The life-science sector saw declines in venture capital funding during the first quarter, according to two VC surveys, which differed on how steep the falloff had been.
The results reflect not only the sputtering US economy and the resulting investor skittishness, but also shifts in the types of companies pursuing private equity, the amounts they seek, and what they plan to do with the money, several market watchers told BioRegion News.
VCs closed around $1.27 billion in biotech and pharmaceutical deals during the first three months of 2008, down 17.4 percent from $1.5 billion in deals completed during the same period last year, according to the quarterly MoneyTree report released last week by the National Venture Capital Association and PricewaterhouseCoopers, based on data by Thomson Reuters.
Dow Jones VentureSource recorded a more dramatic 59-percent decline in the value of biopharma deals, which it said fell to $771.3 million in the first quarter from $1.89 billion during the same period a year earlier.
Medical device deals, by contrast, fell about 15 percent year over year, according to both VC surveys. VentureSource said such deals declined to $866.1 million from $1.02 billion a year earlier, while MoneyTree said they slid to 1.02 billion from nearly $1.2 billion.
However, the two surveys differed on the number of VC deals recorded in the life-science sector. MoneyTree said there were 220 first-quarter biotech and medical device deals, up from 209 a year ago, followed by an increase in biotech deals from 109 to 126. It also recorded a decline in medical device deals to 94 in Q1 ’08 from 100 in Q1 ’07.
But VentureSource listed 126 first-quarter bio and med-device deals, down 17 percent from the 152 recorded during the first three months of 2007. Most of that decrease reflects a slowdown in biotech and pharma financing, the study said. The number of biopharma deals tracked by VentureSource fell to 59 from 83; its study of the medical device segment reported 67 deal in Q1 ’08 compared with 69 one year earlier.
John Taylor, vice president of research for NVCA, and Valerie Foo, research manager at VentureSource, told BioRegion News last week that though the economy did not help matters, it was not the sole or primary reason for the drop-off in capital.
Foo said accounting for part of the decrease was a decrease in early pre-revenue stage companies seeking capital. “Investors are shying away from companies in the start-up phase, or even in product development, and focusing more now on those that have started generating revenue or even are profitable, so that they can hopefully exit sooner.”
That path to a quick exit is longer than in past years, Foo added, because the sluggish stock market has deflated investor demand for life science initial public offerings.
“Investors wanting to pick what development phase these companies are in, they’re going to gravitate more toward mature companies, so that that way, when they are ready to go public, they’ll get their returns faster,” Foo said. “For pre-revenue companies, specifically biopharma companies, that percentage has decreased, as opposed to revenue companies.”
According to VentureSource, one sign that investors are shying away from later rounds is that the median amount of venture financing for biopharma companies fell by about half in the first quarter to $9.35 million from $18 million in Q1 ‘07. But the median amount for medical device investment dipped to $11.5 million from $12 million in the first three months of last year.
“Either investors are going towards these revenue-generating companies that don’t require such a large deal, or they’re just not giving more because they’re cautious,” Foo said. “I think investors are just being cautious, because overall in the industry we’re seeing that too across the board.”
Another reason for the decline could be Wall Street’s frayed nerves and the resulting decline in valuations, which hurt the sole biopharma company to complete a venture-backed IPO in the first quarter. Bioheart, a Sunrise, Fla., developer of autologous cell therapies for treating chronic and acute heat damage, raised $5.8 million after pricing its shares at $5.25 on its first trading day Feb. 19. By April 25, its shares fell to $4.10.
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“The medical device area is one, I think, where we’re going to get a lot more attention as the population ages, and the folks who invest in that are very much aware of that long-term.” |
Taylor noted that a growing number of later-stage life-science companies were more inclined to seek capital for later rounds through partnerships with pharma or biotech giants rather than the VC firms.
“These companies are requiring such huge amounts of cash earlier on that the questions I would ask is, ‘Are these companies being financed through some other creative means other than a straight equity round? Is there some kind of partnership with a big pharna that is providing the later-stage financings in place of what would have been a large round?’” Taylor said.
Taylor also said the drop-off in life-science VC investments could reflect another factor cited by a venture capital investor last week on a MoneyTree conference call. James Thomas, a partner of Thomas McNerney Partners in Stamford, Conn., noted that life-science companies have also reduced the amount of capital they need from investors by narrowing the functions of the drugs or devices for which they need financing.
“What those VCs are doing now,” Taylor said, “is encouraging the companies to get approved for a narrow product area, one that’s cheaper to run the test for. Once they get that approved and once they get product moving, then they go back and do the clinical trials for the other adjacent areas, they’re going very narrow now in what they’re trying to get approved for as a way to mitigate these costs.”
Gary Kurtzman, vice president of life sciences with Safeguard Scientifics in Wayne, Pa., said the slumping economy is also reducing what start-ups receive in capital, since many investors are responding to the market uncertainty by setting aside larger percentages of their early-stage financings toward later rounds.
“We may have to keep these companies private or keep them until they have an exit,” Kurtzman told BRN. “Where maybe a company would have had a 30- to 50-percent reserve, I think it’s not uncommon to see a 100-percent or even 200-percent reserve for companies. If we’re investing in a company today — let’s say it’s $5 million or $10 million — we may reserve up to another $20 million for that deal. We’re looking to put more into a deal, but maybe staging that a little bit more.”
The economic slowdown has also lowered the amount of capital that investors must pony up for those later-stage deals, Kurtzman said, “so there’s a lot of value, and there’s value in deals which are somewhat later stage and somewhat closer to commercialization. People are looking for value.”
“The VCs are shopping, and that may be a shift away from biotech to look for later-stage bargains. And I think you’re going to find those in medical device [companies],” Kurtzman said. “We are clearly looking at value in that marketplace, even in relatively later-stage opportunities. We’re able to find value, and that may be why there’s a slight uptick in medical devices.”
Medical device companies are attractive, he added, because devices involve a quicker approval process, allowing companies to bring products to market faster. MoneyTree’s Taylor agreed and cited another factor: Investors are aware of the nation’s graying demographic. Those factors, in turn, allow VCs to recoup their investments faster, he said.
“The medical device area is one, I think, where we’re going to get a lot more attention as the population ages, and the folks who invest in that are very much aware of that long-term,” Taylor said.
Cluster Bombs
Unlike past quarters, many of the largest decreases in VC funding took place in top-tier clusters, with Philadelphia recording the biggest dollar drop-offs in two life-science sub-sectors. Its biopharma VC awards plunged from $282.9 million in Q1 ’07 to just $5.1 million in Q1 ’08, while its medical device funding fell over the past year from $12.1 million to $200,000 [see accompanying charts below].
For the nation’s top two life-sciences cluster, VentureSource found that:
- The four regions comprising the San Francisco Bay Area racked up 35 percent less in biotech and med device funding during the first three months of 2008 over the year-ago quarter, falling to $485.8 million from $748.4 million; and
- The two regions comprising the Boston-Cambridge, Mass., metro area saw a 63-percent plunge in life sciences VC spending, to $134 million from $359.39 million.
Sharp drops in biotech financing accounted for most of those regional declines. The Bay Area saw a nearly 60 percent year-to-year first quarter drop, from $406.7 million to $163.7 million — while medical device financing slid just 5.7 percent during that period, to $322.09 million from $341.7 million.
In Boston/Cambridge, biotech spending plunged even further, dropping 73 percent from $303.7 million to $82.3 million. The region’s medical device activity dipped 7 percent, to $51.70 million from $55.74 million.
Yet when the number of financing deals is counted, the Boston/Cambridge and suburban Route 128 sub-regions didn’t see too much difference year to year. Within the Route 128 region, biopharma deals dipped to six from 10, but medical device deals increased to eight from seven. But Boston picked up two biopharma and one medical device financing deal in Q1 ’08, compared with none of either category of deal in Q1 ’07.
The four regions comprising the San Francisco Bay Area saw a combined 12 biopharma deals in the first quarter of 2008, compared with 19 in the first three months of 2007. The number of combined medical device deals in Q1 ’08 stood at 17, compared with 20 in Q1 ’07.
“If this happens over a complete year, I might start to make a lot of that. There tend to be cycles to things,” Kurtzman said. “If instead of putting in $10 [million] in today and $10 [million} a year from now, I instead put $8 [million] right in now and another $16 [million] in over time cause I’m going to hold it longer, I’m going to do slightly fewer deals.”
Bruce Booth, a partner with Atlas Venture in Waltham, Mass., told BRN his firm didn’t see fewer deals in the first quarter.
“We’re seeing the same amount of deal flow as we saw this time last year. There are a lot of companies out there seeking financing. In the course of last year, we probably saw 800 life science-related investments. We’re going to be well on track for that this year,” Booth said.
One encouraging sign, he said: Boston and Cambridge companies accounted for much of the approximately 50 companies selected form a pool of 256 to make presentations at last week’s first annual Biotechnology Industry Organization National Venture Conference, co-hosted by NVCA.
Many of those companies are also seeking money from biotech and especially pharma giants. “The appetite from big pharma for doing deals couldn’t be greater,” because their balance sheets are full of cash despite patent challenges and other issues raised with a series of recently-approved drugs, Booth said. “You’ll continue to see big pharma continuing its aggressive M&A and partnering strategies, and adoption of open-source innovation models.”
As for the falloff in amount financed, he said the drop “has very little to do with the overall biotech industry. I think there’s a lot of companies out there who will be seeking financing, are seeking financing, and, frankly, the coffers of venture capitalists are full. There’s been a lot of fundraising over the last few years. So you have a lot of capital, and a lot of companies that want to put it to work.”
That will take time, he said, since “the IPO window has essentially shut. And companies are in the midst of considering their options.”
Booth said his firm views partnerships and acquisitions as the best liquidity path for its investments. Atlas was among investors in Adnexus Therapeutics, which Bristol-Myers Squibb acquired in September 2007 for $415 million after deducting Adnexus’ net cash balance, plus up to $75 million more depending on how well the new BMS subsidiary meets development and regulatory benchmarks. Adnexus canceled plans filed just a month earlier for an IPO projected to raise $86 million.
That IPO window is unlikely to re-open any time soon, Booth said, which will compel early-stage life science companies to return to the venture market over the next couple of quarters.
“I wouldn’t be surprised if later on this year, you see a much more of an uptick in venture financing in biotech, as companies that were sort of giving a wait and see to the public markets figure out how to do their next round of financing,” Booth added. “That wouldn’t be a bad thing for the venture business at all.
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Biopharmaceutical Venture Capital Investment ($M)
|
|||
| Region |
Q1 2008
|
Q1 2007
|
% Change
|
|
The following regions are ranked by their percentage change in venture capital investment in biopharmaceutical companies:
|
|||
| Philadelphia |
5.1
|
282.9
|
- 98.2
|
| Seattle |
5.9
|
58.9
|
- 90.0
|
| Route 128 |
43.3
|
303.7
|
- 85.7
|
| Research Triangle |
13.8
|
63.5
|
- 78.3
|
| Indianapolis |
6.3
|
24.5
|
- 74.3
|
| Orange County |
0.7
|
2.5
|
- 72.0
|
| Peninsula/ South Bay |
91.6
|
275.3
|
- 66.7
|
| East Bay |
33.1
|
95.0
|
- 65.2
|
| San Diego |
172.7
|
447.0
|
- 61.4
|
| San Francisco |
39.0
|
36.4
|
+ 7.1
|
| Madison/ Milwaukee |
18.7
|
11.0
|
+ 70.0
|
| Other NC |
12.7
|
3.0
|
+ 420.0
|
| Denver-Boulder Metro |
85.0
|
12.3
|
+ 691.0
|
| The following regions recorded no venture capital investment in Q1 2007: | |||
| Boston |
39.0
|
0.0
|
—
|
| Atlanta |
30.0
|
0.0
|
—
|
| Montana |
28.0
|
0.0
|
—
|
| New Jersey South |
25.0
|
0.5
|
—
|
| Other Tennessee |
10.0
|
0.0
|
—
|
| Salt Lake City |
8.0
|
0.0
|
—
|
| Connecticut |
6.6
|
0.0
|
—
|
| Long Island |
5.0
|
0.0
|
—
|
| Other Maryland |
3.5
|
0.0
|
—
|
| New Hampshire |
3.2
|
0.0
|
—
|
| The following regions recorded no venture capital investment in Q1 2008: | |||
|
Twin Cities
|
0.0
|
1.4
|
—
|
|
Other Virginia
|
0.0
|
1.7
|
—
|
|
San Antonio
|
0.0
|
3.0
|
—
|
|
Detroit/ Ann Arbor
|
0.0
|
3.3
|
—
|
|
Cleveland Metro
|
0.0
|
5.0
|
—
|
|
Kentucky
|
0.0
|
5.0
|
—
|
|
Nashville Metro
|
0.0
|
5.0
|
—
|
|
New Jersey North
|
0.0
|
5.0
|
—
|
|
Other Florida
|
0.0
|
16.0
|
—
|
|
Houston
|
0.0
|
18.0
|
—
|
|
Baltimore
|
0.0
|
20.0
|
—
|
|
Portland Metro
|
0.0
|
20.0
|
—
|
|
New York City
|
0.0
|
31.0
|
—
|
|
Central Florida
|
0.0
|
45.0
|
—
|
|
Metro Chicago
|
0.0
|
60.0
|
—
|
SOURCE: Dow Jones VentureOne, Equity Financings for US Venture-Backed Companies, by Financing Type (2002-Q1 2008).
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Medical Device Venture Capital Investment ($M)
|
|||
| Region |
Q1 2008
|
Q1 2007
|
% Change
|
|
The following regions are ranked by their percentage change in venture capital investment in medical device companies:
|
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| Philadelphia |
0.2
|
12.1
|
- 98.8
|
| Atlanta |
4.5
|
20.0
|
- 77.5
|
| East Bay |
22.4
|
58.7
|
- 61.8
|
| Peninsula/ South Bay |
211.6
|
266.5
|
- 20.6
|
| Orange County |
92.2
|
115.0
|
- 19.8
|
| San Diego |
118.2
|
145.1
|
- 18.5
|
| Twin Cities |
23.5
|
28.0
|
- 16.1
|
| Route 128 |
47.7
|
55.7
|
- 14.4
|
| Phoenix Metro |
37.5
|
37.7
|
- 0.1
|
| Baltimore Metro |
20.5
|
15.5
|
+ 32.3
|
| San Francisco |
23.0
|
16.5
|
+ 39.4
|
| Pittsburgh |
5.9
|
1.6
|
+ 362.0
|
| Seattle |
63.0
|
9.5
|
+ 663.0
|
| Rhode Island |
11.0
|
2.7
|
+ 407.0
|
| The following regions recorded no venture capital investment in Q1 2007: | |||
| North Bay |
65.0
|
0.0
|
—
|
| Houston Metro |
25.0
|
0.0
|
—
|
| Jacksonville Metro |
25.0
|
0.0
|
—
|
| Dallas/ Ft. Worth Metro |
20.0
|
0.0
|
—
|
| Kansas City Metro |
8.0
|
0.0
|
—
|
| Detroit/ Ann Arbor |
6.0
|
0.0
|
—
|
| Madison/ Milwaukee |
4.5
|
0.0
|
—
|
| Boston |
4.0
|
0.0
|
—
|
| Santa Barbara/ Ventura |
2.5
|
0.0
|
—
|
| Other Mass. |
2.3
|
0.0
|
—
|
| Cincinnati Metro |
1.0
|
0.0
|
—
|
| The following regions recorded no venture capital investment in Q1 2008: | |||
| Connecticut |
0.0
|
0.8
|
—
|
| Columbus Metro |
0.0
|
1.6
|
—
|
| Research Triangle |
0.0
|
2.0
|
—
|
| Cleveland Metro |
0.0
|
4.0
|
—
|
| New Jersey North |
0.0
|
9.0
|
—
|
| San Antonio Metro |
0.0
|
10.6
|
—
|
| Portland Metro |
0.0
|
12.0
|
—
|
| New York City |
0.0
|
13.9
|
—
|
| Salt Lake City Metro |
0.0
|
21.3
|
—
|
| South Florida |
0.0
|
30.0
|
—
|
| New Hampshire |
0.0
|
35.0
|
—
|
SOURCE: Dow Jones VentureOne, Equity Financings for US Venture-Backed Companies, by Financing Type (2002-Q1 2008).