Months of economic and financial market upheaval have caught up with most life-sciences venture capitalists as nearly 75 percent of US bioregions have reported double-digit year-to-year declines in both the amount of money invested and in the number of deals executed, according to fourth-quarter figures released by one VC activity tracker last week.
Thirteen of 18 regions tracked by Dow Jones VentureSource recorded drops in biopharmaceutical VC activity during the final three months of 2008, while three regions showed increases and two were unchanged.
Regional year-over-year declines for biopharma investment were on average larger than those for investment in early-stage medical device makers; 10 of the 18 regions showed decreases, five showed increases, and three went unchanged (See accompanying chart, below).
During Q4 '08, Dow Jones VentureSource said venture capitalists invested $706.9 million in 68 biopharma company deals, down 53 percent from the more than $1.5 billion placed in 97 deals during the same three months of 2007.
Overall medical device investment fell more than 20 percent during the period to $624.4 million in 50 deals from $784.2 million in 60 deals in the year-ago period.
"I think it is mainly the economy," Jessica Canning, Dow Jones VentureSource's director of global research, told BioRegion News last week. "There's so much hesitation in the market right now. Venture investors look at five- to 10-year investments in these companies, and so they're looking very long term. Trying to understand and estimate where the economy will be for these companies in five to 10 years is probably causing a little bit of hesitation in venture investment right now."
That hesitation, she added, applies both to early and later-stage investments in companies, many of which are now five to seven years old. Such companies, Canning said, would typically have gone public by now, but the generally moribund market for initial public offerings — and in particular for life-sciences and healthcare companies — has compelled entrepreneurs to continue pursuing venture capital instead.
"The venture investors have held on to [their portfolio companies] a lot longer than they used to," Canning said. "The question is, 'Is it better to invest in a brand-new company that has long-term potential, or a company that is toward the end of its life cycle, at the peak of its growth?' That's the real question that a lot of venture investors are looking at right now."
Surprisingly, bets on companies in regions that have traditionally led in biopharma investment — including New England and its Route 128 sub-region, San Diego, and San Francisco Bay Area — have fallen below the national average during the fourth quarter of 2008, according to Dow Jones VentureSource.
For instance, VC investment in San Francisco Bay Area-based life-sci startups slid nearly 40 percent year-to-year, according to the survey. Those trends could not be immediately explained by Canning. However, she said the comparatively smaller decrease in med-device investment suggests that investors are becoming wary of biopharmas because of the increasing amount of time it takes a drug to win approval in the US.
That was evident in the nation's two largest life-sci clusters.
The Bay Area, which continued as the US region with the greatest share of life-sci investment in the fourth quarter, recorded $218.8 million invested in 15 biopharma companies.
The region also saw $220.9 million invested in 13 medical-device makers, a change for the region in which drug developers have long enjoyed a lion's share of venture capital. For instance, for all of 2008, VCs invested $785 million in 43 biopharma deals in the Bay Area compared with $238.6 million bet on 24 med-device deals.
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Med device investors outspent their biopharma counterparts by a larger margin in the Route 128 region, which takes in Boston, neighboring Cambridge, Mass., and their suburbs. According to Dow Jones VentureSource, the region saw seven deals totaling $102.2 million in the final three months of 2008, up from $84 million in five deals in Q4 '07.
Biopharma investment, by comparison, reached only $70.2 million in nine deals during Q4 '08, well below the $349.7 million racked up in 17 biotech and pharma deals in the year-ago quarter.
Some traditional biopharma investors and others interested in the broader healthcare sphere, Canning added, have shifted their focus to medical software companies, which traditionally require less time than drug or device makers for a return on investment due to the absence of a federal review process for new software.
Any such interest, however, wasn't enough to stem an exodus of investment from the sector during Q4 '08 as investment in medical software plunged to $57.3 million in four deals from $163.9 million in 18 deals. However, investment in med-software companies for all of 2008 rose nearly 17 percent to $354.4 million from just over $303 million in 2007. An expectation of stronger returns from companies scrambling to fulfill federal and state mandates for electronic medical records "might be part of" the reason for the uptick, Canning told BRN.
"It might be that the venture investors are looking to diversify their portfolio in this area, and look for new and upcoming industries," Canning said.
While Boston's established Route 128 region joined New York state and up-and-comer Colorado in recording sizeable double-digit gains in medical-device investment during the fourth quarter last year, several other up-and-coming regions that have anchored their life-sci efforts on activity in that sector — including Austin, Tex., Florida, and southern California — saw year-to-year declines of more than 75 percent.
San Diego, for example, went from more than $79 million in three med-device deals during the final three months of 2007 to no deals in Q4 '08. San Diego only fared slightly better on the biopharma side, falling from $225.6 million in 11 fourth-quarter 2007 deals to just over $51 million in five deals.
But San Diego's 77 percent year-to-year decline in biopharma investment was better than that of Boston's Route 128, which fell about 80 percent; Washington state, which declined about 81 percent; and all of southern California, which slid about 83 percent.
The steadiest biopharma performers during the fourth quarter of 2008 were North Carolina's Research Triangle region and the "Potomac" region that comprises Maryland's bio cluster. VC investment in Research Triangle life-sci shops grew 52 percent to $90.6 million, though the number of deals stayed flat year to year at four. By comparison, the Potomac region's $19 million reflected three deals, one more than the two worth $10 million the sector recorded in Q4 '07.
That reflects a trend Canning said was typical of tougher economic times: Investors in areas where deal-making stayed flat with last year's level typically gravitated to less-risky but costlier later-stage investments in companies with which VCs are familiar, as opposed to placing bets on early-stage companies with shorter track records.
That appears to hold this year, based on overall VC investment data: Investment in later-stage companies of all types jumped as a share of the total number of deals by 4.5 percent from 34.7 percent in the fourth quarter of 2007 to 39.3 percent in the same period of 2008, according to Dow Jones VentureSource, which did not break down that data by industry.
One finding that can be gleaned from the life sciences, however: All but one of the regions that saw decreased VC investment in biopharma, and all but two of those with less year-to-year capital going to medical-device makers, saw corresponding drops in the number of deals made.
But four of the five year-to-year gainers in the medical-device area generally saw more deals in the sector than in the final three months of 2007, as well as larger amounts of capital invested. Only New York metro
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held at a single quarterly deal, even as the amount invested rose over the past year from $19 million to nearly $51 million.
Dow Jones VentureSource is one of two sources of national and regional venture capital data that release information quarterly. A second VC market tracker — the quarterly MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, with data by Thomson Reuters — is set to release its fourth-quarter figures on Jan. 24.