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VC Bets on European, Asian, Mid-East Life-Sci Shops Shrivel in Q1, Dow Jones Report Shows

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The broad decline in first-quarter life-sciences venture capital investment seen in much of the US was more than mirrored in many of the world's busiest biotechnology and medical device clusters, which recorded even sharper year-to-year declines during the first three months of 2009, according to a study by Dow Jones VentureSource.

Figures by Dow Jones VentureSource showed China and Israel recording double-digit quarterly biopharmaceutical VC declines exceeding that of the US' 21.3 percent drop. In addition, no biopharma investment at all was recorded in India during Q1 '09, compared with $10.6 million in the year-ago period. In Europe, France, Germany, and Italy surpassed the 21.3 percent VC tumble seen in the US, while Sweden, the Netherlands, and Austria either recorded smaller percentage losses or showed year-to-year gains (see chart, below).

On the medical-device front, China and India didn't record any venture capital investment during the period, while Israel, France, Germany, and the UK showed higher declines than the US, where VC spending plunged during the first quarter by 51 percent to $476.9 million from $972.3 million in Q1 '08, according to the report.

However, Denmark saw a smaller decline in equity investment than the US, at 46.5 percent, while Finland and the Netherlands captured venture investment this year after failing to attract capital in the year-ago quarter.

Gina Chan, research manager with Dow Jones Financial Information Services, told BioRegion News that the results largely reflected retreats from the VC market by investors due to the global financial crunch. The upheaval, which has all but frozen the credit markets, was also blamed in the US for what DJVS recorded as a 21-percent national drop in biopharma VC, a sharper 51 percent decline in medical device capital, and declines in most regions in the country tracked by DJVS and the MoneyTree Report of PricewaterhouseCoopers and National Venture Capital Association, using Thomson Reuters data [BRN, April 24]

"Whether it's in the US, Europe, China, or India, VCs are just focusing on supporting their established portfolio companies rather than taking new risks in new startup companies," which means a shift to investing in later-stage companies, Chan said. "People are playing a wait-and-see game right now, whether it's just supporting their existing portfolio companies, or just not investing at all, and just holding onto their capital.

"It's basically seed and early stage companies that are suffering the most," she observed, especially in budding industries like biopharma and medical device making.

As for the extent of pullback by investors overseas, Chan said healthcare sectors such as the biopharma and med-device industries "are still really, really new for folks in the emerging markets. It's just such a new thing for VCs that they're going to tend to focus on what they know, and that is software, [information technology], and traditional services like retail or consumer services."

"When you have a global economic downturn, it's likely that VCs will pull back, and the drop will be more in those countries versus those in Europe and the US," Chan said.

Asian declines in biopharma investment were less than those of the continent's overall VC market, which fell 75 percent from $6.9 billion in Q1 '08 to $1.7 billion in Q1 '09, according to Asian Venture Capital Journal data.

"Although deals in India and China overall are dropping, it seems like [venture capitalists] are focusing more on companies that are already generating revenue, such as in the retail or consumer-services sectors," Chan added.

But China and India hold longer-term promise for life-sci VC growth, according to Beyond Borders 2009: Global Biotechnology Report, released last week by Ernst & Young.

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"Stimulus activities on the part of the Chinese government, a key investor in the life-sciences industry, could give biotech and pharmaceutical concerns enough of a boost to sustain growth," the report said, noting that by 2020, China will boost to 2.5 percent from 1.3 percent in 2005 the amount of its gross domestic product devoted to R&D activity.

"A burgeoning middle class with greater access to medical care is also driving revenue growth for domestic and multinational companies," E&Y added.

Another long-term advantage for China, as well as India, in their efforts to attract investors, according to E&Y: The projection that more US and European life-sci companies will scramble to cut costs by doing business with companies in both Asian nations."

"As organizations in the West adjust to the recession, there could be new opportunities for Indian firms," MK Bhan, secretary to the government of India's Department of Biotechnology, said in an interview included with the report. "As Western firms move to reduce their costs, they are more likely to turn to Indian biotech companies to source their products."

But in the interview, Bhan also acknowledged that the economic woes of US and European countries — namely their ability to maintain investment cash — could also affect their potential trading partners in India: "In the short term, there could be some decline in export orders for India’s biotech products due to liquidity constraints in importing countries."

According to E&Y, investment in Indian companies zoomed from less than $10 million in two deals in 2006 to just over $120 million in nine deals during 2008.

Israel's 84-percent drop in quarterly year-to-year medical-device investment exceeds its 72-percent decrease in biopharma, though the med-device industry has traditionally been stronger there. Chan cautioned, though, that only a handful of deals took place during Q1, and that a clearer picture of Israel's life-sci VC activity should emerge as the year progresses.

"We'd like to see how it goes as the year progresses, versus just focusing on the four deals that were completed in the first quarter of '09 in Israel's healthcare sector," she said.

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