How healthy is the money supply for biotech companies? [© xxxx_3D - Fotolia.com]
B. B. King’s line “the thrill is gone” could apply just as easily to venture capitalists when it comes to their waning interest in doing a huge volume of biotechnology deals, judging from recently released first quarter numbers. It isn’t obvious from the MoneyTree Report, which recorded a 5% year-over-year increase in the amount of venture capital invested in biotech. The first three months of 2011 logged $784.19 million compared to $746.22 in the same period last year.
But the more telling number is the number of deals recorded during that time. It dropped 21% to 85 in Q1 ’11 from 107 in Q1 ’10, according to the MoneyTree Report. Turns out venture capitalists are doing fewer deals for more money these days. That’s being accomplished in two ways. Companies are either pursuing huge first rounds, or they wait for funding until later stages, by which time they have results from at least some clinical trials.
“We’re seeing that there’s a real retreat across the board in the life sciences—in biotech particularly—on the early-stage side,” Michael A. Greeley, general partner with the Boston venture firm Flybridge Capital Partners, told GEN. “The funds that can get raised are really around social media, frankly, and so you have an attrition of biotech funds, fewer being raised. Those that are being raised are smaller.
“It really makes it that much more daunting to take on a development program that’s measured in potentially decades, not quarters. And the regulatory hurdles are becoming almost insurmountable. I think there’s a lot of pressure on early-stage funding.”
Tracy T. Lefteroff, global managing partner, venture capital and life science industries services for PricewaterhouseCoopers, told GEN that the growing scrutiny of new treatments by the FDA is both delaying financing for companies and discouraging many investors from committing VC.
“If you don’t have a clear pathway through the FDA, it’s tough to get funding these days. It clearly is raising the bar on what type of companies will get funded by the venture capitalists,” Lefteroff said.
Betting Bigger, Later in Development
As a result of the regulatory pressure and the demand of investors for human data, Greeley said, biotech companies and venture capitalists are coming to terms on “mega-super” series A rounds that are in the tens of millions of dollars, much higher than typical for a first helping of venture capital.
“The series A rounds that get done are raising $30 or $40 million. They are basically saying, we’re going to create companies from whole cloth, and we’re going to build a base of investors that can take it all the way to the clinic up front. Whereas before, entrepreneurs would raise a few million dollars, say $5 million, get to some early animal data, then they’d go raise another $10 million, then validate their data with a clinical study,” Greeley pointed out.
“Because there were so many more investors, there was a much more robust market, and the presumption was that if you had good data, you could always raise money,” he added. “That’s really not the case right now.”
Drug developers likelier to find funding, Lefteroff agreed, have molecules in Phase II or Phase III trials or that are at least about ready to enter clinical trials. “I don’t think any biotech companies are getting funded today that do not have at least some human data. Venture guys can’t fund them through the true R&D phase any more. You still might see a few of those deals get done, but not many.”
Seed-stage financing plummeted between Q1 2010 and Q1 2011 from $137.72 million to $47.71 million. Expansion-stage financing rose from $107.64 million in Q1 2010 to $137.71 million in Q1 2011. Later-stage financing rose from $180.72 million in Q1 2010 to $219.05 million in Q1 2011.
An example of a large series A round for a later-stage company is $30 million raised by PanOptica, whose lead compound is in Phase II trials. PAN-90806 is being developed as a topical (eye drop) treatment for neovascular age-related macular degeneration (AMD).
On the other hand, Blueprint Medicines, which does not seem to have clinical-stage products, also closed a high series A financing of $40 million. The firm is developing personalized cancer therapies. What it lacks in later-stage candidates it makes up for in co-founders: Nicholas Lydon, Ph.D., and Brian Druker, M.D., had a track record of success as co-developers of Gleevec®, a treatment for chronic myeloid leukemia (CML).
Until companies can convince investors of their potential, Lefteroff added, they have to either pursue government grants or pour in their own money. An interesting model for some megasized venture awards is one where payments are tranched based on milestones. In those cases, companies do not see a windfall, explained Lefteroff and Greeley.
Molecular Dx Remain Attractive
A growing number of series A winners focus on molecular diagnostics. Sera Prognostics announced closing on a series A-1 round of $1.4 million in January for a blood test for detecting preterm birth and other pregnancy complications. Also that month, Diagnoplex, a developer of molecular diagnostics for colon cancer, closed on an extension of an earlier CHF 10 million ($11.43 million) series A round.
“We’re moving more toward the holy grail, which is personalized medicine,” Lefteroff said. “The ability to take the data that has been released by the sequencing work that’s being done and apply that in the diagnostic world against many different disease states and datapoints is an area that continues to attract a lot of money.”
Lefteroff said molecular diagnostic companies have retained their allure with investors despite the prospect of new FDA regulations, since the potential savings in healthcare costs are believed to outweigh the costs of developing diagnostics. Also fueling the funding and development of diagnostics, he said, was the increased ease of obtaining reimbursements in recent years.
Pharma Ventures May Step In
Early-stage companies are also trying to prove their mettle and scrambling for capital at a time when it is expected that the U.S. VC market will shrink. Among U.S. venture capitalists, 56% expect limited partners will be less inclined to invest in VC funds, according to a report by NVCA and Deloitte released last year. “That has really, I think, profoundly negative effects on capital-intensive businesses like biotech,” Greeley said.
He said he hopes the capital void gets filled over time by interesting creative partner deals or by pharma stepping up and playing a more aggressive role. “A lot of the pharma corporate venture funds have never been as active as they are right now. Pharma’s saying, ‘When the tide is out is when you go pick up shells.’ You’re seeing them be much more aggressive and opportunistic in trying to find nuggets.”
One such example: Roche Venture Fund joined with several venture firms and other investors in the $20 million series B preferred stock placement closed by Conatus Pharmaceuticals in February. Conatus intends to use the money to advance CTS-1027, which is in multiple Phase II HCV trials and was licensed from Roche.
Later-Stage Financing Stays High
Later stages of financing continue to be large as well. For example, Antiviral therapeutics developer Chimerix raised $45 million in series F financing to develop two therapies and hire 15 R&D employees.
RainDance Technologies won $37.5 million in series D financing to find new applications for its commercial targeted sequencing and sequence enrichment technology, commercialize products for single-molecule digital PCR and single-cell analysis, and expand its global sales and support infrastructure.
Companies with products that are still early in development are unlikely to win VC funding at the level they have been used to in recent years. VC money is going to firms with more developed products and technologies. Early-stage companies, thus, will need to find funds from other sources such as the government, disease foundations, and partnerships with other organizations.