(UPDATED: See below.)
At first glance, life-sciences investments seemed largely to hold steady in the third quarter, despite failing to match a 7.6 percent rise in overall funding, according to data from VentureOne and Ernst & Young. A closer look, however, reveals a very different story — namely, the fact that venture capitalists appear to be fleeing the biotech sector with great speed. Private equity and other non-VC funding sources are presumably taking their place, at least for now.
Biotech startups raised $1.4 billion in equity financing during the quarter, according to the top-line data VentureOne/E&Y normally makes available (click on the chart thumbnail at left for more detail). It turns out, however, that only 62 percent of that, or $871 million, originated with VCs, with private equity and other non-VC sources making up the difference.
Overall VC investment in biotech dropped by more than a third — 38 percent — in the quarter compared to a year earlier. That precipitous drop stands in sharp contrast to 2006 and the first half of 2007, when VCs accounted for the vast majority of biotech financings. (According to VentureOne, VCs still account for almost all medical-device investments as well, although now I wonder if that data can still be trusted on that point; see below.)
As you’d expect, many of the top biotech deals in the quarter involved non-VC investors. GlobeImmune, which raised $41.2 million in September in the quarter’s third-largest biotech funding, counts a number of private-equity and hedge funds among its investors, including Wexford Capital. (See a detailed list in our coverage here.) Tengion, which raised $33 million last month, was backed by non-VC financiers such as Deerfield Partners, Bain Capital and Johnson & Johnson.
That said, the reason for the sharp one-quarter drop in VC funding remains kind of a mystery. VentureOne’s quarterly financing data is often pretty “chunky,” in the sense that the numbers can swing wildly based on whether a just a few deals fall on one side or the other of the quarterly cutoff. On the other hand, a few VC firms with interests in life science have recently announced cutbacks or cancellation in new fundraising — see, for instance, news on Enterprise Partners here, while Matt Marshall noted problems at Sequel Venture Partners in Boulder, Colo., here — and while there’s not exactly an avalanche of such issues, these announcements might be trailing indications of bigger problems to come. I’ll be looking into this more closely as soon as I can.
On a separate note: What seemed like a nascent revival in innovative, early-stage biotech companies earlier this year may have petered out. Looking only at VC fundings, seed rounds accounted for only 6.9 percent of all deals, compared to 11 percent a year ago. Second and later-stage fundings accounted for 60 percent of all VC biotech fundings, way up from 47 percent last year.
Overall, healthcare-related equity financings rose a meager 3.7 percent in the quarter compared to a year earlier. By contrast, total startup investments rose 7.6 percent. Biotech fundings dipped slightly compared to a year earlier, falling 2.3 percent to $1.4 billion. Medical-device investments continued to rise sharply on that basis, jumping 19 percent to $830.3 million, although funding was down compared to the first and second quarters.
Major deals in medical devices during the quarter included Globus Medical ($110 million), Simplex Diabetic Supply ($50 million) and Satiety ($30 million). Arguably, however, neither Globus nor Simplex really qualifies as a VC deal, as I noted at the time (here and here). Which could, in fact, suggest that VCs may be pulling back from the device sector as well, and that only definitional issues with the data are obscuring that fact for now.
UPDATED: Rewritten to focus on the sharp decline in biotech VC financing.
UPDATE REDUX: I’ve since taken a closer look at the data with the help of VentureOne. Things aren’t exactly what they seemed, although the outlook for biotech still isn’t good: See here.
Tags: biotechnology, hedge-funds, medical-devices, Private Equity, Venture Capital10 Comments
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DV Henkel-Wallace said:
When you say “biotech” are you including small molecule drugs (i.e. traditional “pharma”) as well? Your entry doesn’t say and people sometimes use “biotech” ambiguously.
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David P. Hamilton said:
I am using the term somewhat loosely, and the short answer to your question is yes — the term does include pharmaceutical companies, although I don’t know exactly how VentureOne defines them.
VentureOne’s “biopharmaceuticals” category is a catch-all that includes the following:
* Biopharmaceuticals, other
* Biopharmaceuticals, TBA
* Biotechnology therapeutics
* Drug delivery
* Drug development technologies
* PharmaceuticalsAlthough now that I think about it, I’m not sure that the “pharmaceuticals” category maps neatly onto the canonical large-molecule/small-molecule distinction. Among other things, VentureOne counts only nine “pharmaceutical” fundings in Q3, as opposed to 36 “biotech therapeutics” and one each of “biopharmaceuticals, other” and “biopharmaceuticals, TBA.”
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Mike said:
David,
Interesting insight. Can you post the data that breaks out investments by type of company (VC, PE, other non-VC, etc.)?As for the first question posted: every VC report I’ve ever seen includes all drug development companies, regardless of definition as pharmaceutical or biotechnology, as biopharmaceutical or biotech companies.
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David P. Hamilton said:
Mike, I can describe the data to you here, although I can’t actually post the spreadsheet with the VC-only data, as VentureOne doesn’t normally make it public, and provided it to me under that condition.
Also, just to be clear, I only have two sets of numbers: the “equity financing” data, a snippet of which I posted above, defined as funding from VCs, private equity, corporations, hedge funds, and individuals for companies that had received at least one venture round; and “venture financing,” which is pretty much VC only (although it might also include angels).
So for all of 2006, the broad biotech sector received $4.8 billion of equity finance in 290 rounds. For VC funding, biotech received $4.6 billion in 270 rounds. That’s a difference, but not a huge one.
In 2007, biotech equity finance in Q1, Q2 and Q3 amounted to $1.8 billion, $1.2 billion and $1.4 billion respectively. For the same quarters, venture funding came to $1.8 billion, $1.1 billion, and $871 million. So you can see that the dropoff — whatever it is — just happened in Q3. I’m still trying to run down whether that’s an artifact of some kind in the numbers, and I’ll post again when I get a good answer.
Btw, the financing-rounds data show a similar but less dramatic falloff. For the first three quarters of this year, there were 80, 87 and 66 equity rounds of all kinds, respectively. The data for venture rounds: 78, 84, and 58. This mainly suggests to me that that rounds grew dramatically larger in Q3, particularly on the non-VC side (average Q3 round size $15 million for VC, and $21 million for all equity).
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Mr. Gunn said:
I’ve heard that the subprime market collapse has hit the VCs particularly hard. Could the drop-off just be a reflection of that, and not biotech specific?
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David P. Hamilton said:
Could be, Mr. Gunn, except that there’s no similar dropoff in the numbers for medical devices, where Q3 equity financing was $830.3 and VC financing was $817.8. I only have both sets of numbers for the healthcare sector, so I don’t have any insight into what may be going on elsewhere.
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Don Jones said:
One quarter in the venture capital world doesn’t make a trend. It is also helpful to look at the exit market as well for an indication of the general health of a particular sector. For example, recently a medical device startup, TranS1, went public - on 10/18 - and the shares shot up 60% on the first day. The company lost $4.1 million on $7.2 million sales through 6/30/07, so the IPO results were astounding, and in a nervous stock market no less.
When venture capital firms see those kinds of results, it makes them smile…
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David P. Hamilton said:
Don, you’re absolutely right that one quarter doesn’t make a trend, and I hope I was clear enough in laying out the caveats in this post. Your point on the exit market is also a good one, although it cuts against biotech — Targanta is down 15 percent from a lower-than-expected pricing, for instance, Bioheart got whacked even before it got to the gate.
All that said, I’ve taken a closer look at the Q3 data in a new post here. Bottom line to me is that the quarter still looks terrible, just not for the reasons I originally thought.
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Don Jones said:
David - we agree on Biotech. I was just making a distinction for the medical device sector and using an exit example for that sector, though reading it again it looks like you’re more focused on biotech.
Keep up the analysis focus - there isn’t enough of that out there!
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David P. Hamilton said:
Don, I only focused on biotech in this item because that’s where the most dramatic shift took place. Devices are still going strong, both in funding and in exits. As I’ve suggested before, I think biotech investors would love to see an IPO along the lines of TranS1 or AthenaHealth, but so far it just hasn’t happened. Although on the other hand, the M&A market for biotech remains quite strong (i.e., BMS/Adnexus and Merck/NovaCardia, not to mention public-company deals like AstraZeneca/MedImmune and TBA/Biogen).
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