Biotech Venture Capital Investment Slips in Q3

Venture cash flow in the biotech industry during the third quarter paled in comparison with the red-hot numbers seen in Q2, but few in the industry are complaining about it.

In the second quarter, biotech attracted a whopping $1.8 billion in new venture cash, the biggest three-month figure since 2005. For the past three months, the figure was a more modest $1.1 billion, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) based on data from Thomson Reuters. But that’s still significantly higher than the same period a year ago. And with close to $4 billion raised in the industry over nine months, biotech is positioned for one of its best years since the 2008 financial crisis hit.

“We consider this a great quarter,” said PwC life sciences partner Greg Vlahos. In the second quarter, a couple of $100-million-plus megadeals tipped the scales, including Intarcia’s behemoth $200 million round. And with biotechs still accounting for the lion’s share of new initial public offerings (IPOs) — 18 out of 23 IPOs in the third quarter were for life sciences companies, according to Vlahos — there’s reason to believe that the overall environment for new venture rounds should remain strong.

Venture capitalists strongly supported device firms during the third quarter, increasing their spend and the number of deals compared with the same period last year. There were 78 medical device company deals worth $585.6 million during the quarter, according to the report, for increases of 18.2 percent and 13.3 percent, respectively. The average quarterly VC spend on medtech so far this year was also up, rising 15.1 percent to $624 million compared with Q3 2013.

“Driven by a strong IPO market for venture-backed companies and the rise of startups in every region across the country, we continue to see a greater number of new players joining the venture game,” NCVA president/CEO Bobby Franklin said in prepared remarks. “The emergence of non-traditional investors, including hedge funds and mutual funds, is contributing to the increase in venture investing this year. Another factor that can’t be ignored is the changing nature of our economy, where startup companies are disrupting entrenched industries and, in some cases, creating new industries altogether. Traditional and non-traditional venture investors alike recognize this and want to get in on the ground floor of innovation.”

There is one troublesome sign for biotech, however: the current turbulence in the stock market, which could start to frighten away the legions of investors who have enthusiastically backed some of the biggest biotech offerings.

News that Canaan Partners is rolling out a $675 million fund comes on top of a big round of new funds from the biotech industry’s top players. Over the past six years, the number of venture groups operating in the life sciences industry has narrowed considerably, leaving fewer investors. But the remaining VCs represent a more sophisticated set, many of which are starting a new wave of closely held biotechs which can be sold to pharma partners.