showed overall quarterly VC activity of $7.1 billion invested in 907 deals, compared with $7.8 billion in 983 deals.
 
Differences between the VC trackers reflect variations on what deals they count as getting done, and occasionally on how they define the various regions.
 
The larger investment in biotech compared with medical devices marks a change from some recent quarters, in which med device VC investment generally outstripped VC investment in traditional biotech and pharmaceutical startups, as investors sought faster returns on investment and a less intense regulatory environment driven by the fact that approvals for devices take less time than for drugs [BRN, July 30, 2007].
 

“Investors are getting a little more hesitant.”

But in perhaps a more telling sign of shifting interests among tech investors, the company that received the largest venture capital award during the third quarter was not a biopharma as has been typical in recent years, but a solar energy company — SolarReserve of Santa Monica, Calif. — which won $140 million in second-round funding.
 
The highest VC award among life-sci companies, and tied for No. 3 on Dow Jones VentureSource’s list of top deals, was the $100 million in fifth-round later-stage financing awarded to Pacific Biosciences of Menlo Park, Calif. Foo said Dow Jones VentureSource is examining the phenomenon to see if a trend is in the making.
 
Another sign of a shift among investors, Foo said, may well be the increase in capital seen by life-sci companies, as entrepreneurs seek larger amounts of capital either to fund later-stage growth, or to tide them over through the lengthening period between company formation and exit events such as mergers, acquisitions, or initial public offerings.
 
M&A activity has grown as the market for IPOs has shriveled over the past two years. But the time companies spend pursuing liquidity through M&As is longer than the time they once spent trying to exit through IPOs. Since 2000, according to Dow Jones VentureSource, the median time to liquidity of biopharma companies has jumped from almost four years to more than five-and-a-half years. For medical device companies, that period has lengthened from six and one-third to more than nine years.
 
“The later-stage companies tend to be faring a little bit better, just because now is not a really good time to start investing in startups or new companies just yet. [VCs] just want to keep their existing portfolio companies afloat for a while longer,” Foo added. “Investors are getting a little more hesitant.”
 
The later-stage life-sci companies reflect “a safer bet, less risk, especially regulatory and clinical risk,” James Datin, executive vice president and managing director of life sciences with Safeguard Scientifics, told BRN. “If you’re earlier stage, you’re going to have something really differentiated [from competitors] to get capital. And it’s a safe bet to say that valuations are going to be coming down. Is it going to be 10, 20, or 40 percent? That remains to be seen over the next year.”
 
Datin said life-sci entrepreneurs will not only have to overcome hesitance among investors for early-stage deals, but fewer places to turn for capital as well — a trend he said had begun even before the market upheaval of recent weeks. With more than $100 million of investment capital available for life sciences and other healthcare companies, as well as information technology concerns, Safeguard is in good shape, he added.
 
“There are going to be fewer venture capital firms over the next couple of years. The most successful funds will continue to get bigger, so you’ll have fewer funds raising larger amounts of capital.”
 
These conditions, Datin said, will pull entrepreneurs to bioclusters where they have relationships already in place with investors and others. But in many cases, startup life-sciences companies will be looking to overseas VC firms and investors for capital, said Datin and Jim Healy, a managing partner with Soffinova Ventures, which has offices in San Francisco, San Diego, and Menlo Park, Calif.
 
Geography also played a role. “There’s an interest to look beyond the US and look beyond North America for capital,” Datin said. “There’s an enormous amount of capital in the Middle East, and to some extent Asia and Europe. You’re starting to see more of those organizations interested in that. There are also agents that can provide introductions to people for capital over there.”
 
In return for that capital, Datin added, overseas investors are likely to press for shifting some operations of their American client companies outside of the US — especially manufacturing, and research collaborations. That is the case with one company for which Safeguard recently closed financing; the firm will not identify that company pending a future public announcement.
 
“This particular company is expanding in Europe and has a significant amount of interest from different European governments wanting to not only provide manufacturing incentives, but making some very close contacts to VCs [and] sources of capital in their countries, because they see not only a financial opportunity but also a strategic opportunity as well,” Datin said.
 
Datin and Healy also said that life-science entrepreneurs will find financing easier to obtain than other tech sectors. That is a result of factors favorable to life-sci growth, which include an aging population, long product cycles, and growing demand for pharmaceuticals to treat diseases for which no other therapies are available.
 
Yet life-sci entrepreneurs shouldn’t expect the IPO market to bounce back any time soon. Of 68 life-sci IPOs filed over the past 12 months, he noted, all but two have been pulled or are still waiting for a better time to go public. The valuation of those companies has fallen precipitously, Datin said.
 
“It’s just the nature of our time,” said Datin, whose firm will examine more than 500 life-sci business plans by US entrepreneurs this year. “Because of the economic times, capital is going to be scarcer. Credit’s going to be tougher. It certainly will affect how we look at our current companies.”
 
With IPOs relatively scarce, VC firms will hold onto their portfolio companies longer. “We’re going to be asking companies in many cases to reduce cost, reduce their burn, to review their cash needs, pare down their wish lists. And for many for these companies, the culture, the mind-set is going to be new turf for them. They’re not used to that, Datin said.”
 
Added Healy: “We have turned down excellent management teams with very good business plans simply because they had very high capital requirements. We think that financing and access to capital is now a key risk. So it really impacts how we make decisions within our partnership about new investments and financing existing portfolio companies.”
 
New England No. 2
 
Both venture-capital tracking firms agreed the second-largest biotech cluster was New England — largely centered around Boston and Cambridge, Mass., and their suburbs — which recorded the steepest jump in year-to-year VC activity.
 
MoneyTree recorded a 51.5-percent jump, to $286.1 million from $177 million in the third quarter of 2007, though the number of deals dipped to 21 from 22. Dow Jones VentureSource saw a 54.3-percent gain, to $335.6 million from $217.5 million, and the number of deals rising to 18 from 16.
 
New England ranked fourth, however, in MoneyTree’s survey of medical device VC activity, as the region collected $87.5 million in Q3 ’08, up 24 percent from $70.5 million from a year earlier, though the number of deals doubled to 12. Dow Jones VentureSource counted about $48.6 million for Q3 ‘08, down more than half from $107.1 million in Q3 ’07, while the number of deals fell by half to four.
 
After New England, MoneyTree pegged the North Central region — Iowa, Minnesota, Nebraska, North Dakota, South Dakota, and Wisconsin — as the next-largest medical device cluster. The region recorded just under $130 million in the third quarter, triple the $42.1 million of Q3 ’07, though the number of deals only rose to seven from six during the period. In biotech, by contrast, the North Central region picked up just $2.3 million, down two-thirds from the year-ago quarter’s $6.4 million, though the number of deals stayed even at two.
 
Dow Jones VentureSource showed the six states combining for $147.9 million in five medical device VC deals in Q3 ’08, versus about $50.7 million and six such deals in the third quarter of 2007. The firm showed no biotech deals this past quarter and only a single $23.6 million bio deal a year earlier.
 
The sharpest gain among major biotech clusters took place in the Philadelphia region. According to MoneyTree, the region drew $110.3 million in seven deals during this year’s third quarter, more than four times the $25.8 million in four deals a year earlier. However, Dow Jones VentureSource showed a more-than one-third decline during the period, to $56 million from $86.3 million — even as the number of deals rose from two to three.
 
DowJones listed not a single medical device deal for the region in 3Q ’08, versus $116.8 million in three deals the year-ago quarter.
 
Also showing mixed signs in regional VC statistics was the New York metro region, which placed as No. 3 in MoneyTree’s listing of top biotech clusters. New York metro recorded $130.6 in nine deals during Q3’08, more than double the $56.2 million in five deals in Q3’07. But Dow Jones VentureSource showed a mirror image, with $57.4 million in four VC deals recorded in this year’s third quarter, down from $124.3 million in eight deals a year ago.
Both VC tracking firms agreed, however, that the Pacific Northwest was among the nation’s big gainers in biotech venture capital activity.
 
The amount of biotech VC funding raised in the region dominated by the Seattle area more than doubled to $64.5 million in Q3 ’08 compared with $27.3 million in the year-ago quarter, even as the number of deals over the past year only edged up to seven from six deals during that time, according to MoneyTree. Dow Jones VentureSource also recorded a biotech increase, to $21.8 million from almost $14.2 million, while the number of deals ballooned to five from two. Neither firm tracked any medical device deals for the region.
 
There was also consensus among the firms that the biggest year-to-year regional loser in venture capital was the San Diego area. MoneyTree saw that region plummet to about $10.4 million in six deals from $187 million in 13 deals in the third quarter of 2007. Dow Jones VentureSource recorded a similarly steep drop, to $7 million in two deals during Q3 ’08 from just under $49 million in six Q3 ’07 deals.
 
San Diego similarly plunged in medical device activity. DowJones VentureSource saw $13.4 million in four third-quarter 2008 deals, well below the $107.6 million in nine deals recorded between July and September of last year. MoneyTree listed $15.5 million in three deals, versus $54.2 million in eight deals in the year-ago quarter.
 
The Southeast region — which includes Alabama, Florida, Georgia, Mississippi, Tennessee, South Carolina, and North Carolina — collected less than half the venture capital raised last year, with MoneyTree recording $34.1 million in seven deals in Q3 ’08, compared with $80.6 million in 10 deals in the third quarter of last year. Dow Jones VentureSource recorded $39.5 million in seven deals, down from $ 54.3 million last year, even though the number of deals in Q3 ’07 was only four.
 
Among regions staying steady year-to-year was the biotech region consisting of Maryland, Washington, DC, Virginia, and West Virginia. This region, which MoneyTree calls “DC Metroplex,” recorded $27.4 million, up from $26.4 million therein the year-ago period. As for medical devices, MoneyTree had better news for the region — a 15-percent climb, to $30.7 million from $26.7 million, even as the number of deals stayed steady at seven.
 
The DC/Maryland region has had very mixed results with Dow Jones VentureSource. The VC tracker, which defines the region as the “Potomac,” received $33.5 million in three Q3 ’08 deals, up from a single $100,000 deal a year earlier. But when it comes to medical devices, VentureSource had not a single deal for the region, compared with two deals totaling about $40.8 million in Q3 ’07.

Region by Region Charts

Biotech Venture Capital Investment ()
Region
Q3 2008
Q3 2007
% Change
The following regions are ranked by their percentage change in venture capital investment in biotech companies:
Silicon Valley
555.0
239.0
+ 132.0
New England
286.1
177.0
+ 51.5
NY Metro
130.6
56.2
+ 132.0
Philadelphia Metro
110.3
25.8
+ 328.0
Midwest
65.1
66.1
- 1.6
Northwest
64.5
27.3
+ 136.0
Southeast
34.1
80.5
- 57.6
DC/Metroplex
27.4
26.4
+ 3.8
San Diego
10.4
187.0
- 94.4
Texas
7.2
14.7
- 51.0
LA/Orange County
5.0
124.0
- 95.7
Sacramento/
N. Cal
4.0
North Central
2.3
6.4
- 64.0
South Central
1.7
2.4
- 29.2
Southwest
0.8
12.3
- 93.5
Alaska, Hawaii, & Puerto Rico
1.5
Colorado
61.4
Total
1,304.4
1,108.0
+ 17.7

 

Medical Device Venture Capital Investment ()
Region
Q3 2008
Q3 2007
% Change
The following regions are ranked by their percentage change in venture capital investment in medical device companies:
Silicon Valley
295.5
249.0
+ 18.7
North Central
130.0
42.1
+ 209.0
LA/Orange County
87.8
8.2
+ 971.0
New England
87.5
70.5
+ 24.1
NY Metro
52.5
27.3
+ 92.3
Texas
40.2
28.1
+ 43.1
Colorado
33.5
30.3
+ 10.6
Northwest
32.7
61.9
- 47.2
DC/Metroplex
30.7
26.7
+ 15.0
Midwest
28.3
31.8
- 11.0
Southeast
22.1
36.0
- 38.6
Upstate NY
20.0
27.3
- 26.7
Philadelphia Metro
16.6
180.0
- 90.8
San Diego
15.5
54.2
- 71.4
Southwest
15.4
16.9
- 8.9
South Central
2.6
2.9
- 10.3
Total
910.8
893.2
+ 2.0

SOURCE: MoneyTree Report, Q3'08, a collaboration of PricewaterhouseCoopers, the National Venture Capital Association, using data from Thomson Reuters.

 

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