September 1, 2008 (Vol. 28, No. 15)

Money Is Still There, but Traditional Biotechs Face More Competition from Emerging Clean Energy Firms
Significant changes occurring in the global economy, in general, and venture investing, in particular, have finally caught up with venture capital (VC) support for biotech companies. Despite an abundance of funding as well as scientific and technological progress, the environment for investing in the life science industry seems to have changed dramatically.
For example, the first quarter of 2007 enjoyed record highs in venture investments in biotechnology, medical device, and healthcare firms. In fact, average investments in these areas maintained nearly the same levels through the end of the first quarter of 2008.
This year’s second quarter, however, has not fared as well. Second quarter venture investing in general made a major downturn, and there were no public offerings of any venture-backed company.
For life science firms in particular, in the second quarter far fewer venture dollars went to a smaller number of life science companies. In the first quarter, U.S. life science venture capital firms made 315 investments aggregating nearly $3 billion. In the second quarter, there were 215 such investments aggregating $1.9 billion.
The change was even more dramatic in biotechnology. The number of biotechnology venture backings fell by nearly 50%, and the dollar amount invested fell by more than 40% from the first quarter, according to Thomson Financial. Outside the U.S., the venture financing value fell nearly 50% in the same period.
In the second quarter, venture investors worldwide made 89 investments, half the number made during the prior quarter. This totalled an aggregate of $919 million, approximately 60% of the $1.5 billion invested in the first quarter.
In addition to the decrease in absolute dollars being invested in biotechs over the past year, the proportion of life science dollars going to these companies has shifted compared to medical devices and equipment as well as other healthcare ventures. Biotechnology firms’ share of investments made in the life science industry fell to below 40% from approximately 45% in 2007.
The average amount invested in biotechnology, though, remained high in the second quarter, at more than $10 million; investments have ranged from $8.4 to 11.8 million over the past six quarters.
One factor behind these changes is that biotechnology investments, like most venture capital investments, are inherently risky. In today’s uncertain economic climate, many investors are opting to sit out and wait for more certainty in the market before they invest.
Another reason is that biotech investments generally take longer to mature than nonbiotech investments. For those life science investors who are nervous about the long term in the current environment, investments that have a shorter return time, such as those in medical devices and other healthcare ventures, have become more attractive.
A significant third factor is the emergence of clean energy as an alternative investment category that is growing in favor with long-term investors. Venture capitalists whose portfolios include longer-term investments are shifting their dollars from biotechnology to solar energy, wind power, and other sustainable energy solutions. This reallocation is only partially apparent from the current statistics.
Hence, in addition to losing dollars to nonbiotech firms, traditional biotechnology companies must now compete for venture capital attention and investment with biofuels companies.
Constriction in the public equity markets also plays a role in the reduction seen in venture investing in biotechnology. In 2007 there were 31 IPOs of life science companies, 11 of them for biotechnology companies. In the first half of 2008, four life science firms including one biotech, Bioheart, made IPOs.
Such a decline may result from a number of factors some of which are not specific to life science investing, including general investor apprehension, the debt crisis, and Sarbanes-Oxley and related regulations. Add to this the lack of liquidity and public cash available for biotechnology companies, and it seems that biotech start-ups will grow more slowly.
Lack of liquidity in the public markets has also resulted in public companies taking on private investments from venture capitalists. In the last few months, Cadence Pharmaceuticals received a private infusion of $54 million, and Antisoma raised $40 million shortly following its acquisition of Xanthus Pharmaceuticals. Investment of venture capital into public companies and later-stage private companies means that even less is being spent on early-stage companies.
Lack of liquidity in the U.S. markets has also led a number of biotechnology companies to go public through the London Stock Exchange’s Alternative Investment Market (AIM). In connection with an AIM listing, Phibro Animal Health raised approximately $97 million to buy out some of its existing shareholders.
Life science acquisitions have also taken a beating. Thomson Financial reports that 47 venture-backed life science companies were acquired in 2007. Only 12 have been taken over in the first half of this year, eight of which were acquired in the first quarter.
Additionally, judging by the take-over values reported so far this year, acquisition dollars are well off the pace set in 2007. The total value of the 36 acquisitions made last year for which transaction values were made public was $7.4 billion. So far this year, the aggregate amount of the seven deals for which financial terms were disclosed was $2.2 billion.
In the first quarter of 2008, there was one venture-backed acquisition for which the value was reported: the acquisiton of AppTec Laboratory Services by WuXi Pharmatech in February for $163 million. Likewise, there was only one such acquisition reported for the second quarter of 2008, Antisoma’s acquisition of Xanthus for $53 million.
Venture capital investments, particularly those in life science companies, are long-term undertakings. In theory, the level of such investments made in life science at any time should not be significantly affected by short-term fluctuations in stock market activity or the economy. The drought of new public money coming into venture-backed companies through IPOs, however, as well as increasing caution on the part of acquirers have biotech venture investors hanging on tighter to their wallets and checkbooks.
The money is still there but it is going to be harder for biotechnology companies to obtain. This is particularly true given the increased competition for investment with medical device and equipment companies as well as new competition from biofuels and alternative energy companies for investment dollars.

Read a different point of view from J. Leslie Glick, Ph.D., a corporate management advisor, on VC funding as reported in the October 15 issue.

Previous articleGSK Pays $125M Upfront for Part of Valeant’s Neurology Program
Next articleThe Japanese Acquisition Binge