In the past couple of weeks there have been contrasting views put forward with respect to the future of investing in the biotech sector.
This suggests that whilst many VCs see investing in the biotech sector as carrying increased risk, whilst others are actively raising capital for biotech dealmaking. As in all markets, different groups hold different views on the outlook for the sector.
On the one hand, venture firms are reportedly reducing biotech investment due to an increased FDA risk. See: Venture firms reduce biotechnology investment on FDA risk.
Venture capital firms are investing less in experimental drugmakers and medical device makers because of what they say are regulatory hurdles, a survey found.
Almost 40 percent of 150 venture capital firms that responded to the survey have decreased their investment in life sciences during the past three years, the National Venture Capital Association said today in a statement. The same proportion expect to continue to reduce their spending on these companies over the next three years, a potential $500 million loss, the association said.
Whereas, on the other hand, Sofinnova recently announced the completion of raising $440 million for biotech-only investment. See: Sofinnova raises $440 million for biotech-only VC round.
Sofinnova will seek out companies with drugs already in clinical trials, as well as purchase therapies developed by other pharmaceutical companies, said Garheng Kong, a general partner at the Menlo Park, California-based firm.
“The initial target was $325 million,” Kong said in a telephone interview. “Obviously we over-subscribed that, and had excess demand.”
The fund stands out because investors have had a harder time raising money this year. U.S. venture capital fundraising fell 53 percent to $1.72 billion during the third quarter, the lowest amount since the third quarter of 2003, according to the National Venture Capital Association.
So what does the future hold?
The current economic climate is proving difficult for investors and biotechs alike.
With the addition of increased regulatory pressure, there is a need for more selective investment criteria. This is not necessarily a bad idea if the best opportunities and developments are able to obtain sufficient funding.
Will this be the case? Watch this space…
Risk reduction through a better and earlier understanding of market positioning and both regulatory and commercial hurdles would be no bad thing.
With regards to medical devices, according to Deloitte, there has been an increase in VC investment in this sector to compensate for the longer time to obtain FDA approval (more money into a smaller number of companies). Will be interesting to see whether growing disatisfaction with the 510k process will reduce VC investment in medical devices.
There have always been contrasting views on investing in biotech – always will be. It’s just a matter of the degree of contrast.
There’s clearly less actual cash about in North America and Europe but with yields in “safe” assets at historic lows those who do have some cash to spare are beginning to leave their bunkers and are making investment decisions. Presumably they feel that their money has spent long enough stuffed in to metaphorical mattresses. Outside of VC’s a number of bigger companies in pharma and medical device clearly have plenty cash in their reserves (the world not having ended) and are making deals at what they plainly see as the bottom of the current cycle. In many ways it will be surprising if we don’t see a rise in investment at all stages of company development throughout 2012. The rise is certain to be volatile and patchy – but it will be a rise taken over two or three quarters.
The perceived risk of the FDA being more assertive is as much a reflection of market skittishness as it is of the FDA’s teeth. Investors are perhaps still looking for excuses not to spend money quite yet. Early stage pharma particularly has always been risky and the risk profile hasn’t changed wildly over the last decade. However investor’s appetite for risk fell off a cliff three years back and we’re not likely to see any time soon the return of all those press releases announcing a few hundred thousand being dropped into the laps of some scientists in a shed with the next cure for cancer at hand. The well thought out strategies on the other hand that have a coherent plan to bring actual product to market and sell something within the expected lifetimes of the investors are (for the most part) seeing some cash.
I think that the survey result from the National Venture Capital Association suggesting VC’s will continue to decrease their investment in life sciences over the next three years should be taken with a pinch of salt. It may well be the case but based on my experience I’d happily bet that there is equally likely to be a substantial increase in investment in the sector through to 2015/16. Even if we don’t see an increase in real terms my alternative bet is that the proportion of money invested in life sciences will rise in comparison to most other sectors.