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May 1, 2009 (Vol. 29, No. 9)

VC Lock-Down Mode Paralyzes Bioindustry

Downsizing of the Industry Is Inevitable as Financing Window Is Virtually Closed

  • Venture Capital Investing

    Venture investors in biotech are in lockdown mode as they reserve precious capital for their existing companies. Arthur Klausner, an experienced venture capitalist recently of Pappas Ventures, believes that venture capital is currently facing a painful double squeeze—diminished fund sources on the front-end due to the tight money situation at pension funds and endowments, and limited exit opportunities at the back-end caused by the complete lack of IPOs.

    Nevertheless, according to Klausner,  “this situation should result in some excellent venture capital investments being made in 2009/10. It’s very much a buyer’s market out there for VCs that have fresh capital to invest, with private financings tending to be limited to top-tier companies—and often at bargain-basement valuations.”

    Jonathan Fleming, managing partner at Oxford Bioscience Partners, has shifted some resources away from biopharm to medtech and diagnostics. “Drugs are a more risky investment in these times, not only because the FDA has raised the bar for clinical trials and approvals, but the buyout exit is less likely as the large pharmaceutical companies are investing outside the U.S. for new markets and products,” he reports. “Diagnostics and devices represent a much more dynamic environment with less product risk and faster returns on venture investments.” Supporting this scenario, he cites the acquisition of Sirtris by GlaxoSmithKline for $720 million as one of the few venture-backed companies acquired by big pharma in 2008.

    “VCs seem to be triaging their portfolios, denying further infusions to the runts of their litters,” explains Tom Kiley, a one-time Genentech executive who has served as a director of many life science companies. To the extent that new companies are being funded at all, the focus seems to be on diminished regulatory risk, i.e., medical devices and drug repurposing.

    One question is whether big players on the venture and IPO side such as JPMorgan and GoldmanSachs will continue to focus on biotechnology now that they are commercial banks and have to reduce risk and bolster their capital.

    Data from the National Venture Capital Association shows that around $4.5 billion was invested in biotech in 2008, $1 billion of that in Q4. For comparison, $4.6 billion was invested in the software industry in 2008. Since 2004, VC investments in biotech have exceeded $4 billion.

    Recently, Essex Woodland Health Ventures (EWHV) raised $900 million for its latest healthcare fund and will invest across the spectrum of drug device and service companies globally. EWHV currently has $2.5 billion under management. Also in recent news, Google launched a $100 million venture fund focused on a broad range of fields including biotechnology start-ups. Google already has an investment in personal genomics with 23andMe.

    Another positive trend is a recent report from Burrill and Co., revealing that VCs invested $1.486 billion in biotech in the first quarter of 2009, a substantial increase over the $837 million in Q1 2008. The data, however, may require further analysis as the average size of the deal fell from $20 million to $7 million and the funding increase may be skewed by one large deal.

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