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MoneyTree Report Shows VC Investment in Biotech Startups Slips 20 Percent in Q4

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Venture capital investment in early-stage biotechnology companies slid more than 20 percent in the face of the ongoing financial upheaval, according to newly released fourth-quarter statistics.

The declines, represented as dollar amounts and the number of deals completed, also showed that in the final three months of 2008 eight of 23 states with biotech VC activity recorded decreased funding over the year-ago period, with the steepest slides recorded in established biocluster states, according to the quarterly MoneyTree Report. Fourteen states showed gains, the report showed (See accompanying chart, below).

Meantime, of medical device and equipment makers, 11 of 22 states with a VC presence in that segment recorded decreased funding in Q4 '08 over Q4 '07, while nine states showed gains (See accompanying chart, below).

According to MoneyTree, during the fourth quarter of 2008 venture capitalists invested just over $1 billion in 109 biotechnology companies, down more than 20 percent from the nearly $1.3 billion placed in 131 deals during the same three months in 2007.

Among industries, biotech was the second-largest investment category during the fourth quarter, trailing the top-ranked software sector by $4 million, said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture capital practice, which released the data, based on data by Thomson Reuters, with National Venture Capital Association over the weekend.

By comparison, total medical device and equipment investment fell more than 46 percent during the fourth quarter of 2008, to $553.7 million in 76 deals, from nearly $1.3 billion in 91 deals in the year-ago period.

The quarterly life-sci data was part of a fourth quarter that saw $5.4 billion in 818 VC deals across all industries, nearly 23 percent down from $7 billion in 963 deals recorded in the year-earlier period. The quarter also capped a year that saw MoneyTree's first year-to-year decline in VC investment since 2003.

"I've got to believe that it's pretty much entirely due to the economy. This continues to shake a lot of people, and you're seeing at every level people doing a little sitting on their hands," Bob More, a general partner with Frazier Health Ventures, a VC firm specializing in the biopharma, medical device, and healthcare sectors, told BioRegion News last week.

"People are just trying to find the bottom of where things are headed in the economy, and to understand the foundation from which they are working," he added.

That search isn't likely to end in the next three to six months, since the economy is not expected to even begin recovering by then, said More. That factor hurts earlier-stage startups, since during tough economic times investors gravitate instead toward safer later-stage companies with which they are more familiar.

"What you are seeing from venture capitalists right now is a little bit of them making sure that their portfolios are well funded and taken care of. They're trying to identify the great companies in their portfolio, and make sure they have access to capital," More said. "There's always the concern that early-stage research, the basic R&D, is not getting funded, and I don't think venture capitalists are looking to fund that right now."

Another complication for early-stage companies seeking VC funding, More said, is that they are seeing increased competition for that money from public companies pursuing private investment in public equity, or PIPE, deals.

"There's a little bit of a cross-competition between private companies and public companies for funds right now, and there are a lot of venture capitalists that do PIPEs," he said. "We're certainly hearing a lot of them looking in the public market for PIPE opportunities."

Frazier has raised seven investment funds with commitments totaling over $1.8 billion since it was founded in 1991, and is now making investments using a $600 million fund formed in 2008.

More could offer no explanation for why medical-device companies showed steeper investment drops than biotechs, but did say the med-device sector was no less popular than biotech with life-science or healthcare investors. He cited as an example that he and other professionals in his firm are considering funding an undisclosed med-device maker.

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"The device companies that can manage their spending well and [that are] trying to get through this period of difficult fundraising are doing so. I don't see it as a major threat where great companies aren't getting funded," More told BRN. "I think the very good companies are getting funded, and certainly in times like this, that's what you worry about."

Speaking during a PricewaterhouseCoopers conference call that reported the fourth-quarter data, More said he was optimistic about VC investment in biotech, medical devices, and the broader healthcare industry.

"There are a lot of important problems to be solved, and I believe most of these problems are going to be solved by the entrepreneurs," he said. "I think the pharmaceutical companies and the large medical-device companies have their expertise on distribution and allocation of those resources. I don't think they're great at the new, big innovations. I think we're going to continue to lean on the entrepreneurs to do this.

"The companies with innovative therapies, that are going to be bringing drugs to patients, those will get funded, [though] it may not be at the levels that people had hoped to be rewarded at this point," More added. "There are great deals out there that are getting funded, and we're seeing them at every stage."

States of Denial

A state-by-state breakdown of the results by MoneyTree Report provided to BRN bore out what a region-by-region breakdown furnished earlier this month by Dow Jones VentureSource also found — namely that areas that have traditionally been the nation's leaders in biotech and medical-device VC investment fell below the national average in dollars invested [BRN, Jan. 19].

The nation's top two life-sciences states, California and Massachusetts, were among the quarter's biggest losers in VC investment, each recording bigger declines than Washington state, Minnesota, and Texas.

MoneyTree also supplied data in 17 regions, most of them multi-state, though four of which comprise sections of California, which, statewide, saw its biotech investment activity drop by 37 percent and its medical device investment plunge 54 percent during the quarter.

Most of this decline was felt in San Diego, which recorded a nearly 72-percent fall in biotech VC bets to $258 million in 16 deals. By comparison, more than three fourths of the $398.1 million invested in California companies, or $307.9 million, was placed in 23 companies in MoneyTree's "Silicon Valley" sub-region of communities in and around San Francisco.

Another $72.6 million was placed in nine San Diego region companies, followed by $15.4 million in two Sacramento/northern California businesses, with another two Los Angeles/Orange County companies receiving a combined $2.2 million.

During the fourth quarter of 2008, LA/Orange showed improvement in med-device invested, with $43.5 million placed in six companies, up 51 percent from $28.8 million in five companies a year earlier. LA/Orange still finished second in med-device investment to Silicon Valley, which recorded $157.6 million in 17 companies, down about 61 percent from the $403 million invested in 28 companies in the final three months of 2007.

The San Diego region racked up a single $1 million VC company in the final three months of 2008, far below the $16.1 million in three deals it enjoyed a year earlier.

Also falling year to year was life-sci VC activity in Massachusetts. The Bay State's biotech sector saw $218.9 million invested in 21 companies during the fourth quarter of 2008, down 17 percent from the $264 million collected by 25 companies a year earlier. Massachusetts saw an almost identical dip in medical device investment, from $68 million to almost $57 million, though the number of deals stayed the same during that period at seven.

More said he thought the dip in biotech megacluster states reflected greater interest by investors than in the past in how their portfolio companies operate, rather than where they are based.

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"I think people are looking for good, sound, fundamental businesses to invest in, and that may benefit, to a certain extent, some of the mom-and-pop companies that maybe have developed a medical device and have some sales and are moving along. Those might be outside the traditional areas for early-stage R&D," More said. "We are looking for growth equity opportunities where there may be some consolidation and putting things together, and I think that may benefit the non-traditional locales."

The biggest investment percentage gain among non-traditional med-device states in Q4 '08 was Michigan, which, according to MoneyTree, saw two deals totaling $16 million, up from a single $1.8 million deal in the final three months of 2007. Michigan also saw a small gain in biotech VC, up from $10.7 million in that period to $11.3 million in this past year's fourth quarter.

The strongest biotech VC gain was enjoyed by Colorado, which climbed from $5.5 million in Q4 '07 to $23.5 million in Q4 '08 despite the number of deals falling from four to two. In medical devices, however, the strongest showing was enjoyed by a traditional biopharma powerhouse.

Pennsylvania saw its medical device VC funding multiply more than seven-fold, to $85.9 million in Q4 '08 from just $11.3 in Q4 '07. But in biotech, Pennsylvania's amount of VC investment dropped by nearly 34 percent, to $37 million, as its number of deals dipped from eight to seven during the period, though still good enough for sixth place.

Where biotech is concerned, according to MoneyTree, several East Coast states finished strongly during the final quarter of 2008, including New Jersey, New York, North Carolina, and Maryland. But in medical devices, Maryland investment nearly disappeared year-to-year, while North Carolina plunged about two-thirds and New York didn't make this year's chart.

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