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MoneyTree Reports Overall Drop in Q1 Biotech VC Funding, But Smaller Declines in Boston and Bay Area Clusters

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The two largest life sciences clusters in the nation showed some of the smallest year-to-year declines in first-quarter venture capital investment in biotech and pharmaceutical companies compared with their counterparts among the next tier of large clusters and nearly all of the smaller ones, according to the quarterly MoneyTree Report released earlier this week.

Where medical device VC investment is concerned, however, MoneyTree's "Silicon Valley" (San Francisco Bay Area) and "New England" (Boston and Cambridge, Mass.) clusters showed year-to-year losses well in the middle of the pack among 18 US regions.

The Silicon Valley's $132 million in 12 med device companies is a 63.5 percent plunge from the $362 million in 31 companies recorded a year earlier, while the $42 million received by six New England companies is 46 percent below the $78 million won by 14 companies in 1Q '08. [See chart below].

Both clusters fared much better in biopharma investment, however, with Silicon Valley remaining the top US cluster with $210 million in venture capital, down a little over 16 percent from the $251 million racked up a year earlier. New England's $149 million in biopharma VC marked a nearly 32 percent falloff.

Yet both regions outperformed other large bioclusters, as defined by MoneyTree. The "DC Metroplex" that includes Maryland's Montgomery County saw only $400,000 in venture investment during Q1 '09, well below the $5.4 million recorded for Q1 '08. At the same time, the Northwest region that includes Seattle skidded to $6.8 million in VC funding awarded to three companies, down about 89 percent from $59.7 million to six firms. And the San Diego region saw $59.4 million in first-quarter 2009 capital invested in eight biotech companies, down 72.5 percent from the $216 million in VC awarded to 15 companies in the year-ago quarter.

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

VC market observers said the results reflected a result of the ongoing economic upheaval — namely a reluctance by venture capitalists to invest beyond their home regions during tough times

"In harder times, it in fact is … even harder to raise money in areas where there's kind of a sub-critical mass of presence. That's simply because people tend to retrench. People tend to also find their opportunities at lower prices in places where they previously thought were too crowded, and now all of a sudden they get to see very good deals in locales where there are lots of deals," said Noubar Afeyan, managing partner and CEO of the Cambridge, Mass., venture capital firm Flagship Ventures, answering a BioRegion News question during an April 17 conference call with reporters on the latest quarterly MoneyTree Report.

"I would say that it's certainly not going to get easier for various regions that are competing to surpass the critical mass of activity in this area. It's not going to be any easier over the foreseeable quarter than it has been," Afeyan added.

Flagship manages more than $600 million in early-stage funds, and invests in a portfolio of 50 companies, mainly in therapeutics, life-sci tools and diagnostics, and alternative or "clean" technologies such as biofuels.

Afeyan's view was echoed this past week separately by Stephen Sands, a managing director with Lazard Freres & Co.

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The Bay Area and Boston/Cambridge regions, he said, are "where the venture money is, and they'd obviously prefer to invest closer to home. They just have a lot of that happening on the coasts that sort of draws a lot of money there," sparked by the large concentrations of experienced biotech entrepreneurs and managers in both clusters, Sands said April 20. Sands spoke during a panel discussion on the state of the market for life sciences financing at the New York Biotechnology Association's 18th Annual Meeting, held at the New York Marriott Marquis hotel.

"The money goes where there is success," Sands told BRN in remarks after the panel talk.

Also in the top tier of bioclusters, he said, was the Greater Philadelphia region, where startups have been formed through VC firms like Quaker BioVentures, founded in 2003 using $20 million in state tobacco settlement funds.

Dow Jones VentureSource — which at deadline had not released detailed regional first-quarter life sciences VC results — did, however, show a 21 percent falloff in biopharma VC investment, to $723.1 million in 56 deals for the first three months of 2009 from $918.4 million in 69 deals in the year-ago period; and a 51 percent plunge in capital streaming into medical device businesses, from $972.3 million in 74 deals during the first three months of 2008 to $476.9 million in 42 deals in Q1 '09.

MoneyTree recorded similar trends, though different numbers. It showed $576.8 million invested in 81 biotech and pharma companies during the first quarter of 2009, down about 47 percent from $1.08 billion in 132 companies in 1Q '08. MoneyTree also showed a 61 percent year-to-year drop in med device VC, from almost $1.07 billion in 102 companies in the first three months of 2008, to $412.4 million in 53 companies in this year's first quarter.

'Stressed' Economic Times

Biotech was the second largest category of companies winning Q1 '09 VC investment according to MoneyTree; software was first at $614 million. For life-sci and all industries, the first quarter saw a larger proportion of later-stage deals — to 36 percent from 30 percent in the first quarter of 2008 — and a drop in the number of companies winning first-time funding to 132, the lowest number since the third quarter of 1994.

The change reflects the near-collapse of the initial public offering market, prompting later-stage companies to subsist on VC financing longer; as well as nervousness among venture capitalists, who mostly eschewed the risk of funding newer startups by investing instead in tried-and-true companies, said John Taylor, vice president of research for the National Venture Capital Association, on the MoneyTree conference call, and Jessica Pascucci, a research associate with Dow Jones Research, in a separate interview.

"Overall, we're in a very difficult and stressed economic time right now. I think everyone's trying to figure out what the future looks like," Taylor told reporters.

Taylor projected a comeback in early-stage financing later this year: "A number of deals were actually started in the first quarter. But it's taking longer to get the deals done. A lot of those deals are already closing in the second closing. So we would anticipate some improvement in the second quarter, with the time being especially difficult for deals where a new investor would be coming in.

"The venture industry is still open for business. It is still accepting business plans," Taylor added.

Afeyan said the larger drop-off in medical devices reflects the lengthening of investment periods before an exit. "Absent high-visibility, large exits, I think people are being a little bit careful with the quantity of investments they take on. And I think they're going to be looking for, probably in that case, more acquisition-type exits to get back in a bigger way."

In biopharma, by contrast, Afeyan said, "we see continued very strong interest in novel breakthrough therapeutics. Certainly the pharmaceutical industry, while consolidating, continues to be doing deals with biotech companies. And that, in turn, is really driving whatever appetite there is in taking technology risks in our sector, and that, we expect, will continue."

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Also, biopharma companies are seeing more market demand for lower-cost drugs and tech platforms "that will fare well in a healthcare cost-containment era" last seen in the 1980s, Afeyan added. "Technology that can help diagnose diseases earlier, or follow treatments and make sure that they are cost effective, are getting a lot of attention."

Pascucci cited figures showing therapeutics investment accounted for $472.4 million of the biopharma total recorded by Dow Jones VentureSource, followed by pharmaceuticals with $144.7 million. Among med device investment tracked by DJVS, invasive devices secured the most funding with $184.6 million, followed by minimally- and non-invasive devices, with $139.4 million. The number of deals in each category was not immediately available.

The sharp decline in med device investment took its toll on clusters anchored by makers of medical instruments. The Southwest — which includes Arizona and its anchors in the med device (WL Gore & Associates) and research/testing laboratory (Covance) segments, saw VC investment in devices nearly collapse, from $56.8 million to a single $2 million deal by SalutarisMD. The Tucson, Ariz., medical-device received $1.5 million from Translational Accelerator, Arizona's first venture capital firm focused on financing early-stage life-sci companies; and the remaining $500,000 from the Tucson nonprofit angel investor network Desert Angels.

Michael Voevodsky, CEO of SalutarisMD, told the Arizona Republic in March that his company was developing a product designed to address "a worldwide issue in ophthalmology," but has declined to elaborate, citing competitive reasons.

Last year's number was buoyed by two eight-figure med device deals: The $22.5 million received by Ulthera, a Mesa, Ariz., spinoff of Guided Therapy Systems that makes ultrasound-based skin-repair devices; and the $15 million deal won by Cayenne Medical, a Scottsdale, Ariz., company whose platform technology is designed to assist in soft tissue ACL reconstruction.

San Diego showed the next steepest falloff of about 89 percent, to $12.5 million in Q1 '09 from $112 million a year earlier; while the DC Metroplex crested in a year from $22.8 million to $3 million, down roughly 87 percent.

In an interview last week, Matthew Hudes, US managing principal for Deloitte’s biotechnology practice, offered a possible explanation for the DC region' s VC declines — the inability of Maryland to generate startup companies across the life sciences, which he attributed to smaller amounts of venture capital invested in Maryland firms compared with those of top-tier clusters, and the large presence in Maryland of government agencies, especially the National Institutes of Health and the US Food and Drug Administration. [BRN, April 17].

That phenomenon, Hudes said, explained why 71 percent of Maryland companies surveyed by his firm reported they were at risk for running out of cash in a year; 76 percent in two years. By comparison, in the San Francisco Bay Area, 51 percent said they faced the risk of running out of cash within a year; 56 percent within two years. Massachusetts fared slightly better, with 49 percent of the Bay State's 83 public life sciences companies saying they had a year of cash on hand, and 55 percent, two years.

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