Life-Sciences Venture Capital Ebbs and Flows—An Arithmetical Riddle Ours is a society ruled

Life-Sciences Venture Capital Ebbs and Flows—An Arithmetical Riddle

Ours is a society ruled by numbers. Since the dawn of civilization, humankind has marked the passage of time in seconds, hours, minutes, days, weeks, months and years. Democracies have chosen their leaders through popular (i.e., highest) vote, athletic monarchies have been fashioned from win totals, and professional success has long been measured in dollars rather than accomplishments.

Numbers, however, are peculiar creatures. They don’t lie, but they don’t exactly tell the whole truth, either. Poorly defined or incorrectly defined numbers spawn misinformation disguised as fact that can disarm skeptics, bewilder reporters and dupe the public into believing almost anything. Author, journalist and professor Charles Seife described the pitfalls of blind numbers trust in his 2010 book, “Proofiness: The Dark Arts of Mathematical Deception.” In the book, Seife details the impact of subtly manufactured numbers on public opinion, using the “Red Scare” of the 1950s as his prime example. Not surprisingly, the “Red Scare” (like most things in life) was based on a number—particularly, the 205 suspected communists the late U.S. Senator Joseph Raymond McCarthy insisted were working in the U.S. State Department at the time. Though his claim was never verified, the thought of so many suspected communists (205) secretly working for the U.S. government nevertheless sparked an anti-Communist movement in America that led to the false conviction of Julius and Ethel Rosenberg for espionage (the couple was executed for reportedly relaying atomic bomb secrets to Russia) and Communist allegations against beloved redheaded comedian Lucille Ball.

“From school days, we are trained to treat numbers as platonic, perfect objects,” Seife told The New York Times during a 2010 promotional tour for his book. “They are the closest we get to absolute truth. Two plus two always equals four. Numbers in the abstract are pure, perfect creatures. The numbers we deal with in the real world are different. They’re created by humans. And we humans are fallible. Our measurements have errors. Our research misses stuff, and we lie sometimes. The numbers we create aren’t perfect platonic ideals. They are mixed with falsehood, but we don’t recognize that.”

Maybe we don’t want to recognize the falsehoods. Or, perhaps we simply don’t know how to spot them. Statistical half-truths particularly are well-hidden in the business world, where numbers constantly are ingested, inspected, dissected, reconstituted and regurgitated by companies reporting quarterly earnings or advisory firms analyzing trends.

Multinational professional services company PricewaterhouseCoopers LLC (PwC), for instance, regularly tracks capital investments in various industries and reports on trends based on the data it
collects. In August, the London, United Kingdom-based firm concluded that life-sciences venture capital funding shrunk for the fourth consecutive quarter between April 1 and June 30, falling 39 percent in dollars and 22 percent in deal volume compared with the same period last year. Life-sciences funding also was down 9 percent from the first quarter of 2012, a sign that both the industry and the global economy face continued pressure.

PwC’s conclusions, however, appear to contradict market intelligence from Burrill & Company, a diversified global financial services firm specializing in the life-sciences industry. In the Sept. 14 issue of its bi-monthly publication, The Burrill Report, editors insist that venture capital in most sectors is on the up-swing this year and likely will surpass 2011 funding levels.

The proof, according to Burrill editors, is in the “numbers.”

U.S. life-sciences companies (including medical device, diagnostics, therapeutics, tools and technology, digital health and healthcare IT firms) are on track to raise $9.6 billion—26 percent more than the $7.6 billion raised last year and 42 percent more than the $6.7 billion raised in 2009.

Drug development companies can expect $3 billion in funding this year, an 8 percent increase compared with 2011 but a 7 percent dip from the $3.2 billion they received in 2009, The Burrill Report story contends. Such an increase doesn’t seem likely though, given the 13 percent slide in pharmaceutical funding PwC discovered during the second quarter.

PwC also detected an 82 percent drop in industrial biotech funding in Q2. But that decrease potentially could impede a 77 percent surge Burrill & Company is projecting for the subsegment: “Most of the surge is coming from strategic investors—big chemical and oil companies—and is necessary so these companies can bring their technologies to commercial levels,” Burrill editors predict. “It is also due to the fact that public markets have battered companies that went public before they commercialized their technology as it has been harder than they expected to achieve their projected production values.”

Burrill envisions a similar healthy surge for diagnostics companies this year due to widespread use and acceptance of their tests. The San Francisco, Calif.-based company gives credence to its argument by citing the $58 million capital raised in late August by cardiovascular genomics diagnostics firm CardioDx just weeks after receiving Medicare coverage for its coronary artery disease test, Corus CAD. The gene expression test is used to diagnose patients who might have coronary artery disease before a major event like a heart attack. Such confidence from investors and insurers is likely to boost venture investment in diagnostics to $715 million this year, a 76 percent increase compared with last year’s levels, Burrill editors anticipate.

There still is plenty of time for the subsector to prove Burrill correct, but PwC’s data, compiled in a brief report ironically titled, “Dollar Drought,” casts some doubt on its adversary’s bold prediction. Medical diagnostics funding, the company notes, plummeted 44 percent to $54 during the second quarter of 2012 while medical therapeutics investment slipped 26 percent to $508 million.

“Dollar Drought,” in fact, paints a gloomy portrait of life-sciences funding in the United States over the last several quarters. It cites a precipitous drop in both funds and deals—in total 174 deals worth $1.4 billion occurred during the second quarter of 2012; the life-sciences share of total venture funding fell to 20 percent in Q2, hitting its lowest level since the third quarter of 2002.

One of the only bright spots in PwC’s report is medical/health products funding, which skyrocketed 111 percent to $137 million in Q2. Naturally, Burrill gurus interpreted the numbers differently, predicting the “tools and technology” sector to be the only life-sciences sub-segment to experience flat funding levels this year (though total investment is projected to be about 38 percent more than the $534 million raised in 2009). Burrill experts explained their reasoning, claiming most of the “tools and technology” funding went to later-stage rounds for only a few companies, including Intrexon Corporation, a synthetic biology platform firm that closed a $58 million series E round in April, and IntegenX Inc., a developer of sample preparation systems that raised $39.4 million in series D funding in August.

Yet there is still hope for tools and technology companies. Numbers, after all, don’t always tell the full story.

“It is important to note that 2012 projected financings for privately held companies are based on year-to-date numbers,” The Burrill Report story concludes. “Although the summer months saw an increase in financings for U.S.-based therapeutic companies, it was not a boom time for global venture financings…”

Not according to the numbers, anyway.