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With Vibrant VC Spending and Dry IPO Market, Regional Biotech Investment Trends Will Hold

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A robust venture-capital market combined with a sluggish IPO environment will ensure that the pecking order among the nation’s biotech clusters won’t change, venture capitalists and other VC market watchers concluded in separate interviews last week.
 
“I think it’s going to continue to make [the existing leading geographic] markets the key markets” for biotech activity, said Tracy Lefteroff, global managing partner for life science industry services with PricewaterhouseCoopers.
 
Lefteroff and other analysts believe that large biotech clusters, with their vast talent pools and acquisitive pharma populations, will continue to command the lion’s share of private equity as VCs continue to look for earlier exits.
 
Venture capital firms have invested more cash in more biotech companies in the first quarter this year than during the same period over the past two years, according to data released by PwC and the National Venture Capital Association with Thomson Financial. In fact, VCs invested more money in biotechs during the first quarter of 2007 than in the first quarters of 2005 and 2006 combined.
 
On the other hand, a sluggish initial public offering market has compelled companies to stay private longer in hopes that over time either the IPO market improves or they find a buyer.
 
PwC and the NVCA issued their latest quarterly MoneyTree Report April 24 with data by Thomson Financial. The report showed that 102 biotechs received a total of $1.5 billion in private-equity financing during the first three months of 2007.
 
By comparison, during the same period last year, 85 biotechs garnered $808 million in capital, while the first quarter of 2005 found 73 biotechs receiving $682.4 million. PwC also said its survey shows that biotech has now replaced software as the most attractive industry for venture capitalists.
 
Region-by-region results analyzed by PwC showed the Silicon Valley had the largest number of VC financing deals at 22, followed by San Diego with 18 and New England with 17. [See Table 1, below]. When investment amount was measured, San Diego topped the list with $359.77 million followed by New England with $309.88 million, then Silicon Valley with $276.98 million, for a total $946.63 million.
 
MoneyTree Report’s Regional List of Biotech Venture Capital Awards, First Quarter 2007
Region
Investment amount ()
# of deals
San Diego
$359.77
18
New England
$309.89
17
Silicon Valley
$276.98
22
Northwest
$141.66
9
Midwest
$104.50
7
Southeast
$103.62
10
Philadelphia Metro
$94.09
4
DC Metroplex
$34.68
6
NY Metro
$32.00
3
LA/ Orange County
$13.60
2
Texas
$10.75
2
Sacramento/ N. California
$6.51
1
South Central
$0.80
1
SOURCE: MoneyTree Report, Q1 2007 PricewaterhouseCoopers and National
Venture Capital Association with data
by Thomson Financial.
 
A day earlier, Ernst & Young and Dow Jones VentureOne released numbers showing 94 first-quarter VC financing deals in the “biopharmaceuticals” category, valued cumulatively at just over $2.3 billion. That compared with 70 deals totaling $861.5 million in the year-ago quarter, and 47 deals valued at $735.4 million for first-quarter 2005.
 
E&Y/VentureOne also found that the average size of venture financing rounds spiked up to $20 million in the first quarter from $5 million during the same period last year.
 
E&Y/VentureOne placed the Bay Area and the rest of the “Pacific Northwest” region on top with 23 VC deals valued at a total of $480.9 million. San Diego, Los Angeles, and the rest of the “Pacific Southwest” was right behind with $409.9 million among 17 deals, followed by Boston and the rest of the Northeast with $318.9 million spread over 15 deals. [See Table 2, below]
 
Ernst & Young/Dow Jones VentureOne
Sub-Regional List of Biotech Venture
Capital Awards, First Quarter 2007
Region
Investment amount ()
# of deals
Bay Area
$427.19
20
San Diego
$394.20
14
Peninsula
$280.79
15
Philadelphia
$268.70
4
Pennsylvania
$268.20
3
Boston
$207.35
7
East Bay
$95.00
3
Research Triangle
$72.80
4
Illinois
$60.00
2
Greater Seattle
$53.68
3
North Florida
$45.00
1
San Francisco
$36.40
1
New York City
$26.50
2
Potomac
$21.70
2
Maryland
$21.70
2
South Bay
$15.00
1
Colorado
$12.25
1
New Jersey
$7.50
2
Lexington/ Louisville
$5.00
1
Wisconsin
$4.49
2
N. Carolina/ S. Carolina
$3.00
1
Orange Co.
$2.50
1
Minnesota
$1.42
1
Los Angeles
$0.40
1
TOTAL
$2,330.77
94
SOURCE: Ernst & Young and Dow Jones VentureOne, Quarterly Venture Capital Report, first quarter 2007.
 
The nation’s top three biotech clusters based on investment and number of companies funded – the San Francisco Bay area, New England, and the San Diego region – have switched places during the last two years but remain far ahead of other US regions, according to both E&Y and PwC.
 
During the past two years, later-stage companies have taken in more VC cash than their startup counterparts, which is one reason why overall private equity investment has increased, PwC’s Lefteroff said.
 
Bryan Pearce, E&Y’s Northeast strategic growth markets leader, said another key factor is the increasing time from startup to investor exit, whether through IPO or a merger or acquisition. “As life and time-to-exit increases, the amount of capital going into companies also increases.”
 
Cash, but Don’t Carry
 
Pearce and Lefteroff agreed that a third reason for the jump in VC investment is the greater availability of capital.
 
“Over the last few years, there’s been a substantial amount of money that’s been dedicated to these sectors,” Lefteroff told BioRegion News last week. “And you continue to support those companies until you have a liquidity event. And that’s why you continue to see these dollars flowing in.”
 
For years that event has been the IPO. Indeed the number of new biotech stock offerings continues to grow: According to Burrill and Company, 20 biotech companies raised a total of $862 million through IPOs during the first quarter of 2007, compared with $303 million in six IPOs during the year-ago quarter and $289 million in six during the first three months of 2005.
 
But because low IPO per-share pricing has forced companies to wait for gains in the “aftermarket” period after going public, a growing number of biotechs and their investors now look to an M&A play as that liquidity event. According to E&Y’s new “Beyond Borders: Global Biotechnology Report,” the total value of mergers last year jumped 17 percent over 2005 to $18 billion. It was the second-highest total ever behind 2002, when Amgen shelled out $16 billion for Immunex.
 
“Investors realize there is a ready market for biotechnology companies: the large pharmaceuticals and large biotech companies that want to replenish their pipelines,” said Ivor Royston, a founding managing partner of Forward Ventures in San Diego.
 
“If you have a cluster of many biotech companies, obviously it’s going to really help the cluster develop. [But] it doesn’t help the cluster [if] companies are bought out and absorbed into other companies outside the cluster area,” said Royster, founder of Hybritech, which was acquired by Eli Lilly, and Idec Pharmaceuticals, which has merged into Biogen Idec.
 

“If you have a Boston or Cambridge biotech company acquired by a New Jersey-based pharma company, will the brain trust that was in Cambridge or Boston stay or move to [New] Jersey? My sense is probably more often than not you’ll keep it in Boston or Cambridge.”

While M&As may thin out regional clusters through consolidation, established clusters can also enjoy greater activity from pharma or biotech giants hungry for deals or geographic expansion, said Gautam Jaggi, senior manager and executive editor of E&Y’s “Beyond Borders” report. One example is Novartis, which opened its Institutes for BioMedical Research in Cambridge in 2002, in an effort to bolster its internal R&D by carrying out research close to the region’s academic institutions.
 
E&Y’s Pearce said the growth of M&As will not likely redraw the map of the nation’s top biotech hotspots in part because of their large talent pools and the likelihood an acquirer wouldn’t risk losing top talent by relocating a company.
 
That’s the approach promised last week by AstraZeneca. The British pharma giant said it would keep in Gaithersburg, Md., the headquarters of MedImmune, which it plans to acquire for $15.6 billion. The deal, set to close in June, will retain the $1.3 billion-a-year company as Maryland’s largest biotech, with half of its total 2,500 jobs based in the state.
 
“If you have a Boston or Cambridge biotech company acquired by a New Jersey-based pharma company, will the brain trust that was in Cambridge or Boston stay or move to [New] Jersey?” Pearce said. “My sense is probably more often than not you’ll keep it in Boston or Cambridge.”
 
Fueling M&A growth in the biotech sector have been pharmaceutical and biotech giants looking to spend less on new technology than it would cost to develop in-house, and venture capitalists open to the idea of selling rather than floating.
 
“Increasingly it’s a competitive marketplace for investment dollars when you’re a venture-capital firm. So those VC firms are in general looking for earlier exits than they used to in the past,” said Gary Kurtzman, vice president of life sciences with Safeguard Scientifics in Wayne, Pa. Safeguard is a publicly traded provider of capital and management services to life science and technology businesses.
 
The earlier stage the deal, Kurtzman said, the more likely it is to find funding in a larger biotech cluster with a greater concentration of VCs. Later stage deals and M&A plays, he added, aren’t as dependent on geography.
 
“If you’re Pfizer, you don’t care whether you’re buying a company in the UK or in Texas,” he said. “If it’s an M&A between two smaller companies, in general when you look at these true exit scenarios, it truly doesn’t matter.”
 
Jason Henrichs, a managing director at Rock Maple Ventures in Marlborough, Mass., agreed that M&A plays continue to draw early-stage companies to the established clusters. As they grow, he said, many of those companies will find it to their advantage to stay.
 
“From an exit perspective, there’s something to be said for being in the Kendall Square area [of Cambridge, Mass.] at these various events to just be rubbing shoulders with a number of other players, from the business-development folks to the acquirers, to understand what it is they are looking for, and to be able to spread your gospel,” Henrichs said.
 
“The closer you are to the investor’s back door, the more important it is because of just the ability to sit down and to work through some things,” he added. “[At] the early stages, all you know is that the plan is going to change.”

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