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Wall Street BioBeat : Aug 1, 2009 (Vol. 29, No. 14)

Biotechnology Investments Exhibit Resilience

Slivers of Light Are Evident in a Variety of Places Including Venture-Backed Exits
  • Robert Dellenbach

The first half of 2009 was a glass half empty for many companies looking for venture financing. For biotech companies, there are reasons, perhaps cautiously, to see the glass half full and rising.

According to MoneyTree® data tracked by Thomson Reuters and PriceWaterhouseCoopers, venture investment in the U.S. in the first half of 2009 fell to approximately $6 billion, less than half the $12.5 billion or so invested in the second half of 2008 and about 40% of the $15.5 billion venture investors put to work in the first half of 2008. The biotech industry is feeling the pain, but less so than other industries.

Although the $1.3 billion invested by biotech VCs in the first half of 2009 is down from the second half of 2008 by almost the same 47% decline experienced across all industries surveyed, in the second quarter of 2009 early reports show biotech topping the list of industry sectors at $734 million, or a record 25% of all venture capital invested. This compares favorably with the 17.2% of total VC dollars biotech companies have received over the past five years.

Fewer companies are receiving funding these days, but as a proportion of the total number of companies receiving venture funding, biotechs have done well so far this year. At least 130 U.S. biotechnology companies have received funding in 2009, representing approximately 14.5% of the 900 or so companies funded across all venture-backed industries. In the first quarter of 2009, life science represented almost 15% of the total, compared to approximately 12.3% over the past five years. The size of venture investments in life science companies also held firm at nearly $10 million per deal, which is consistent with the average deal size over the past five years. In a year when economic performance is generally measured by how much less worse things are going, the resilience of biotech investing is encouraging.

With institutions, corporations, and wealthy individuals scrambling to shore up their mainstream cash positions, venture capital has taken a back seat as an asset class for investors. This is true for the life sciences as well as for the other sectors historically favored by venture investors. Early data indicates that biotech-specific funds have raised much less in the first half of 2009 than the $5.7 billion raised in 2008 and $6.7 billion in 2007 (and a far cry from the $11.4 billion raised by venture firms in 2006), as reported by MoneyTree.

Nevertheless, established venture capital firms continue to raise significant commitments for investment in biotechnology. In 2008, among other fundraising activities, Kleiner Perkins Caufield & Byers raised $700 million for its fund XIII to invest in life science as well as greentech and information technology companies. Versant Ventures raised $500 million, its fourth fund, to finance 30–35 medical device, biotech, and pharmaceutical investments, according to the firm.

Delphi Ventures’ $300 million Fund VIII was raised to back early-stage life science ventures. Clarus Ventures, formed in December 2006, raised $660 million in 2008 for its second fund to invest in biotechnology, specialty pharmaceutical, and medical technology companies developing human therapeutics. Already in 2009, Essex Woodlands Health Ventures reported closing $900 million for its eighth fund to invest both growth capital and venture capital in drug, device, and service companies. Domain Associates has closed more than $350 million, 5AM Ventures raised approximately $160 million, and BSD Venture Capital closed its first $250 million fund.

According to Mark Heesen, president of the National Venture Capital Association (NVCA), quoted in a recent  NVCA/Thomson Reuters report, although many investors are not raising funds because they either have just completed their prior fund raise or want to wait out the economic downturn, “venture firms with solid records continue to be able to secure sizable commitments from limited partners.” Funds are available but as in other sectors they are fleeing to quality. Far from shutting down, venture fundraising has continued, indicating a continued flow of cash to fund the most promising biotech start-ups and expansion.

Active Venture Firms

The most active venture capital firms in the first half of 2009 included HealthCare Ventures, which invested $23 million in nine companies, Alta Partners, which invested nearly $26 million in five companies, and SV Life Sciences Advisers, which invested $23 million in five companies. New Enterprise Associates, with more than $3.4 billion under management, invested $44 million in four companies, Novartis Venture Fund invested $23 million in four companies, S.R. One invested $20 million in four companies, Intersouth Partners invested $18 million in four companies, Lilly Ventures invested $15 million in four companies, Aberdare Ventures invested $35 million in three companies, and Domain Associates invested $23 million in three companies.

Opposing Forces

Most of the investors surveyed by Deloitte Touche Tohmatsu and the NVCA in their 2009 Global Venture Capital Survey believe they will invest in fewer companies in the short term; only a handful (13%) said they expect to increase their investing activity. However, when asked to rank the sectors with growth potential, almost 25% of the investors indicated biopharma.

Two trends identified in the survey include increased investment overseas and continued growth in cleantech investments. Because of the close connection between many clean technologies and the life science’s and biotechnology’s global reach, both of these trends offer opportunities for entrepreneurs in life sciences.

Another trend identified by more than one-third of the Deloitte/NVCA survey participants is a move by venture investors toward later-stage financing, including VC financing in public companies. Only 6% of investors across all sectors surveyed intended to move toward earlier stage investing.

According to MoneyTree data, approximately 45% of investments in 2008 were early-stage or seed compared to approximately 35% of early stage and seed investments so far in 2009. Dollars invested in early-stage and seed investments in 2008 represented approximately 36% of total biotech investments compared to 30% for investments in the same stages in the first half of 2009. Early-stage dollars continue to be harder to come by. But according to the Deloitte/NVCA survey, most investors think this is a terrific time to be investing.

A final trend is that there are slivers of light shining through at the end of the tunnel for venture-backed exits. There were five venture-backed IPOs in the first half of 2009, compared with six in all of 2008. None of the 2009 IPOs and only one of the 2008 IPOs involved a life science company, but if the public markets continue to warm back up to the idea of new issuances, venture investing would increase on all fronts. And given the number of life science VC investments in public companies recently, biotech could benefit quickly and aggressively from even small openings in the IPO window.

While that window remains closed, acquisitions are the primary exit for investors. Thomson-Reuters and the NVCA reported four biotech acquisitions in the first half of 2009 with a combined value of approximately $550 million. In 2008, there were a reported 16 biotech acquisitions, of which nine had disclosed values aggregating $893 million.

The numbers don’t give us an adequate sample to draw firm conclusions, but on a per-reported-deal basis, 2009 is looking better than last year. So raise your half-full glass and toast the good fortune of those who have enjoyed success so far this year and those who may find success in the months to come.

Investment Profiles

A number of companies received venture-backed biotechnology investments in the first half of 2009. Anecdotally, a significant portion of the higher-dollar investments were made by established venture funds in public companies and were directed to companies anticipating or in the middle of clinical trials for cancer and infectious disease treatments.

An intriguing example of the potential for seeing a glass half full and rising is Boulder, Colorado’s Clovis Oncology, a start-up founded at the beginning of 2009 to acquire, develop, and market anticancer compounds. Led by executives from Pharmion, which was acquired last year by Celgene for $2.9 billion, Clovis raised $145 million in May from New Enterprise Associates, Domain Associates, Frazier Healthcare and Technology Ventures, Abingworth Management, Proquest Investments, Aberdare Ventures, and Versant Ventures.

After going public in 2006, San Diego-based Cadence Pharmaceuticals, which in-licenses and develops infection-fighting products for use in hospital settings, continued to raise private equity funding, including approximately $25 million in 2008 and $87 million in 2009. Investors included Venrock, Frazier Healthcare and Technology Ventures, Domain Associates, Versant Ventures, New Enterprise Associates, Bay City Capital, and T. Rowe Price Associates.

Hyperion Therapeutics, based in South San Francisco, closed a $60 million Series C financing to fund Phase II and Phase III clinical trials for its gastroenterology and hepatology therapies. Bay City Capital and Panorama Capital led the financing. which included existing investors, Highland Capital Partners, New Enterprise Associates, and Sofinnova Ventures.

Anacor Pharmaceuticals raised $50 million in January from GlaxoSmithKline, Schering-Plough, Rho Ventures, Venrock Associates, Care Capital, and Aberdare Ventures to further develop products based on its boron chemistry platform.

Proteon Therapeutics raised $50 million in Series B funding to continue clinical studies and development of its products targeted at preventing arteriovenous fistula maturation failure and arteriovenous graft failure in patients with end-stage renal disease who are on or preparing for hemodialysis. Investors included Bessemer Venture Partners, Devon Park Bioventures, TVM Capital, Skyline Ventures, Prism VentureWorks, Intersouth Partners, and several of Proteon’s original angel investors.

Symphogen, a Danish company founded in 2000, raised €33 million from Essex Woodlands Health Ventures and existing investors to support clinical development of its antibody products.

Cempra Pharmaceuticals was formed in 2006 in North Carolina. In May, it closed $46 million of Series C financing that will be used to advance clinical development of the company’s lead antibiotic compounds and the company’s preclinical pipeline. Investing in the round were Quaker BioVentures, Devon Park Bioventures, Aisling Capital, Intersouth Partners, and others.