Q2 VC funding totals confirm drought for drug developers

Analysis

When it comes to raising money, the second quarter of each year is where the rubber meets the road for capital-hungry private biotechs needing a boost from venture backers. If 2012’s Q2 is any indication, the sector is in for a very rough ride this year.

Biotechs focusing on human drug development raised just $628m in venture funding in the second quarter, down a staggering $898m from 2011, auguring poorly for the year as a whole as the middle six months of the year are typically the most active (see tables). It is confirmation of a drought brought on in part by a lack of investment in venture firms themselves, not to mention the fear of risk as macroeconomic factors dominate finance.

“It’s a very selective market,” Sander Slootweg, managing partner with Netherlands-based venture fund Forbion Capital Partners, told EP Vantage in a recent interview. “Sometimes it’s that one VC likes one deal, but there’s no ability to build syndicates. Only the best companies are getting funding.”

Quarterly VC investments
Financing Date Investment ($m) Financing Count
Q2 2012 628 51
Q1 2012 821 82
Q4 2011 307 27
Q3 2011 1,194 83
Q2 2011 1,526 91
Q1 2011 770 67
Q4 2010 142 14
Q3 2010 1,536 112
Q2 2010 1,870 120
Q1 2010 1,052 87
Q4 2009 461 36
Q3 2009 1,546 101
Q2 2009 1,413 93
Q1 2009 1,451 98
Q4 2008 183 19
Q3 2008 1,530 109
Q2 2008 1,508 94
Q1 2008 1,262 80

Crumbs

With software developers swallowing nearly a third of all US venture capital dollars in the second quarter, according to a National Venture Capital Association and PriceWaterhouseCoopers analysis, biotechs are left to battle for the crumbs. A stark indicator of the outlook for venture capital is the fact that venture capital funding in the second quarter could not even match that of the first quarter, which is usually one of the slower periods.

Among those private companies working in human drug development, the first half saw $1.4bn in venture capital funding overall. Without a significant pickup in activity, that run rate will put it well below the $3.8bn in 2011, which itself was the slowest year in the past five (Slow Q1 for VC funding points to another challenging year ahead, May 3, 2012).

The first half numbers do provide a glimmer of hope. The number of financings does not seem to have fallen as sharply as the amount of capital raised, at 132 this year through June 30 compared with 158 at the same point in 2011 (Vantage Point – VC funding slump in first half points to tougher times ahead, August 17, 2011).

Annual VC investments
Financing Date Investment ($bn) Financing Count
H1 2012  1.4 132
2011 3.8 268
2010 4.6 333
2009 4.9 328
2008 4.5 302
2007 6.0 333

However, that is a sign that companies can expect to raise less money than in past years, which will probably be cold comfort for early-stage companies looking at expensive phase II trials to prove proof of concept for partnering. It is probably a sign that big pharma may be able to extract better terms from such companies in licensing talks if fewer venture capital dollars are available and what is available comes in smaller chunks.

Furthermore, the biggest fundraisings have already consumed a significant share of VC dollars. When second tranches for Circassia and Symphogen are added into the $206m raised in the top five funding rounds in the first half of 2012, more than one-fifth of the venture capital cash was spoken for.

Thus combined with the pickup in the number of funding rounds, a shrinking capital base and a few players scoring big jackpots, individual fundraisings are on the decline on average.

Biggest Rounds of 2012 to date
Company Financing Round Investment ($m)
Sangart Series G 50.0
Celladon Series D 43.0
Aragon Pharmaceuticals Series C 42.0
Alder Biopharmaceuticals Series D 38.0
Igenica Series C 33.0

Where it is spent

In keeping with past trends, the biggest share of VC money in the first half of 2012 was spent in series B rounds, reflective of the need for private biotechs to achieve proof of concept in phase II trials before being able to partner a drug or sell shares on the public exchanges.

Variations from past trends can be seen in A, C and D rounds, with the former two below five year trends in terms of percentage of money raised and the latter above. It is probably too early in 2012 to draw any conclusions from that trend, and given the drastic increase in the share of fundraisings that do not disclose a specific round it could be reflective of a turn away from the traditional “escalator model” of VD fundraising.

Times have been tough for biotechs in need of a booster shot of cash to get them closer to exit or partnership, and the venture capital totals from the second quarter are more confirmation of this fundraising famine. Anybody seeking good omens will need to look hard; but, though the signs are not good, a strong finish in 2012 could provide some optimism that current trends can be reversed.

Venture Capital investment rounds
Total Investment ($m) Total Finance Deals % Investment per Financing Round
Financing Round H1 2012 2011 2010 2009 2008 2007 H1 2012 2011 2010 2009 2008 2007 H1 2012 2011 2010 2009 2008 2007 5yr average (07-11)
Seed Capital 8 20 27 22 12 80 3 15 20 15 12 20 1% 1% 1% 0% 0% 1% 1%
Series A 162 1,021 898 1,244 993 1,231 23 80 81 94 81 79 12% 27% 20% 26% 22% 21% 21%
Series B 349 997 1,295 1,002 1,047 1,141 27 54 62 56 60 51 26% 26% 28% 21% 23% 19% 24%
Series C 118 396 1,031 948 894 1,237 7 20 51 44 36 48 9% 10% 22% 19% 20% 21% 17%
Series D 208 370 225 490 399 525 8 16 18 21 12 18 15% 10% 5% 10% 9% 9% 10%
Series E 88 322 63 46 145 266 5 7 4 5 4 9 6% 8% 1% 1% 3% 4% 4%
Series F  - 61 174 303 110 50 1 3 3 10 2 1 0% 2% 4% 6% 2% 1% 2%
Series G 50 127 78  - 27  - 1 2 1  - 1  - 4% 3% 2% 0% 1% 0% 2%
Series H  -  - 10  -  -  -  - 2  -  - 0% 0% 0% 0% 0% 0% 0%
Series Undisclosed 371 483 800 814 855 1,454 58 71 91 83 94 107 27% 13% 17% 17% 19% 24% 20%
Annual Totals 1,353 3,797 4,600 4,870 4,482 5,984 132 268 333 328 302 333 100% 100% 100% 100% 100% 100% 100%

All data sourced to EvaluatePharma

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com

Share This Article