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VC Investing in Life Sciences Up in Dollar Amounts, But is It Enough?

In 2011, the Life Sciences industry saw an increase in VC investing dollar amounts, but the amount of deals going through declined.  Biotech companies raised $4.7 billion- more than any other sector except software, and enough to help make last year one of the top three years for venture fundraising in the past decade.

A Thomson Reuters report broke the numbers down further; total VC dollars poured into the Life Sciences sector - including 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 does this all mean? It means that VCs in the 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, for anything in investing to be sustainable, FDA issues will need to be worked out.”

Some trends showed positive signs for the life sciences industry despite the downturn in number of VC deals. During the fourth quarter, VC investing in early-stage companies totaled $987 million- a 47 percent jump from the previous quarter and an 88 percent increase over the fourth quarter of 2012. It was the first time since the second quarter of 2012 that early-stage topped late-stage funding.

The earliest stages of drug development are when entrepreneurs traditionally struggle the most to raise funding. The “Valley of Death” as it’s commonly known, is 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. The shift of VC funding to early-stage is encouraging to small and young companies; especially with the increase trend of VCs investing in unproven molecules and giving hope to the companies to continue their work.

The top five regions for life sciences investing in 2011 included San Francisco, Boston, San Diego, New York, and Orange County. 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, life sciences companies raised $497.6 million- 90 percent more than in 2012. But the number of deals dropped from 54 to 47.

VC investing in life sciences is looking up, and this is good news for all. Even if the volume of deals continues to fall, the face that more money is going into life sciences is a positive sign, says Leftroff.  With an economy in rough shape from the last few years, these green shoots are just what the industry needs.

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