VentureBeat

Venture-capital financing may be at a six-year high, but the picture in life sciences is a mixed one. After a blowout first quarter, second-quarter fundings in biotechnology actually dropped 19 percent, to $1.1 billion, compared to the same period last year, according to data from Dow Jones VentureOne and Ernst & Young. Medical-device investments, however, were on a tear, with VCs funneling more than $1 billion into the sector during the quarter — the highest total on record.

Overall venture investment in healthcare reached $2.36 billion, up seven percent — slightly slower growth than all venture funding, which rose eight percent.

The slowdown in biotech funding could partly be a consequence of the sector’s stellar results in the first quarter, when investment more than doubled to $1.8 billion. But other factors seem to be at work as well. The average size of biotech funding deals fell substantially while the number of deals rose, suggesting that VCs are showing renewed interest in early-stage biotechs spinning out of university research labs for the first time in roughly six years — a trend some VCs confirm. “At the universities we’re talking to, we’re seeing a lot more friends and colleagues and competitors,” says Amir Nashat, a general partner at Polaris Venture Partners.

Generally speaking, this sort of trend reflects Big Pharma’s increased interest in acquiring mid-to-late stage biotechs. A spate of major acquisitions over the past few years have convinced VCs that they can once again count on reasonably early “exits” from investments in young companies. That said, some large deals are still getting funded; Portola Pharmaceuticals, a South San Francisco, Calif., biotech focused on blood-clot treatments, raised $70 million back in May, the fourth largest VC deal in the quarter.

Medical devices, meanwhile, accounted for three of the ten largest deals, including an $85 million second round for Sientra, a Santa Barbara, Calif., device maker focused on plastic surgery and aesthetics. Other major device deals included CVRx, a Minneapolis maker of hypertension devices that raised $65 million in May, and Asthmatx, a Mountain View, Calif., device maker focused on asthma who raised $50 million from Olympus Medical Systems.

Overall device funding jumped 58 percent to $1.05 billion in the quarter.

Venture capitalists pumped eight percent more into companies during the first quarter, but all the action came in healthcare.

Venture capitalists gave 16 percent less to companies in the IT industry, however — they invested less money into software, semiconductors and Internet infrastructure companies. Web 2.0 companies, however, appear to have drawn more money than ever. See table below. Web 2.0 companies are part of the “Information services” category, which saw $722 million, up from $659 million during the first quarter of last year.

David Hamilton covers the reasons behind the record level of healthcare investments. They include the aging baby-boomer generation, which is spending more money on healthcare, continued innovation in the area, and a track record of lucrative returns from investments in the sector.

The data comes from Dow Jones VentureOne and Ernst & Young.

Alternative energy and other clean technology companies also saw a boost. Venture capitalists invested $237.0 million into ten “alternative energy” deals, up from $53.8 million in six deals. They invested $54 million into eight “environmental” companies in the first quarter, compared to just $4 million invested in one deal a year ago, the data showed.

California dominated the venture capital activity in the first quarter, representing 44 percent of the nation’s deal flow and 48 percent of the capital invested. The San Francisco Bay Area boomed, gobbling up $2.20 billion, ten percent more than during the previous quarter.

Finally, early-stage investing increased, making up 38 percent of the deals in healthcare, noted Jessica Canning, who has just been appointed director of global research at VentureOne.

Biotechnology and medical-device venture investment soared in the first quarter as funding for information technology and other sectors declined, according to data compiled by Ernst & Young and Dow Jones VentureOne.

Overall venture funding for U.S. companies rose 8% in the quarter, compared to the same period last year. Biotech firms pulled in a record $1.8 billion, more than double what the industry raised a year earlier. Funding for medical-device companies rose 55% to $953 million. The healthcare sector raised $2.9 billion, accounting for 41% of the $7 billion in first-quarter venture investment.

Venture funding of the IT industry, by contrast, fell 16% in the quarter to $3.1 billion. Software, semiconductors, communications and computers all saw double-digit declines, although investment in information services — presumably reflecting the boom in Web-based services — rose 10% to $722 million.

The surge in biotechnology funding appears to reflect two relatively recent trends in the industry. With Big Pharma now on the prowl to acquire promising biotechs, venture capitalists are thinking harder about how to best dress up their companies for sale. As several VCs recently told the industry newsletter BioCentury (no link available), that frequently means committing biotechs to larger, more rigorous and more expensive mid-stage human tests of experimental drugs. The idea is to generate more reliable data that might catch the eye of a pharma acquisitions hawk, and so far VCs seem willing to pony up for a chance to do so. For instance, Ascenta Therapeutics recently raised $30 million, plus the possibility of another $20 million in milestone payments, to advance an experimental cancer drug through mid-stage trials.

At the same time, VCs do seem to be showing renewed interest in small, early-stage biotech companies — often newly formed companies that take the biggest risks in developing new drugs or even entirely new ways of treating disease. As I wrote earlier, these companies have been out of favor for years, after investors got burned in the biotech-stock mania that accompanied the looming completion of the human genome project in 1999-2000. Now they seem to be edging their way back. According to the VentureOne data, funding for these companies — technically, seed and first-round investments — amounted to $513 million in the quarter, or 29% of all biotech venture funding, up from 26% in all of 2006.

On the other hand, while some VCs have recently asserted that they’ve broadening their healthcare interests beyond biotech and medical devices, the latest data shows no evidence of such a trend. According to VentureOne, funding for healthcare services dropped 57% to $84 million, while that for health-related information services and software fell 27% to $58 million.