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|
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|
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)|
|Aragon Pharmaceuticals||Series C||42.0|
|Alder Biopharmaceuticals||Series D||38.0|
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)|
All data sourced to EvaluatePharma
To contact the writer of this story email Jonathan Gardner in London at email@example.com