September 1, 2007 (Vol. 27, No. 15)

Investors Are Spending More Money and Making Higher Valuations

Healthcare venture capitalists have been busy this year, at least their limited partners’ dollars have. The numbers have never been better. What does that mean for private biopharmaceutical, medical device, and other life science companies seeking funding in 2007? Here’s our view of the numbers and trends.

Number and Value of VC Investments

In the first quarter of 2007, venture capital investors put $2.9 billion into private U.S. healthcare companies, including $1.8 billion in biopharmaceuticals and $953 million in medical device ventures. This represents the largest stakes made in these categories in any quarter since Venture Source and Ernst & Young LLP began quarterly reporting of healthcare funding in 2000.

On an annualized basis the 2007 number is approaching $12 billion, thus 2007 could see the biggest ever infusion of venture support into health sciences and technologies. The previous record was set in 2000 at $9.8 billion. The 2007 amount will be about half more than last year’s $8.3-billion aggregate life science funding.

The increase in total dollars doesn’t mean this is easy money. The number of life science companies receiving venture funding has hovered between 150 and 175 per quarter, or about 650 per year, since 2000. That year, 838 investments were made, the highest ever. The median size of a venture investment in healthcare also has remained relatively steady. It has increased on an annual basis from $7 million in 2000 to $8 million in 2006. For the first quarter of 2007, however, the median healthcare financing jumped to more than $12 million. Specifically, in biopharma it was even higher, reaching $20 million, partially as a result of some large private equity and acquisition-related financing.

Biopharmaceutical, biotechnology, and pharmaceutical companies consistently represent almost half of the recipients and are awarded about 60% of the dollars from healthcare venture capital firms. The medical devices category remains steady at about 40% of the transactions and 33% of the money, and the rest goes to healthcare services and medical software and information technology companies.

The firms receiving the largest private support so far in 2007 include EUSA Pharma (, developer of specialty pharmaceuticals focused on European markets, which received $175 million in acquisition capital from investors, including 3i Group, Advent Venture Partners, Essex Woodlands Health Ventures, Goldman Sachs Private Equity Group, NeoMed Management, and SV Life Sciences. CardioNet, which provides service-mobile outpatient telemetry solutions, received $110 million from private equity investors, including Foundation Medical Partners, Hambrecht & Quist Capital Management, Sanderling Ventures, and other private equity investors.

Large first-round venture capital investments in the last year include Macroflux’ ( $75 million from Nomura Phase4 Ventures, New Enterprise Associates, and HBM Partners in connection with Macroflux’ spinout from Johnson & Johnson’s Alza ( subsidiary. The company develops transdermal delivery technology for proteins, peptides, and vaccines. Zogenix (, a firm focused on pharmaceuticals to treat central nervous system disorders and pain, received $60 million in first-round funding from BA Venture Partners, Clarus Ventures, Domain Associates, Life Science Angels, Thomas, McNerney & Partners, and Windamere Venture Partners. Arete Therapeutics ( raised $35 million in Series A financing from Alta Partners, Frazier Healthcare Ventures, Burrill & Company, Three Arch Partners, and Altitude Life Science Partners.

The most active venture capital firms investing in healthcare over the past 18 months include Versant Ventures, Alta Partners, Domain Associates, Three Arch Partners, Polaris Venture Partners, MPM Capital, Frazier Healthcare Ventures, New Enterprise Associates, Oxford Bioscience Partners, and InterWest Partners.

Company Valuations from 2006

Each year Fenwick & West surveys the valuations of life science companies receiving venture capital investment in the San Francisco Bay Area. The survey for 2006, which includes data from 79 life science company financings, can be found at Key findings are listed below.

• Life science companies are gaining value. Up-rounds, or financings where the price per share is higher than the prior round, continue to dominate healthcare venture investments. Nearly 80% of the 2006 follow-on venture capital funding in life science companies were valued higher than the prior financing round. In 2004, only 54% were up-rounds.

• Valuations increased at a significantly higher rate in 2006 than in the prior two years. Since we started measuring valuation increases in 2004, The Fenwick & West Life Science Barometer™, which measures net average price changes for life science companies receiving venture capital, has gone up from a 23% to a 50% increase in 2006. Most of this gain was in the second half of the year, which saw a net 67% rise in company valuations over prior rounds. Although these results are not weighted against the size of the investment, the numbers tell us that venture capital-backed life science companies are experiencing a substantial boost in valuation.

• Both the biopharmaceutical and medical devices market segments enjoyed positive growth in 2006. Of the 31 biopharmaceutical companies we studied that had a follow on financing, 85% had up-rounds, and the net percentage price increase was 41%. For medical devices companies, 76% of the venture capital support was based on increased valuation, and the net percentage price increase was a hefty 55%.

Putting this all together, the news is very good for existing life science companies seeking funding—there is more money available, and investors are willing to make higher valuations. Investors are also backing startups, with the larger transactions for spinouts and acquisitions. The increase in deal size and the corresponding stasis in the number of transactions mean that investors are trying to find ways to put more dollars to work without taking on the extra risk of funding a dramatically larger number of new companies. One way to do this, as we have seen over the past year, is to fund the growth of existing technologies by investing in spinouts and acquisitions.

Robert Dellenbach is a corporate and intellectual property attorney at Fenwick & West LLP. Web: E-mail: [email protected].

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