Venture Capitalists Flock to Biotechnology Sector in Q2

Venture capitalists finally are returning to the biotechnology industry.

Funding jumped 41 percent during the second quarter, with $1.3 billion going into 103 deals, according to the latest MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA) based on data from Thomson Reuters. The increase was driven by the strength of two large funding rounds in the quarter.

The influx of cash to U.S. biotech firms follows a particularly heavy three-month period for initial public offerings (IPOs). During the first half of 2013, biotech IPOs have raised about $1.5 billion for companies, and such sales show no signs of abating. NVCA experts contend the spikes in IPOs and VC investment prove the biotech industry finally is on the road to recovery.

“Life sciences investment is poised for a slow and steady recovery, provided we can continue to see progress on the regulatory front,” NVCA President Mark­­ Heesen said.
Close to a third of the biotech deals in Q2 were for first-time rounds in the life sciences field, with $328 million funding startups – double the dollar pace for early-stage companies seen in the first quarter. The two big biotech rounds include an $85 million investment in Intrexon, RJ Kirk’s latest biotech play, and a $60 million round for Trevena. 

“The increase in early stage investing is an encouraging sign that entrepreneurs with innovative ideas can get the funding they need to succeed,” remarked Mark McCaffrey, global technology partner and software leader at PwC US. “As the exit window continues to open, we’ll continue to see VCs shifting their focus back to companies in the earlier stages of development.”

Such investor confidence, however, was limited to the biotech industry. VC dollars to medical device firms fell 1 percent in the second quarter as investors pumped $543 million into 71 deals. While the decline is an improvement compared with the first quarter’s 20 percent drop in deal value and 10 percent slip in deal volume, it nevertheless extends a funding slump that some analysts fear may permanently alter investment strategies.

One of the major roadblocks to a medtech investment recovery is healthcare reform. A greater emphasis is now being placed on products that can help reduce skyrocketing healthcare costs; companies, of course, cannot make such promises or guarantee their new devices and diagnostics will win insurance coverage and produce revenue. As a result, investors are still gun-shy about returning to the industry. “Products can get approved, but now you can’t get paid for it,” observed one industry analyst. “This is what is really discouraging the investment in that space. It is pushing people away. Everything goes in cycles. But until we have more predictability about the path we get paid, it is going to be more challenging.”

Biotech, on the other hand, gives investors an exit. Analysts claim that pharmaceutical companies increasingly want to purchase promising new drugs in development.