Print this Page

Investing in the Industry

Overview: Shift in venture capital to later stage companies

Venture capital provides essential funding to early-stage, high potential, high risk, startup companies. Every year, there are nearly 2 million businesses created in the U.S., and 600 to 800 receive venture capital funding. The classic business model for the biomedical industry was for an entrepreneur to identify an invention with commercial potential, then to raise funds from venture capitalists with the goal of floating an initial public offering (IPO) that would provide liquidity for initial investors and tap into the public stock market to raise additional funds.

Since the global financial meltdown in 2008, however, this model has broken down. First, the limited partners (typically pension funds, university endowments et al.) from whom venture capitalists raise their funds have aggressively moved to squeeze risk out of their portfolios. This has meant reduced allocations to venture overall. Second, the risk-adjusted returns for many venture funds have been disappointing. And third, the IPO window was largely closed between 2008 and 2011, meaning that the only avenue for investor liquidity was to sell companies to larger players, albeit for lower returns than IPOs traditionally produced.

Brian Halak, Partner, Domain Associates“In addition to future benefits to human health, investing in venture capital can have significant economic benefits. According to a 2011 Global Insight study, venture-backed companies in healthcare and tech accounted for nearly 12 million jobs and $3.1 trillion in revenues in the U.S. in 2010. The National Venture Capital Association (NVCA) reports that 11 percent of private sector jobs come from venture-backed companies and venture backed revenue accounts for 21 percent of U.S. GDP. These statistics are especially staggering when venture capital only accounts for less than 1 percent of total money raised in the private sector.”

Brian Halak, Partner, Domain Associates

Read Full Q&A

Overall, life sciences (biotechnology and medical devices) investment for the first three quarters of 2012 was down 19 percent in dollars and 12 percent in deals from the same period in 2011.

Nationally, life sciences investing increased in terms of dollars but declined in deal volume for the third quarter of 2012 with $1.7 billion going into 181 deals, comprising 26 percent of VC dollars invested, compared with the second quarter of 2012.

Investment in biotechnology increased by 64 percent in terms of dollars and 22 percent in terms of deals with $1.2 billion going into 116 deals in Q3 2012. This increase is driven by a number of larger, follow-on rounds in the third quarter compared with Q2 2012 when just $755 million went into 95 deals.

Medical device investing declined for the third consecutive quarter, falling 37 percent in dollars and 27 percent in deal volume with $435 million going into 65 deals, experiencing the lowest dollar level of investment since 2004.

“The long time horizon often required for a liquidity event, regulatory challenges, and large amount of capital often needed to fund life science companies likely contributed to this sector’s investment decline during the past four quarters.”

Tracy T. Lefteroff, Global Managing Partner of the Venture Capital Practice at PwC U.S.

California leads the states in life sciences venture investing

California, Massachusetts and Pennsylvania received the most life sciences venture capital dollars during the first three quarters of 2012.

CaliforniaCalifornia led the states, attracting $1.98 billion in venture funding for life sciences for the first three quarters of 2012. Of that total, $1.18 billion went into biotechnology, and the remaining $799 million went into medical devices.

 

Mark Goldsmith, M.D., Ph.D., Venture Partner, Third Rock Ventures“VC funding is more important here in California than in many other areas of the country because of the tremendous skill set in the region. The major universities and medical schools in the state are known for their breakthrough science. It’s particularly important to unlock the potential clinical impact that this breakthrough science can provide. Furthermore, this area has a track record for building groundbreaking companies that have created tremendous value.”

Mark Goldsmith, M.D., Ph.D., Venture Partner, Third Rock Ventures

Read Full Q&A

Investment dropped from 2011 in California and Massachusetts whereas Pennsylvania, Ohio and Washington increased in venture investment dollars from 2011, albeit from a comparatively low base.

CaliforniaCalifornia leads the country in total life sciences investment. The $1.98 billion venture capital dollars raised in California in the first three quarters of 2012 is more than the combined total of the next eight states (Mass., Penn., Texas, Ohio, Wash., N.J., Minn., Ill.).

Avalon Ventures“Biotech clusters will continue to evolve in areas with terrific research centers. California is uniquely situated because of the tradition of great research and natural big city clusters (San Diego, San Francisco, Los Angeles) that provide a great foundation for biotech.”

Kevin Kinsella,Managing Director, Avalon Ventures

Read Full Q&A

Investment by stage: Fewer early-state ventures attract funding

On a year-over-year basis, early-stage funding of the life sciences in California declined by 13 percent to $783 million through the third quarter of 2012. Quarter over quarter, early-stage funding increased by 6 percent from Q3 2011 to Q3 2012.

Early-stage deal volume held steady compared with the same quarter last year and remained constant at 24 deals when compared with the first quarter of 2012. Average deal size shrank 1.5 percent year over year but increased 6 percent quarter over quarter to $10.8 million.

“The drop in early-stage funding could have implications for the life sciences sector into the future,” Lefteroff said. “If the number of new venture funds continues to contract as it has in recent years, there may be less capital available to support start-ups.”

In the U.S., the percentage of early- and seed-stage biotech deals steadily declined from 65 percent to 58 percent from 2010 to 2012. However, in California over the past two years, the percentage of early and seed stage deals increased from 60 percent to 63 percent.

Domain“Early stage companies are essential for the health and success of the life science industry. They are on the frontlines of translating scientific breakthroughs into products that can help patients. California is leading the country in ensuring early stage companies can continue to start and thrive.”

Brian Halak, Partner, Domain Associates

Read Full Q&A

Companies are also seeking varied sources of investment. Burrill & Company along with S&P CapIQ report found that foundation funding of California companies has steadily increased from $22.2 million in 2010 to $71.4 million in 2012.

Third Rock Ventures“Early stage companies continue to view venture capital as an important source for funding, but are also looking to innovative partnerships with pharmaceutical companies, as well as non-dilutive funding by non-profit organizations. Additionally, angel investing is more visible these days, but the challenge remains that in life sciences a small amount of money does not go very far.”

Mark Goldsmith, M.D., Ph.D., Venture Partner, Third Rock Ventures

Read Full Q&A

Venture capital firms are also innovating

Venture capital firms are also being innovative in their respective industries. In March 2012, Domain Associates and RUSNANO agreed to jointly invest in emerging life sciences technology companies, foster technology transfer into Russia, and establish therapeutic manufacturing facilities in Russia. RUSNANO and Domain’s venture capital funds plan to co-invest in approximately 20 U.S.-based healthcare technology companies. The joint venture will obtain exclusive rights from their portfolio companies to manufacture and market products in Russia, Ukraine and other countries in the Commonwealth of Independent States.

Domain Associates“We are seeking out geographies in need of medical innovation and leveraging our access to technologies to generate funding that will help compensate for the shrinking pool of VC dollars available in the U.S. Our efforts on this front have led us to a groundbreaking initiative in Russia and some very interesting initiatives in China. We think that California and the U.S. at large would be wise to look at ways to fill the gap created by shrinking venture capital dollars.”

Brian Halak, Partner, Domain Associates

Read Full Q&A

Launched in 2011 but announced at the J.P. Morgan healthcare conference in January 2012, Warp Drive Bio is a creative model of pharma-biotech partnership. With leading scientists, Gregory Verdine, Ph.D., George Church, Ph.D., and James Wells, Ph.D. combined with Sanofi’s expertise, the goal of Warp Drive Bio is to discover and develop natural product drugs with proprietary genomic technology. The business model is distinctive in that Warp Drive Bio will remain fully independent, able to retain rights to many developed assets and pursue other industry partners.

Third Rock Ventures“Warp Drive Bio was launched this year through a groundbreaking strategic partnership with Sanofi with financing from Third Rock Ventures and Greylock Partners. The breakthrough business model provided $125 million in initial funding to Warp Drive and created a new paradigm in pharma/biotech deal making – a predefined acquisition agreement and agreed-upon purchase price that Warp Drive can elect to exercise if it achieves certain milestones.”

Mark Goldsmith, M.D., Ph.D., Venture Partner, Third Rock Ventures

Read Full Q&A

Capital markets: IPOs are trending upward for 2012

One of the greatest challenges for biotech entrepreneurs is the sheer scale of investment needed to take a new product from the laboratory, through the FDA, and successfully commercialize it. Biotechnology companies in the development stage require access to successively larger pools of capital to conduct advanced clinical development and establish commercialization capabilities.

The ability to access capital has a tremendous impact on speed to market as well as the advancement of new technologies in the pipeline. Unsurprisingly, the No. 1 reason a company delayed a research and development project was because funding was not available (Read More > Ground View: Delaying R&D, CEO SURVEY)

With the overall U.S. business climate and stock market slowly improving, as of third quarter 2012, all of the healthcare-related indices were up compared with 2011. The biotech indices were still outperforming the U.S. markets over the last year. The Dow Jones and S&P 500 were up only 9.5 percent and 12.7 percent respectively, while the NASDAQ composite and NASDAQ Biotech indices were up 15 percent and 34.8 percent respectively.

Against this backdrop of improvement, in 2011, nine U.S. life sciences companies executed IPOs, raising approximately $472 million. As of the third quarter 2012, 14 U.S. life sciences companies completed IPOs, raising almost $950 million.

California companies account for half of the IPOs in 2012. These seven companies raised $400 million. Twelve of the 14 U.S. companies are in drug discovery and development. The only preclinical company is Regulus Therapeutics, a microRNA company that was co-founded with technology from Alnylam and Isis.

Regulus Therapeutics“We believe that the life science industry needs more innovative medicines and therapies to treat patients. And, in turn, the capital markets need to be willing to back these companies providing the innovative ideas and technologies in the therapeutic areas with high unmet medical need.”

Kleanthis Xanthopoulos, Ph.D., President and CEO, Regulus Therapeutics

Read Full Q&A

After-market performance for the U.S. biotech IPO class of 2012 has been gradually improving compared withpast years; 62 percent were trading above their IPO offer price as of Aug.31, compared with56 percent for 2011 IPOs and 39 percent for the 2010 IPOs.

IPO valuations have also been trending upward. For 2012, three of the 12 IPOs (Merrimack Pharmaceuticals, ChemoCentryx and Tesaro) had valuations exceeding $300 million. Each of these companies is in late clinical stage trials for cancer indications. Compared to 2011, only Sagent Pharmaceuticals, a specialty pharma company, had an IPO valuation of more than $300 million.

Reverse mergers are an alternative way for companies to access public markets. Organovo, a 3-D bioprinting company, was successful in February of this year with this strategy to list on OTC markets.

Organovo“The benefits of a reverse merger include the speediness and lower cost than an IPO. However, a company has a long road ahead after a reverse merger to operate on the same playing field as an IPO company due to less exposure to Wall Street during the deal and the bad behavior of some foreign reverse merger companies. SEC could help this process by identifying companies by more factors than ’reverse merger company‘ to identify risky companies that cause problems, since so many healthcare companies using reverse mergers are compliant, forthright organizations.”

Keith Murphy, CEO, Organovo

Read Full Q&A

M&A deals still below average for 2012

As of November 2012, six mergers and acquisitions (M&A) of California companies accounted for transaction totals of $14.98 billion. M&A transaction amounts were reported for 29 out of the 53 deals and accounted for more than $17.6 billion. Of the 53 deals, 33 were biopharmaceutical, 18 diagnostics and two were R&D companies. The top M&A deal was the acquisition of Amylin Pharmaceuticals for $10.6 billion by Bristol-Myers Squibb in collaboration with AstraZeneca.

Gilead“We see M&A as focused on recognizing and supporting the strengths of complementary partners. I expect M&A to pay dividends for our industry in the coming years, by being a critical source of innovation.”

John Martin, Ph.D., Chairman and CEO, Gilead Sciences

Read Full Q&A

Permanent link to this article: http://www.californiabiomedreport.com/investing-in-the-industry/