VC funding for
biotech companies withering
By Robert Dellenbach
Source: Genetic Engineering & Biotechnology News
September 3, 2008
via: CheckBiotech
Money is still there, but traditional biotechs
face more competition from emerging clean energy firms
Significant changes
occurring in the global economy, in general, and venture investing, in
particular, have finally caught up with venture capital (VC) support for
biotech companies. Despite an abundance of funding as well as scientific and
technological progress, the environment for investing in the life science
industry seems to have changed dramatically.
For example, the first quarter of 2007 enjoyed record highs
in venture investments in biotechnology, medical device, and healthcare firms.
In fact, average investments in these areas maintained nearly the same levels
through the end of the first quarter of 2008.
This year’s second quarter, however, has not fared as well.
Second quarter venture investing in general made a major downturn, and there
were no public offerings of any venture-backed company.
For life science firms in particular, in the second quarter
far fewer venture dollars went to a smaller number of life science companies.
In the first quarter,
The change was even more dramatic in biotechnology. The
number of biotechnology venture backings fell by nearly 50%, and the dollar
amount invested fell by more than 40% from the first quarter, according to
Thomson Financial. Outside the
In the second quarter, venture investors worldwide made 89
investments, half the number made during the prior quarter. This totalled an aggregate of $919 million, approximately 60% of
the $1.5 billion invested in the first quarter.
In addition to the decrease in absolute dollars being
invested in biotechs over the past year, the
proportion of life science dollars going to these companies has shifted
compared to medical devices and equipment as well as other healthcare ventures.
Biotechnology firms’ share of investments made in the life science industry
fell to below 40% from approximately 45% in 2007.
The average amount invested in biotechnology, though,
remained high in the second quarter, at more than $10 million; investments have
ranged from $8.4 to 11.8 million over the past six quarters.
One factor behind these changes is that biotechnology
investments, like most venture capital investments, are inherently risky. In
today’s uncertain economic climate, many investors are opting to sit out and
wait for more certainty in the market before they invest.
Another reason is that biotech investments generally take
longer to mature than nonbiotech investments. For
those life science investors who are nervous about the long term in the current
environment, investments that have a shorter return time, such as those in
medical devices and other healthcare ventures, have become more attractive.
A significant third factor is the emergence of clean energy
as an alternative investment category that is growing in favor with long-term
investors. Venture capitalists whose portfolios include longer-term investments
are shifting their dollars from biotechnology to solar energy, wind power, and
other sustainable energy solutions. This reallocation is only partially
apparent from the current statistics.
Hence, in addition to losing dollars to nonbiotech
firms, traditional biotechnology companies must now compete for venture capital
attention and investment with biofuels companies.
Constriction in the public equity markets also plays a role
in the reduction seen in venture investing in biotechnology. In 2007 there were
31 IPOs of life science companies, 11 of them for biotechnology companies. In
the first half of 2008, four life science firms including one biotech, Bioheart, made IPOs.
Such a decline may result from a number of factors some of
which are not specific to life science investing, including general investor
apprehension, the debt crisis, and Sarbanes-Oxley and related regulations. Add
to this the lack of liquidity and public cash available for biotechnology companies, and it seems that biotech start-ups will grow
more slowly.
Lack of liquidity in the public markets has also resulted in
public companies taking on private investments from venture capitalists. In the
last few months, Cadence Pharmaceuticals received a private infusion of $54
million, and Antisoma raised $40 million shortly
following its acquisition of Xanthus Pharmaceuticals. Investment of venture
capital into public companies and later-stage private companies means that even
less is being spent on early-stage companies.
Lack of liquidity in the
Life science acquisitions have also taken a beating. Thomson
Financial reports that 47 venture-backed life science companies were acquired
in 2007. Only 12 have been taken over in the first half of this year, eight of
which were acquired in the first quarter.
Additionally, judging by the take-over values reported so
far this year, acquisition dollars are well off the pace set in 2007. The total
value of the 36 acquisitions made last year for which transaction values were
made public was $7.4 billion. So far this year, the aggregate amount of the
seven deals for which financial terms were disclosed was $2.2 billion.
In the first quarter of 2008, there was one venture-backed
acquisition for which the value was reported: the acquisiton
of AppTec Laboratory Services by WuXi
Pharmatech in February for $163 million. Likewise,
there was only one such acquisition reported for the second quarter of 2008, Antisoma’s acquisition of
Venture capital investments, particularly those in life
science companies, are long-term undertakings. In theory, the level of such
investments made in life science at any time should not be significantly
affected by short-term fluctuations in stock market activity or the economy.
The drought of new public money coming into venture-backed companies through
IPOs, however, as well as increasing caution on the part of acquirers have
biotech venture investors hanging on tighter to their wallets and checkbooks.
The money is still there but it is going to be harder for
biotechnology companies to obtain. This is particularly true given the
increased competition for investment with medical device and equipment
companies as well as new competition from biofuels
and alternative energy companies for investment dollars.
Source: Genetic Engineering & Biotechnology News
greenbio.checkbiotech.org