Life Sciences VC Investing Up in Dollar Value, Down in Deal Volume

2/7/12Follow @arleneweintraub

At first glance, a report released last week by PricewaterhouseCoopers and the National Venture Capital Association seems to portend rich times for life sciences startups. Biotech companies raised $4.7 billion in 2011—more than any other sector except for software and enough to help make last year one of the top three years for venture fundraising in the past decade.

But drill down into the report, based on data provided by Thomson Reuters, and the numbers tell more of a mixed story. Total VC dollars poured into the life sciences sector, which also includes medical devices, increased 21 percent to $7.5 billion in 2011. The biotech portion of the haul marked a 22 percent increase over 2010. But the volume of biotech deals dropped 9 percent to 446. What’s more, the medical device portion rose 20 percent in dollar terms (to $2.8 billion) but dropped 2 percent in deal volume (to 339).

What it all means is that VCs in life sciences remain supportive of the sector, but uncertain about its future, says Tracy Lefteroff, global managing partner in PwC’s venture capital practice. “There are still some major challenges ahead in terms of getting the FDA to provide transparency to young companies about what they need to do to get their products out of the pipeline,” Lefteroff says. “For anything [in investing] to be sustainable, FDA issues will need to be worked out.”

Still, some investing trends last year showed clear signs of optimism in life sciences. During the fourth quarter, for example, VC investing in early-stage companies totaled $987 million—a 47 percent jump fromthe previous quarter and an 88 percent increase over the fourth quarter of 2010. It was the first time since the second quarter of 2010 that early-stage funding topped late-stage funding.

That’s important, because it’s during the earliest stages of drug development when entrepreneurs traditionally struggle the most to raise funding—particularly the much-bemoaned “valley of death,” when a discovery program is beyond the point of being eligible for federal grants, but not advanced enough to attract the attention of most VCs.

Lefteroff says recent investing trends suggest VCs–as well as VC investing arms inside of Big Pharma companies—may be more willing now to take earlier bets on unproven molecules. “It’s encouraging that despite all the problems you hear about in this space, venture capitalists still see tremendous opportunities to develop innovative products and get returns,” he says.

Some subsegments of life sciences did particularly well in the fourth quarter of last year, including companies developing “biosensors,” such as diagnostic products designed to determine which patients should get which drugs. Companies focusing on such products raised $31 million in the fourth quarter of last year. Even the veterinary segment is doing well: Biotech companies developing animal products raised $66 million in the fourth quarter. Lefteroff wasn’t surprised “Veterinary products can be highly profitable once you get them on the market,” he says.

The top five regions for life sciences investing in 2011 were San Francisco, Boston, San Diego, New York, and Orange County, CA. With 26 deals totaling $382.7 million, Orange County pushed Chicago off the list of the top five. In all four of the other top cities, the number of funding deals dropped but the total amount invested increased. In New York, for example, life sciences companies raised $497.6 million—90 percent more than they raised in 2010. But the number of deals dropped from 54 to 47.

Even if the volume of deals continues to fall, Lefteroff says, the fact that more money is going into life sciences is a positive sign. “It indicates a pent-up desire to deploy capital,” he says, “in what will continue to be a vibrant and active sector.”

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