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MoneyTree: Nation's Biggest Bioclusters Record Declines in VC Spending in Q2

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By Alex Philippidis

The nation's two largest life-sciences clusters joined most of the US in recording declines in venture capital investment in biotechnology and pharmaceutical companies during the second quarter, according to the quarterly MoneyTree Survey released this week.

The period also saw an even sharper falloff in medical device investment, , reflecting continued weakness in the market for financing startups as the economy continues to slump, the report notes.

The San Francisco Bay Area and Boston/Cambridge, Mass., fared better in biotech activity than almost the entire next tier of large life-sci clusters, but worse than several up-and-coming regions, which saw either smaller year-to-year losses, or actual gains (See chart below).

VC activity in MoneyTree's Silicon Valley region, which includes San Francisco and its suburbs, fell 34 percent in the current second quarter from the $283 million recorded during the second three months of 2008. However, it remained the nation's top biocluster with $186 million invested in 15 life-sci companies during Q2 '09.

And based on numbers of companies funded, the New England region, which includes Boston/Cambridge, came in first with $169 million spread among 18 bets, second in dollars to the Bay Area. That amount is down 19.5 percent from Q2 '08, when 24 companies received a total $210 million.

The two megaregions finished on top in medical device investment, with the Bay Area recording $164 million in 16 companies during the second three months of 2009. That amount of investment is 57 percent lower than the $381 million won by 29 companies during the year-ago quarter.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said biotech and med device companies should be encouraged by the 48-percent uptick in investment in their sectors since the first quarter, when total combined investment barely surpassed $1 billion.

"Looking at the landscape here in Silicon Valley, where I'm based, the life-sciences sector has remained very vibrant, even through this downturn," Lefteroff said during a conference call with reporters. "So that tells me that there's still a huge demand for venture capital out there. The money can still be put to work. It's just that the areas that are being invested have to be primarily areas that have fundamentally sound business cases for liquidity, and other things."

New England, by contrast, finished 78 percent above its Q2 '08 level, with $111 million versus $62.3 million, even though the number of companies stayed flat at 11. MoneyTree defines New England to include all of Massachusetts, Maine, New Hampshire, Vermont, and Rhode Island; and seven of eight Connecticut counties (Fairfield County is joined with the New York metro area).

"Massachusetts has historical strength in the [med device] category, so I think it kind of plays to Massachusetts' strength. I also think you've seen investments around combination device-drug products,” Michael A. Greeley, general partner with Flybridge Capital Partners, a Boston-based, early-stage venture capital firm with $560 million under management, told BioRegion News. “There's a lot of activity up here now, as well as a lot of interesting drug delivery investments. And I think you've seen a fair bit of diagnostics/detection technologies, and I think that gets captured in the device numbers."

One example of a 2Q med device financing deal: Interlace Medical of Framingham, Mass., in June raised $20.5 million in a Series C round intended to help the company commercialize a minimally invasive system for outpatient removal of polyps and fibroids. Boston-based HLM Venture Partners joined Baird Venture Partners, Hambrecht & Quist Capital Management, and Aperture Venture Partners in the round, along with two previous investors, Spray Venture Partners, which is based in Newton, Mass., and New Leaf Venture Partners.

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Greeley said many investors have rotated away from biopharma deals by investing in health information technology, given the $787 billion American Recovery and Reinvestment Act, and to medical devices that may have shorter, more certain regulatory paths.

"They may not be that much less capital intensive [than biopharma companies], but there's a sentiment that investors are looking for more certainty of success," Greeley said.

"In an environment where investors are so risk averse, and they're looking to fund near-term milestones, those just aren't business models that are conducive to that investment strategy,” Greeley added. “You have long horizons [to liquidity] with very uncertain, almost binary outcomes: Either it's an approved product, or it's not."

Rocky Mountain High

This quarter's biotech results saw a new number-three, thanks to an unprecedented nine-figure VC deal for a startup biotech company.

Colorado, which usually finishes in double-digit millions, ended Q2 with $164 million invested in four companies. However, one of those companies was a Boulder developer of anti-cancer agents, Clovis Oncology, which announced a $145 million, series A financing round on May 21.

Participants in that deal included Domain Associates, New Enterprise Associates, Versant Ventures, Aberdare Ventures, Abingworth, Frazier Healthcare Ventures, and ProQuest Investments, as well as Clovis' management team.

A year ago Colorado racked up just $10.9 million in venture funding awarded to three companies.

While Colorado placed the lowest of seven regions that showed Q2 medical device investment activity, with $8.1 million in a single company, the Rocky Mountain state was the only region besides New England to record a year-to-year med device gain, up 9.5 percent from the $7.4 million awarded in the second quarter of last year.

Device Downturn

Twelve other regions showed year-to-year losses in med device investment — of which eight recorded not a single dollar during Q2 '09. The region recording the biggest such loss was Los Angeles/Orange County, where three companies received a total $23.5 million in VC money, down 83 percent from the $139 million won by eight companies in the year-ago quarter.

LA/Orange extends beyond the City of Angels and the OC to most of southern California excluding San Diego, the Central Coast, and the San Joaquin Valley.

Philadelphia Metro saw the next-steepest year-to-year med device loss, down 81 percent after finishing the second quarter with just $9.8 million, well below the $52.8 million of Q2 '08. The region stretches beyond the City of Brotherly Love, into eastern Pennsylvania, southern New Jersey, and all of Delaware.

The regional results reflect a broader national trend in which medical device investment has seen the sharpest downturn of any life sciences segment. Nationally, according to MoneyTree, the amount of venture capital invested in med devices slumped 38.2 percent, to $628.4 million in 75 deals in Q2 '09, from $915.6 million in 104 deals in the year-ago quarter.

By comparison, biotech investment fell 16.4 percent year-to-year, to $888 million in 85 deals during the second three months of this year, compared with about $1.1 billion in 127 deals in Q2 '08. One factor in the dip: While biotech finished first among all industry sectors with the highest second-quarter dollar amount of first-sequence financing, which typically comes in smaller amounts than in later stages — $172.9 million in 11 deals — the sector's amount of first-sequence financing fell about 40 percent from the $286.2 million in 37 deals racked up in the second three months of 2008.

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Med device first-sequence financing fared better, declining about 30 percent to $96.9 million in 16 deals, from $137.6 million in 30 deals a year earlier.

Lefteroff of PwC said seed- and early-stage financing in biotech and medical devices totaled about $940 million, or 62 percent of the just-over $1.5 billion in total investments made in both sectors.

"That bodes really well for the future funding of this sector, as so many early and seed-stage investments were made. Those will continue to receive venture capital funding for a number of years as they continue to mature," Lefteroff said. "The life sciences sector is one of the few sectors that still have a fairly steady stream of exit events. You see major pharma companies continuing to buy biotechnology companies. You see a lot of biotech-to-biotech mergers. You have seen some M&A deals continue in the medical device space."

More buyers exist, he said, for biopharma companies than med device companies — a trend he said helps explain why med device investment now trails investment in biotech.

Also, Lefteroff said, he saw a proverbial crack in the shuttered window of initial public offering deals, since 15 have been filed during the second quarter, versus none in the first quarter. "I think that the life sciences sector is one where investors are a little bit more optimistic about the ability to get companies liquid. And that's attracting this money to the space.

"The money has been raised by the venture funds. It's got to be invested somewhere," Lefetroff added.

David Jones, chairman/founder of Chrysalis Ventures, said investors should warm to life-sci companies because of their greater potential for cost-cutting than other technology industries: "You haven't seen that kind of cost reduction in the drug discovery landscape or the medical device [field] yet."

Another factor in biotech's high second-quarter numbers: The sector enjoyed three blockbuster venture capital deals totaling more than $250 million during Q2. Joining Clovis on MoneyTree's list of top 10 VC deals of the quarter were Hyperion Therapeutics of South San Francisco, which won $60 million in fifth-sequence financing, and Cempra Pharmaceuticals of Chapel Hill, NC, which racked up nearly $46 million in a fourth-sequence financing.

Overall, the nation saw almost $3.7 billion invested in 612 VC deals across all industries — less than half of the $7.6 billion invested in 1,059 deals during Q2 '08, though 15 percent higher than the $3.2 billion awarded in 603 first-quarter financings.

MoneyTree is compiled by PricewaterhouseCoopers with the National Venture Capital Association, using data from Thomson Reuters.

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