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Life sciences venture capital funding overcomes record lows

Companies in the life sciences sector, which includes the biotechnology and medical device industries, captured the largest share of overall venture capital during 2009, reflecting the relative strength of the sector during the economic downturn, according to PricewaterhouseCoopers.

Under Recovery, a new PwC report that includes data from the PwC/NVCA MoneyTree Report based on data from Thomson Reuters, finds that life sciences funding for 2009 totalled USD6bn in 715 deals, accounting for 34 per cent of all venture dollars invested, compared to 28 per cent in 2008.

"Venture capitalists see real opportunity for growth within the sector. As the worldwide population ages and more people enter their years of greatest healthcare need, demand for new pharmaceuticals, diagnostics, and medical devices has the potential to go higher than we’ve ever seen," says Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers.

For all sectors, venture capitalists invested USD17.7bn in 2,795 deals in 2009, marking the lowest level of dollar investment since 1997. 

Compared with 2008, dollar investments into life sciences plunged 22 per cent in 2009, while the number of deals dropped 19 per cent during the same time period, marking its lowest point in the past six years. Despite the decline, life sciences investment has outpaced overall venture capital funding since the third quarter of 2008.

In the last quarter of 2009, biotechnology investments totalled USD1bn in 108 deals with another USD719m going into 87 medical device and equipment deals. Biotechnology funding declined by seven percent year over year, primarily due to a drop in deal activity.

However, funding for medical devices increased by 14 per cent compared with the same quarter in 2008. This increase reflected gains in both deal activity and deal size.

Early-stage funding for the life sciences sector exceeded USD1bn in the fourth quarter of 2009 for the first time. Increases in both deal activity and deal size resulted in this rise in early-stage investment. 

Late-stage funding declined to USD717m in the fourth quarter of 2009, compared with USD1bn in the same quarter in 2008. Late-stage deal activity and deal size both declined in this period.

"The need for venture capital is greater for early-stage companies that don’t yet have an exit strategy. They need to funnel assets into the clinic to develop products that will make them attractive acquisitions or IPOs down the line," Lefteroff says.  "Later-stage companies are finding other ways to generate cash, such as partnerships and licensing agreements with larger companies looking to expand their product pipelines."

Historically, the biotech human sub-segment has received a majority of the biotechnology industry funding every quarter. In the fourth quarter of 2009, with USD714m in funding, the biotech human sub-segment alone received almost as much funding as the whole medical device industry. Out of 108 biotechnology deals for the fourth quarter of 2009, 64 of those belonged to biotech human.

Looking at 2009 as a whole, 244 of the 406 biotechnology deals belonged to the biotech human sub-segment. Investment in the biotech equipment sub-segment demonstrated strong growth for the year, increasing by 67 per cent to USD207m.

In the medical device industry, the medical therapeutics sub-segment historically attracts the most funding every quarter. However, it began to show a decline after the second quarter in 2009, dropping from USD455m in that quarter to USD439m in the fourth quarter. Within the medical therapeutics sub-segment, the surgical lasers sub-segment jumped by 58 per cent to USD78m. Surgical instrumentation and equipment also gained a small percentage, capturing USD865m for the year.

In the fourth quarter of 2009, the medical and health products and medical diagnostics sub-segments grew by 118 per cent and 35 per cent, respectively — resulting in a growth of 14 per cent for medical devices as a whole over the last quarter of 2008.

The top five metropolitan regions receiving life sciences venture capital funding during 2009 were San Jose (USD1,244m), Boston (USD990m), San Diego Metro (USD606m), San Francisco/Berkeley (USD477m), and New York Metro (USD427m).

Funding in the San Jose area declined more steeply than the national level in 2009, while funding in the Boston metro area outperformed the national average. Both biotechnology and medical devices demonstrated stronger performance in the Boston area.

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