Venture Funding Returns to Life Sciences

The dotcom bubble is back and with it comes a new wave of venture capitalists (VCs) that are pouring money, not just into Internet companies, but into life sciences companies as well—and in increasingly larger numbers.

Brian O'Connell

According to an article in The New York Times in October: "Internet companies with funny names, little revenue, and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance."

While The Times focuses more on information technology companies like Facebook, Yahoo, and Google, the evidence points to a burgeoning number of VCs snapping open their checkbooks and waving them in the direction of biopharmaceutical companies.

According to Healthcare Corporate Finance News, healthcare firms garnered roughly $2.5 billion of venture capital funding during the third quarter of 2007. That's a 10% increase in new venture deals over the same period last year, and a 14% gain in dollars pouring into healthcare companies. The life sciences sector comprises the lion's share of the new deals (Table 1).

Table 1. Healthcare venture capital investments (third quarter ended June 30, 2007)

In a study of venture fund activity throughout the first three quarters of 2007, Healthcare Corporate Finance reports that the medical device sector topped the list of life sciences companies gaining the most venture funding, with 25% of the quarterly dollar total for all sectors combined. "The second-largest deal of the quarter, a $110-million Series E financing for Globus Medical, a developer of spinal implant systems and biomaterials, was led by Clarus Ventures. Neuromed Pharmaceuticals, a biopharmaceutical company developing drugs for chronic pain, announced the largest deal among pharmaceutical, biopharmaceutical, and biotech companies, with a $53.3-million Series E financing led by MPM Capital," says the report.

In the entire healthcare field, the busiest companies were not attracting single venture investors, but sometimes four or five of them. That's a telling sign. A rule of thumb on Wall Street is that if more than one venture firm is knocking on your door, then the investment purse strings are really loosening. That has to be considered good news in the biopharmaceutical sector, particularly for startup companies who should most benefit from a pumped-up venture funding climate. The evidence backs that theory. Seed money going to smaller companies accounted for 29% of all venture investments in the first quarter of 2007, up from 26% during the same quarter in 2006. Table 2 lists the most active healthcare venture capital firms.

Table 2. The most active healthcare venture capital firms (third quarter 2007)

WHY ALL THE FUSS?

The life sciences sector hasn't seen this big a pipeline since 2001, when venture firms turned away from Internet companies and toward biopharmaceutical companies in a desperate bid to stem the losses incurred when vast armies of dotcom dinosaurs went belly-up. The fact that, as The Times points out, the rise in venture funding in the life sciences market this year coincides with the rise in venture funding in the Internet market, is somewhat worrisome. After all, it was only six or seven years ago when an estimated $1.5 billion was lost by venture capital firms. Shouldn't they be worried about history repeating itself?

Maybe not. One reason for optimism is that in the last seven years, the baby boomers have gotten seven years older. In the mind of many Wall Street mavens, that means more consumer demand for disease-fighting and life-enhancing products being produced by life sciences companies these days. As the boomers advance in age, the market for health-related technologies will grow along with them. In addition, the boomers are sitting on some pretty fat wallets, and are only too willing to pay to stay fit and healthy.

PHARMACEUTICAL RESEARCH AND DEVELOPMENT INVESTMENT

Another reason for the expanded financial pipelines is that Wall Street has noticed that the biopharmaceutical sector has, by and large, increased its research and development (R&D) capacities.

According to the Journal of Life Sciences, the pharmaceutical and biotechnology sector is now the largest market in terms of R&D investment, leapfrogging over the technology hardware and equipment sector last year. The big boys are amping up the R&D machines, and Pfizer is setting the tone with total R&D investment of $7.6 billion, an increase of 2.1% over the previous year. Others are gearing up R&D investment as well. Among the biopharmaceutical firms in the list of the top 50 R&D investors that demonstrated big spikes in R&D spending last year were Merck (up 24.3% from the previous year), AstraZeneca (15.5%), Roche (15.5%), Johnson & Johnson (12.9%), Novartis (10.7%), and GlaxoSmithKline (10%). Worldwide, investment in R&D rose 10% over 2005.

Traditionally, R&D has been a sore spot for Wall Street investors, which pushes and pulls money in and out of life sciences in a reactive fashion. If biopharmaceutical companies demonstrate that they're serious about creating new vaccines and treatments then, as the saying goes, the money will follow. And, increasingly, the benchmark that investors use to gauge the seriousness of biopharmaceutical companies is R&D funding.

The increase in biopharmaceutical funding might be also be tied to some ulterior motives on the part of venture investors. We're in an age of major merger and acquisition (M&A) activity in the life sciences market. VCs seem willing to pour more money into promising biopharmaceutical firms to hopefully catch the eye of a big pharmaceutical company on the prowl for new M&A opportunities. Much like a homeowner sprucing up the joint before putting his house on the market, venture investors are earmarking more funds for things like mid-stage clinical trials of experimental drugs to make potential suitors sit up and take notice.

So where is all this new money coming from and will it continue to flow? The New York Times article says it's a combination of Wall Street and academia, particularly endowment funds groaning under the weight of new investment money and from hedge funds looking for new profit opportunities.

That's a good sign for biopharmaceutical companies looking for new investors. For the reasons mentioned above, investor's eyes have turned to the life sciences sector. There's something in the air, and it all points to a financially flush venture funding environment in 2008.

Let's just hope that, as far as bubbles go, history doesn't repeat itself.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, Doylestown, PA, 215.230.1070, brian.oco@verizon.net