Though some investors are still taking risks, many are playing it safe by selecting companies that have good funding track records. [© ArchMen - Fotolia.com]
The migration of venture capital from biopharma companies stepped up during the first three months of 2012, seemingly unaffected by recent signs of life in the IPO market. The dollar value of VC deals fell 18% during the first quarter from year-ago numbers, while the number of deals was relatively flat.
Just $780 million was invested in a total 99 biopharma companies during Q1 ’12, compared with $949 million in 97 deals during the first quarter of 2011, according to the quarterly MoneyTree Report, issued April 20 by PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on Thomson Reuters data.
The report also showed a sharp year-over-year drop in first-sequence, or Series A, investment activity to almost $93.2 million in just 10 deals from $134.3 million in 30 deals. The results confirmed a continuing trend by biopharma startups toward larger first-sequence deals coming later in a company’s life cycle. The average size of Series A financing rounds more than doubled to $9.3 million in Q1 ’12 compared with almost $4.5 million a year earlier.
Companies won the few available first-sequence deals by persuading investors that they’ll get their money back sooner because the startups are more solidly run than Series A winners from before the Great Recession. “The silver lining is that the deals that are getting funded today are really high quality,” Tracy T. Lefteroff, global managing partner, venture capital and life sciences industries services with PwC, told GEN.
“The venture investors are being very selective with what they fund. With the timeframes that it takes to get liquid in the life sciences space, they can’t afford to make many mistakes. The deals that are getting funded are deals that have a clear regulatory pathway to the FDA and clearly have great management teams and intellectual property that’s protectable.”
That means, Lefteroff explained, today’s first-sequence companies are further along in development than their counterparts from as recently as five years ago: “A lot of times, there is already human data.”
Series A investors are basically playing it safe. “It’s a fear versus greed thing on the investment side of things, and when things are uncertain, that elevates the fear,” Robert More, general partner with Frazier Healthcare, told GEN. Not that there’s anything wrong with that, he added: “I think there should always be a valley of death. If everything’s getting funded, that’s not a good environment either and that leads to bubbles."
Playing it safer often means choosing companies for first-sequence funding that have good funding track records. For example, ImaginAb, which won $12.5 million in its Series A round, maintains a dozen partnerships with global biopharma companies to develop companion diagnostic imaging agents for use alongside therapeutic antibodies. Novartis Venture Funds led the round, which included Merieux Developpement, Nextech Invest, Cycad Group, and Momentum Biosciences.
Also, 4s3 Bioscience, a gene therapy developer focused on orphan neuromuscular disorders, won $20 million in Series A funding from KLP Enterprises. The company uses technology licensed from UCLA and enjoys a track record of winning funding from private and public funders. In 2008, a year after its founding, 4s3 won seed funding from Genzyme Ventures. Two years later, it borrowed $600,000 from the quasi-public Massachusetts Life Sciences Center, and the loan was repaid last month with interest for a total $685,134. 4s3 has also won a $260,291 grant from the Muscular Dystrophy Association, a combined $244,479.24 in 2009 and 2010 from the Qualified Therapeutic Discovery Program, and a $195,590 grant from National Institute of Neurological Disorders and Stroke.
The two largest financings during Q1 saw institutional investors and big pharma pour capital into private companies. ADC Therapeutics was launched with $50 million led by Celtic Therapeutics Management along with co-founders of Spirogen, whose platform technology is the basis for the 10 antibody-drug conjugate oncology projects the new company will work to commercialize.
Also, Celladon received $43 million to advance its lead candidate, the enzyme-replacement therapy for advanced heart failure, Mydicar. The company last year published positive results from a Phase II trial with Mydicar, helping it win FDA’s Fast Track designation. The financing was led by new investor Pfizer Venture Investments, with four other new investors that include Novartis Venture Funds and Lundbeckfond Ventures.
Two companies raised $42 million each. Aragon Pharmaceuticals won Series C venture funding for advancing lead compound ARN-509 for castration-resistant prostate cancer, led by new investor Topspin Fund. A Phase II trial began in November and is fully enrolled “well ahead of schedule,” according to the company.
Supernus Pharmaceuticals combined the $27 million it raised by selling its TCD Royalty Subsidiary with $15 million in venture debt. Supernus said it will use the money to commercially launch its two lead candidates in epilepsy, SPN-538 (extended-release topiramate) and SPN-804 (extended-release oxcarbazepine)—if the submitted NDAs win approval—as well as to continue development of pipeline drugs to treat central nervous system diseases.
Helping elevate uncertainty in biopharma financing is the performance of the long-dormant IPO market. According to Burrill & Co., seven companies worldwide went public during Q1, raising a combined $480 million, compared with the $521 million raised by eight IPOs in the year-ago quarter. All but one company was compelled to lower its initial share price before hitting the market.
On the brighter side, this year’s public companies saw their share prices rise an average 20% after their IPO during Q1, after excluding Merrimack Pharmaceuticals, which saw its share price fall 13.7% from the initial $7 on March 28, its first day of trading. As of April 24 it was valued at $7.10 per share.
But that activity is a far cry from the robust pre-recessionary IPO market. “I think 10 years ago we did a survey on entrepreneurs and CEOs in the biotech industry, and 80% of them thought they were going to be public companies someday,” More pointed out. “The inverse is true or perhaps even more beyond that today.” People are now building companies to push projects forward to the point where they are more appropriate for sale or license to a big biopharma company, More added, saying that it is very much the exception that companies are looking to go public now; it is no longer the rule.
Some senior biopharma executives and industry groups like the Biotechnology Industry Organization and Pharmaceutical Research and Manufacturers of America have blamed the shrinking VC market in part on FDA’s post-Vioxx shift toward more risk-benefit analysis of drug candidates. Leaders have termed the process too slow and too uncertain for companies, while FDA has trumpeted figures showing it has picked up its pace of drug approvals.
Several bills promising speedier drug reviews are pending in Congress. They include the fifth authorization of the Prescription Drug User Fee Act, the Transforming the Regulatory Environment to Accelerate Access to Treatments Act, the Faster Access to Specialized Treatments Act, and the Advancing Breakthrough Therapies for Patients Act of 2012. When and if these policies get enacted, FDA will have its work cut out for them, as will companies and other stakeholders who have blamed the regulatory agency for impacting the financing markets.