Life Sciences Funding Rebounds in Second Quarter

Life Sciences Funding Rebounds in Second Quarter

Investment dollars have returned to the life-sciences industry. Despite mixed signals from the economy, the sector—which includes the medical device and biotechnology arenas—captured the most venture capital investment dollars in the second quarter of 2010, according to a new report from global professional services firm PricewaterhouseCoopers. Life-sciences funding totaled $2.1 billion in 234 deals, a 52 percent jump in dollars and a 36 percent rise in deals compared with the first quarter of the year. With the industry’s dismal start to 2010—when investment fell 27 percent in dollars and 15 percent in deals compared with the final quarter of 2009—life-sciences executives are hoping the second-quarter figures herald the return of sustainable growth to the sector.

“It takes several quarters to establish a clearly sustainable growth trend, but the data look good so far,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at Pricewaterhouse Coopers. “If the markets remain positive, we’ll likely continue to see robust investment levels for the remainder of the year, with venture funding in 2010 poised to surpass 2009 levels.”

The industry already may be well on its way to surpassing last year’s funding levels: According to the Pricewaterhouse

Coopers report (titled “Quarterly Rebound”), life-sciences investments totaled $3.4 billion through June 30, a 26 percent increase compared with the first half of 2009. In addition, the total number of life-sciences deals climbed 18 percent to 406 in the first six months of 2010 (consequently, there were 345 deals reached during the first half of last year).

One of the factors that likely contributed to the higher deal volume and funding growth in both the second quarter and first half of 2010 was the number of life-sciences companies that went public, Lefteroff said. Eight pharmaceutical and biotechnology firms took their stock public during the first six months of the year, according to data from various venture capital companies. Among the more noteworthy IPOs were Cambridge, Mass.-based Ironwood Pharmaceuticals Inc., which raised $188 million; Aveo Pharmaceuticals Inc. (also based in Cambridge), which earned $81 million; and Codexis Inc. of Redwood City, Calif., which collected $78 million.

The mini-revival in life-sciences IPOs, however, came with a price—namely, the value of the public offerings. Many of the companies that filed for IPOs this year have had to cut their share price to get them off the ground, a sign that investors are still wary of backing companies with a high development risk and no marketed products.

Codexis and CorMedix Inc., a Bridgewater, N.J.-based pharmaceutical company, priced shares at the bottom end of their respective ranges (Codexis at $13 per share; CorMedix at $6.50 per share), while Alimera Sciences Inc. and Tengion Inc. both reduced prices significantly. Alimera was hoping to raise up to $87 million by selling 6 million shares at $14 to $17 per share; instead the Alpharetta, Ga.-based biopharmaceutical firm made $72 million from 6.5 shares sold at $11 per share. Tengion, which is attempting to develop regenerative medicine technology, had hoped to raise $46 million through the sale of 4.4 million shares at $8 to $10 per share. The company wound up collecting $30 million from 6 million shares sold at $5 per share.

Medical device firms fared no better (it could be argued that they were worse off than their biotechnology and pharmaceutical counterparts due to the lack of IPOs in the last two years). AGA Medical Holdings Inc. of Plymouth, Minn., for example, raised $199.4 million through a public offering last fall, but the amount was well below the $275 million the company had hoped to collect. Weak demand forced the company to lower its share prices from an estimated $19-$21 to $14.50.

Weak demand and poor market conditions led Memphis, Tenn.-based SurgiVision to twice postpone an IPO it had been planning for seven months. SurgiVision had originally planned to offer 2.5 million shares at a range of $9-$11 before postponing the deal the first time in late July; it refiled on Aug. 5 to raise $18 million by offering 3.7 million shares at $5 per share but nixed the deal again on Aug. 30. The company planned to use proceeds from the IPO for research and development, sales and marketing activities and for working capital. SurgiVision had an accumulated deficit of $45.8 million as of June 30. It lost $3.3 million in the first six months of 2010, compared with a $3.8 million loss in the first half of 2009.

Fortunately for the device sector, IPOs are not the only way to raise money these days. There’s also seed and early-stage funding, as well as equity offerings and merger and acquisition exits. Audax Medical Inc., a privately held company in Littleton, Mass., used its equity to raise $686,000 several months ago while Phoenix, Ariz.-based Providien Inc. convinced investment firm Endeavor Capital LLC to fork over $10.5 million so it can acquire small contract manufacturing firms looking for liquidity.

Both late-stage and early-stage funding to medical device firms rose in the second quarter, according to the PricewaterhouseCoopers report, which includes figures from the National Venture Capital Association MoneyTree report (based on data from Thomson Reuters). Early-stage funding increased 25 percent and late-stage investments grew 10 percent compared with the second quarter of 2009. Both stages also fared better than they did in the first quarter: Early-stage funding doubled and late-stage investments climbed 10 percent, the report stated.

The growth in early-stage and late-stage funding helped funnel more money into the device sector in the second quarter of 2010. Overall, medical device funding jumped 40 percent between April and June, with $755 million invested in 95 deals, the report stated. In the first half of 2010, device funding rose 13 percent compared with 2009, an increase that Lefteroff attributed to the healthcare industry’s intense focus on disease detection and prevention.

“The health industries have seen a trend toward prevention and early detection of diseases and medical conditions driven by diagnostics,” he said in the report. “This trend is expected to accelerate. The demand for innovative products is not expected to stop.”

Lefteroff’s reasoning could explain why funding for both medical therapeutics and medical diagnostics rose in both the second quarter and first half of 2010 but investments in medical products fell during those same periods. The report did not give precise figures, but said that funding to diagnostics firms climbed 11 percent in the second quarter and a staggering 87 percent in the first six months of the year. Investments in therapeutic companies skyrocketed 74 percent in the second quarter and 16 percent in the first half of 2010. Surgical instruments received $211 million in funding in the second quarter, while pacemakers and drug delivery products captured $127 million and $34 million, respectively.

Double-Dip Recession? Device Firms are not Convinced

The growing chorus of doomsayers (and some economists) warning of a double-dip recession is falling on deaf ears in the medical device market.

Despite seesawing quarterly earnings reports (much like the vacillating stock market of late), orthopedic manufacturers are showing no real concern about the possibility of another recession. In fact, many chief executives have predicted strong growth through the end of the year.

“Our second quarter performance was characterized by year-over-year constant currency sales growth in all geographic segments,” said David Dvorak, president and CEO of Zimmer Holdings Inc., which reported a 21 percent decline in profit in the second quarter of 2010 but a 9 percent rise in adjusted earnings per share (EPS). “We anticipate accelerated growth through 2010…”

Dvorak made his bold forecast in late July, as chatter about a potential double-dip recession began to intensify. Those who initiated the chatter (dubbed “double-dippers” in the media) cited several factors in their favor: a still anemic housing market, a stubbornly high unemployment rate, Europe’s sovereign-debt problems and big austerity drive, China’s slowing growth, and massive overcapacity in the U.S. economy.

But none of those warning signs mattered much to companies such as St. Jude Medical Inc., Covidien plc or Abbott Laboratories. Perhaps bolstered by positive earnings reports, or by the realization that double-dippers could be wrong—housing starts rose 1.7 percent in July and the Dow Jones Industrial Average climbed 7 percent—the firms either maintained or raised their outlook for 2010.

St. Jude Medical, which reported a 16 percent increase in second-quarter net earnings, raised its 2010 guidance for the second time this year. The St. Paul, Minn.-based firm projects net earnings for 2010 to range between $2.86 and $2.91 per share.

Covidien reaffirmed its full-year sales guidance and operating margin when it released its fiscal third-quarter earnings report on July 29. The Dublin, Ireland-based company expects sales to rise between 5 and 8 percent in fiscal 2010, with free cash flow exceeding $1.5 billion and an operating margin up 22 percent compared with fiscal 2009.

Abbott doesn’t expect its guidance to change, either. The Abbott Park, Ill.-based firm expects its full-year EPS to grow 12 percent, falling anywhere between $4.13 cents and $4.18 cents per share. Company executives said they expect double-digit sales growth for the full year, including incremental sales from the February acquisition of Solvay Pharmaceuticals SA.