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August 01, 2009 (Vol. 29, No. 14)

Biotechnology Investments Exhibit Resilience

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

  • 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.

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