Slow quarter for venture funding could dim hopes of a pick-up

Data Insights

Public biotech companies might be enjoying a marked improvement in their financing climate, but life for private, early-stage drug developers remains tough. Venture financing data collected by EvaluatePharma suggests that this year these companies are unlikely to raise any more than they did last year. On the positive side, this at least represents a marked improvement on 2011 when the financial crash caused investors to desert these high risk propositions.

Unlike previous periods the third quarter of 2013 did not contain any stand out rounds – Dicerna’s $60m Series C topped the chart – and the $891m of VC dollars raised across the three months by companies developing human therapeutics fell slightly below the average of the last five years. This means the traditionally strong fourth quarter for fundraising needs to be action-packed for 2013 to match last year’s result (see tables).

Annual VC investments
Financing Date Investment ($m) Financing Count
9M 2013 3.1 212
2012 4.5 355
2011 4.0 329
2010 4.8 390
2009 4.9 378
2008 4.7 329
2007 5.9 352

After raising a respectable $4.5bn last year, hopes were high that private drug developers – the analysis excludes medtech or diagnostics investments – would see their financial backers loosen up further in 2013. The $3.1bn raised across the first nine months of the year suggests this probably has not happened, with a flat performance looking like the best case scenario.

The quarterly analysis below shows a general trend in financings over each year, with the first three months of any year tending to be relatively quiet and the final three months often showing a flurry of raises. Trends are of course only accurate to a point, but if it rings true this year with a big fourth quarter, 2013 could still match 2012 in terms of dollars raised and the number of transactions struck.

Quarterly VC investments
Financing Date Investment ($m) Financing Count
Q3 2013 891 54
Q2 2013 1,564 90
Q1 2013 649 68
Q4 2012 1,502 87
Q3 2012 1,210 70
Q2 2012 776 90
Q1 2012 985 108
Q4 2011 1,112 87
Q3 2011 772 67
Q2 2011 1,301 88
Q1 2011 853 87
Q4 2010 1,137 92
Q3 2010 1,199 91
Q2 2010 1,404 111
Q1 2010 1,080 96
Q4 Average 2008-13 1,234 91
Q3 Average 2008-13 1,082 76
Q2 Average 2008-13 1,196 89
Q1 Average 2008-13 1,046 91

Last year did show a uptick from the bottom hit in 2011, and certain private companies do report some thawing of the financing climate. The opening of the IPO window, for example, is helping later stage companies, and it has established a get-out route for venture capital backers, although a complete exit is not always possible immediately. Several large rounds have been seen this year, by biotechs moving towards a stock market listing.

Unfortunately a surging Nasdaq Biotechnology Index is not going to help all companies after venture cash and it is no revelation to learn that start-ups are still suffering.

“It is still very hard to get financed in the early stages. Even very good scientific concepts, if they do not fall into certain categories, are very hard to fund,” says Alfred Scheidegger, founding partner at Swiss venture capital firm Nextech Invest.

“It is hard to know where the improvement in public markets will lead,” he says, as some companies that have made it onto the stock market will fail, and some will succeed. “Hopefully that success will transfer to the private sphere and help revive the venture scene, which is what we desperately need.”

The situation remains much harder in Europe than in the US, he adds, where the venture firms themselves have struggled to raised new funds. As a result, “even in the top level in Europe it’s a challenge to syndicate and finance companies properly,” he says.

Biggest rounds of Q3
Company Financing Round Investment ($m)
Dicerna Pharmaceuticals ($) Series C 60.0
NGM Biopharmaceuticals ($) Series C 50.0
aTyr Pharma ($) Series D 49.0
Otonomy ($) Series C 45.9
Argos Therapeutics ($) Series E 42.5

Nextech raised its second fund to invest solely in oncology companies in 2011, a process that Mr Scheidegger describes as “very tough”; in the end it was one of only five biotech venture funds raised in Europe that year, he says.

Ultimately it is the struggles of the venture capital firms themselves in raising new funds that is hobbling new investments, particularly in the early stages where start-ups will require years of support.

“Fund raising is never an easy process and particularly so in the current market,” says Martien von Osch, a managing partner at Forbion. Finding a receptive limited partner with the pertinent knowledge to be able to realise the opportunities and understand the market is now incredibly important, he says, given that many investors suspect that the venture capital model is broken.

“You have to come over additional hurdles to explain the results and the models and the strategies to get them excited,” he says.

Nextech’s strategy of only investing in oncology is fairly novel for a venture fund, and Mr Scheidegger also says that finding fund managers who understand the field has been important.

“Some think it is too focused, others like it. Clearly a pre-selection of limited partners is needed.”

The firm decided to pursue the strategy after realising much deeper insight was needed to make successful investments, and as such has packed its scientific advisory board with cancer experts. Of the 10 investments Nextech has made – more than 650 were evaluated, Mr Scheidegger says – three have now been fully exited. These were Agensys, Ganymed and Telormedix, while another investment, Macrogenics, has just IPO'd on Nasdaq.

Venture funds need to keep up the pace of exits to prove to their limited partners that returns on investment are on the way. Five of the 10 biggest VC rounds so far this year were raised by companies on their way to the stock market; although in many cases the venture-backers have not been able to sell out immediately, the fact that floats are happening can only be helping their case.

And after a torrid time after the financial crash, more life science venture firms are managing to raise new funds. But it is clear that in many cases limited partners remain hard to convince to invest this sector. The opening of the IPO window is a start. But unless big partners start shopping more enthusiastically, or funds pursue new strategies to extract cash from investments in other ways, it is hard to forecast a substantial improvement in the climate for the earliest stage drug makers any time soon.

Biggest rounds  of 2013 to date
Company Financing Round Investment ($m)
Intrexon ($)* Series F 150.0
Revance Therapeutics ($) Series E 104.0
PTC Therapeutics ($)* Series G 60.0
Dicerna Pharmaceuticals ($) Series C 60.0
Trevena ($)* Series C 60.0
Ophthotech ($)* Series C 50.0
NGM Biopharmaceuticals ($) Series C 50.0
Auris Medical (SFr) Series C 49.8
aTyr Pharma ($) Series D 49.0
Karyopharm Therapeutics ($)* Series B 48.2
*Have floated or signalled an intent to do so

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @AmyEPVantage on Twitter

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