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US-Wide VC Spending Falls 3 Percent in Q3; Life Science Clusters Record Big Declines

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Private-equity capital destined for biotechnology and pharmaceutical companies nationwide contracted 2.7 percent in the third quarter due in part to a dip in seed and series A venture capital financing, and despite a steady supply of VC support at later stages and a slight uptick in overall seed-round money, according to Ernst & Young and Dow Jones VentureOne.
 
The figures, released last week, also showed significant declines in some life science clusters. Nationwide, VC spending fell to 66 deals totaling almost $1.42 billion in 22 sub-regions from 73 deals totaling around $1.46 billion year over year.
 
E&Y/VentureOne’s figures are less dire than nationwide VC statistics released Oct. 22 in PricewaterhosueCoopers’ quarterly MoneyTree Report and the National Venture Capital Association with Thomson Financial. PwC and partners showed a total $1.1 billion in 99 deals, flat with $1.1 billion in 103 deals in the year-ago quarter.
 
The number of series A biotech and pharma deals during the third quarter slipped 9.3 percent to 196 deals from 216 a year earlier, while seed rounds fell 13 percent to 34 from 39, and post series B deals nosedived 35 percent to 22 from 34, E&Y showed. However, series Bs rose 5 percent to 224 from 213,  keeping the total number of post-A round deals at 246, just one off last year’s pace.
MoneyTree at deadline had not released biotech-specific round-by-round figures broken out by region, but is expected to do so shortly.
 
E&Y’s report showed that two of the nation’s top three life-science clusters posted declines in third-quarter VC financing. VC spending among companies in San Diego, the West Coast’s second-largest life-sciences cluster, plummeted almost 90 percent to $28 million in six third-quarter deals from $221 million in eight deals a year earlier.
 
Also feeling thinner was the Boston region, the East Coast’s top life sciences cluster, in which third-quarter life-science investment fell by nearly half to $56 million from $98.3 million year over year. The drop came despite a single-deal increase in the period, to six from five year over year.
By comparison VC spending in the San Francisco Bay Area companies increased 7.6 percent to $190.6 million among 14 deals from $177.08 million among 13 deals a year ago.
 
The biggest year-over-year jump was recorded in South Florida, where E&Y showed $500 million from a single undisclosed deal, a 2,000-percent jump from the $250,000 recorded during the same period one year earlier.
 
Cumulative Strength
 
Scott Sarazen, market leader for E&Y’s Global Biotech Center, and Rebecca Fitzgerald, E&Y Venture Capital Advisory Group Leader for the Northeast, told BioRegion News that the declines in Boston and San Diego will have no long-term effect on their standing among the nation’s top biotech clusters.
 
Sarazen said that the number of VC deals during the first nine months of 2007 increased in all of the nation’s top three clusters - the Bay Area, Boston, and San Diego - while total dollar amounts rose only in the Bay Area.
 
Among those figures, Bay Area companies led the nation with a 20-percent increase in third-quarter investments, which rose to $826.7 million in 48 deals from $689 million in 40 deals in the year-ago period. Next highest was San Diego, which grew 9 percent to $550.4 million in 24 deals from $461.8 million in 19 deals. Boston came in third, whose private-equity deals slipped 2 percent to $393.9 million in 24 deals from last-year’s $401.82 million in 18 deals.
 
“If you look at where most of the investments are in this industry, they’re pretty much Boston, San Francisco, and San Diego,” he said. “That’s where most of the investments happen. At any particular time, depending on what technology is hot, that’s where the investments are going.”
 

“It used to be an investment where you might invest for a couple of years [in medical device companies. Now] we’re seeing it’s taking more investment to get these companies to a liquidity event or an exit.”

Those three clusters also finished in the top three among PwC’s list of life science regions. The “Silicon Valley” region that includes San Francisco received $299 million in 22 deals, just 1 percent above the $296 million in 25 deals recorded in Q3 2006; followed by San Diego with $195 million in 11 deals, a nearly 60 percent gain from $122 million in seven deals; and “New England” dominated by the Boston-Cambridge, Mass., region, with $145 million in 25 deals, down 42 percent from $250 million though the number of deals rose from last year’s 19.
 
As for Boston’s Q3 slip, “I would be pretty confident there’s no underlying trend here,” Sarazen said. “It’s just a matter of where the investments are being made.”
 
Sarazen and Fitzgerald offered two possible explanations for Boston’s financing dip: The timing of VC deals may not have allowed for their announcements. And, increasingly, he said, Boston-area VCs have shown interest in doing deals outside the region.
 
Those factors, Sarazen said, may also explain the sharp drop in activity recorded for the nation’s highest cluster after Boston as measured by E&Y. Pennsylvania’s VC financing plunged to $86.3 million in 11 deals from $396.58 million in 25 deals. As with the Boston’s and San Diego’s numbers, Sarazen cautioned against reading the third-quarter figures as a sign of weakness for the Keystone State.
 
Pennsylvania’s Q3 performance, and a similarly sharp falloff in the Philadelphia region (to $49 million from $183.7 million) are likely to reinforce concerns raised publicly earlier this month by a group of business leaders that Greater Philadelphia could and should do more to commercialize technologies developed at regional universities and research institutions.
 
Those concerns surfaced in the 36-page report “Accelerating Technology Growth in Greater Philadelphia,” issued by CEO Council for Growth, affiliated with the 5,000-member Greater Philadelphia Chamber of Commerce.
However, divided about whether they shared the report’s view were attendees and panelists of Biotech 2007, the annual meeting held in Philadelphia Oct. 8-9 by Pennsylvania Bio, BioNJ (formerly the Biotechnology Council of New Jersey), and the Delaware BioScience Association [BioRegion News, Oct. 15].
 
Looking at cumulative totals for the first three quarters of 2007, the Philadelphia area took a 6-percent hit in financing, which slid to $378.4 million among three deals from $402 million among 12 deals.
 
E&Y’s third-quarter report showed medical device investment nationwide increased 19 percent to $830.3 million from $695.6 million, even as the number of deals fell to 48 from 69, respectively. According to Sarazen, that drop reflects investor skittishness about the increasing length of regulatory reviews, forcing them to sink more money into companies — hence the increase in VC financing — as they wait longer for returns on their investment.
 
Year-to-date, investment in medical devices nationwide rose 44 percent to $2.8 billion from almost $2 billion, according to E&Y.
 
“It used to be an investment where you might invest in for a couple of years,” Sarazen said. “We’re seeing it’s taking more investment to get these companies to a liquidity event or an exit.”
 
The increased medical device investment has not cannibalized capital investment from life science companies, he added.

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