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PwC Report Finds More Life Science VC Deals, But for Smaller Amounts, In Q2 2007

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The number of second-quarter biotech and pharmaceutical venture capital deals rose over last year, but an improved market for startups resulted in less money overall being invested in life science companies than in the same period of 2006.
 
The quarterly MoneyTree Report — released Aug. 6 by PricewaterhouseCoopers and the National Venture Capital Association with Thomson Financial — recorded a total of 122 venture capital deals totaling $1.18 billion in 20 sub-regions of the US. That’s up from 112 deals, but down 2 percent from $1.2 billion, measured during the second three months of 2006.
 
Tracy Lefteroff, global managing partner for life science industry services with PricewaterhouseCoopers, said the dip in capital invested reflected more deals being completed by earlier-stage companies needing smaller “seed” and first financing rounds, which typically are smaller than the later-stage rounds of more mature companies.
 
“It’s just the timing of the life cycle of the companies that got funded, because clearly the demand for cash by biotech companies has not changed,” Lefteroff said in an interview. “We probably had some earlier-stage companies that didn’t need the $50 million rounds of capital that you see in mid- and later-stage biotech companies.
 
He said the numbers aren’t a sign that biotechs will make do with less going forward: “They’re going to need the same amount of money long-term.” During the first round, companies typically receive between $15 million and $25 million, and much more than that in later rounds.
 
Two other factors in biotechs seeking less venture capital, according to Lefteroff: An improvement in the initial public offering market and an increase in merger and acquisition activity.
 
“Money follows returns. Where you’re seeing IPOs and M&A activity, you’re going to see people continue to invest in those sectors. That’s part of the reason that people are looking at life sciences as very attractive now. You have a lot of M&A activity as well as a lot of IPO activity. You have the best of both worlds right now.”
 
The IPO market comeback following years of spotty performance has made public financing more attractive to some than VC money. That can be seen in the IPO pipeline: As of July 31, Ernst & Young spokeswoman Katie Johnston told BioRegion News, four biotech companies were in registration to raise $2.4 billion, while 19 pharmaceutical companies were in registration to raise $2.7 billion. Pharma is now the second most active sector in the IPO sphere after information technology, which has 20 companies in registration to raise $3 billion, according to E&Y.
 
Several biotechs filed IPOs during the second quarter, including: MAP Pharmaceuticals, a Mountain View, Calif., developer of an inhalable drug to treat pediatric asthma; ZARS Pharma, a Salt Lake City maker of pain management drugs; and Cambridge, Mass.-based Targanta Therapeutics, a developer of antibiotics for infections contracted in hospitals.
 
Four additional life science companies have filed IPOs since the third quarter began July 1: Talecris Biotherapeutics, a maker of plasma-derived protein therapeutics based at Research Triangle Park, NC; Sucampo Pharmaceuticals, a developer of constipation drugs in Bethesda, Md.; WuXi PharmaTech, a Chinese contract research organization; and Archemix, a Cambridge developer of therapeutics based on aptamers — DNA, RNA or peptide molecules that bind to proteins and other molecular targets.
 
Shanghai-based WuXi priced at $14 per American depositary share on its first day of offering 13.2 million ADS Aug. 8, well above its range of $11 to $13 per ADS offering price. Six days earlier Sucampo did less well; while it raised $28.4 million, it priced its 3.75 million shares at $11.50 each, below its proposed $14-$16 price range. And while shares traded as high as $13.50 on Aug. 3, Sucampo closed on Aug. 9 at $11.59.
 
Art Pappas, managing partner with Pappas Ventures in Durham, NC, said a growing number of investors are using IPOs not as the traditional close-out of their investments in a business, but as a means of financing further investment. The change reflects a growing use of “tranching,” a form of structured financing that creates different investor classes, each of which receives cash flow from the company being invested in.
 
“We as VCs are certainly using the IPO market more for a financing vehicle as opposed to a true liquidity vehicle. Say you have a three-tranche deal: The third tranche can roll directly into an IPO. We and obviously management would be very much in favor of that. It allows us to continue to hold our position,” Pappas said.
 
“I can’t recall a deal that we’ve done in the last 18 months that does not have some kind of tranching or some kind of a commitment level to be part of the next series financing. A lot of that’s being done so we’re not wasting management’s time in progressing the programs of the company or the strategy for the company,” Pappas added.
 
How deals are tranched can affect how much capital flows to early-stage companies at various financing stages — which in turn affects the quarterly reporting of deals by PwC or E&Y, he added.
 
M&A Stampede
 
Also, Lefteroff said, growing biotechs continue to merge with or get acquired by pharmaceutical and biopharma giants eager to replenish their product pipelines more quickly and cheaply than through traditional R&D efforts.
 
“Some of these companies that would have done rounds of financing didn’t have to, because they got bought up by Pfizer or Merck or one of the other big pharma companies,” Lefteroff said.
 
During the second quarter of 2007, 37 biotech companies agreed to mergers with or acquisitions by other companies totaling $23.7 billion, according to Irving Levin Associates, a New Canaan, Conn., publisher of research data on healthcare M&As, IPOs, and venture capital financing.
 

“Money follows returns. Where you’re seeing IPOs and M&A activity, you’re going to see people continue to invest in those sectors. That’s part of the reason that people are looking at life sciences as very attractive now.”

But while the number of M&A deals involving biotechs during the second three months of 2006 was just slightly lower at 33 deals, the value of those deals was a lot smaller, at only $5.2 billion. This year’s value figure was skewed by AstraZeneca’s $15.2 billion acquisition of MedImmune.
 
“For the past four quarters, deal volume has been rising. Dollar volume has been too,” said Sanford Steever, an editor who follows the M&A market for Levin Associates. “From the buyers’ side, clearly there are a lot of big pharma companies that want to get their hands on some late-stage biotech drugs and drug candidates to fill up their pipelines.”
 
From the sellers’ side, he added, “biotech as an industry has not been profitable. It’s on the verge in the next three years or so of becoming profitable as a whole. And I think there are some companies that are buying biotechs just because they think that once the industry becomes profitable as a whole, valuations will change to being based on profits instead of potential profits. A lot of people believe that they’ll be paying more.”
 
Another large acquisition deal in the second quarter was Dutch-owned Qiagen’s $1.6 billion purchase of Digene. The deal, announced June 3, closed on July 30.
 
As with the second-quarter VC report of Ernst & Young and Dow Jones VentureOne, PwC and its partners recorded significant growth of capital investment in medical devices.
 
Lefteroff said it was doubtful that capital flowing to medical devices came at the expense of traditional biotech and pharma investments.
 
“We’re seeing more money come out of the IT space and move into life sciences. It’s not taking it away from other life science companies. If anything, it’s taking it away from other technology sectors that may not be performing at the level that you’re seeing life sciences perform at,” such as semiconductors, software, and telecommunications, he said.
 
The second-quarter MoneyTree Report was released two weeks after Ernst & Young and Dow Jones VentureOne issued their second-quarter venture capital report. E&Y/VentureOne recorded a total 100 VC deals totaling $1.5 billion in 29 sub-regions [BioRegion News, July 30] during the second three months of 2007, versus 77 deals totaling $1.36 billion in the year-ago quarter.
 
MoneyTree was to have come out July 23, the same day as the E&Y/VentureOne survey, but PwC and partners delayed the release, saying they needed to re-examine the data from Thomson Financial following an unspecified technical problem.
 
“We took the time we felt was necessary that when we released numbers, that they were good numbers,” Lefteroff said. “We wanted to make sure that they were accurate. The last thing you want to do is release numbers that aren’t defensible.”

 
 
MoneyTree Report’s Regional List of Biotech
Venture Capital Awards, Second Quarter 2007
Region
Amount
($M)
Companies
Deals
Biotech rank by $ raised(1)
San Diego
194.8
11
11
1
San Jose
160.8
12
12
5
Boston
144.7
25
25
1
San Francisco /Berkeley
138.0
10
10
2
New York
102.1
6
6
1
Washington Metroplex
78.9
8
8
2
Great Lakes
65.6
6
6
1
Research Triangle
57.6
5
5
1
Seattle
44.2
4
4
3
Pittsburgh /Tristate
30.1
2
2
1
Philadelphia
26.6
6
6
2
Denver
26.0
6
6
2
Dallas
20.6
1
1
4
Los Angeles
16.0
2
2
6
South NJ /West Pa.
13.3
1
1
1
Orange County
12.0
2
2
5
Atlanta
3.9
1
1
7
Austin, Tex.
1.7
1
1
7
Twin Cities
1.4
1
1
6
Rest of US
42.6
12
12
5
TOTAL
1,180.9
122
122
2
1) Measures biotech’s rank among industries receiving venture capital within a region. A “1” rank means biotech accounts for the greatest amount of VC money raised in the quarter; a “2” rank, second-greatest, etc.
SOURCE: MoneyTree Report, Q2 2007 PricewaterhouseCoopers and National Venture Capital Association with data by Thomson Financial.
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