Life Sciences Venture Capital Investing Posts Gains in Q3 2012 According to the MoneyTree Report

Venture capital (VC) funding in the Life Sciences sector, which includes the Biotechnology and Medical Device industries, gained in Q3 in terms of dollars compared to the second quarter of 2012, but the sector still trended downward for the year, according to a new PwC US report, "Biotech bounce," that includes data from the PricewaterhouseCoopers LLP/National Venture Capital Association MoneyTree™ Report, based on data from Thomson Reuters.

Venture capitalists invested $1.7 billion in 181 life sciences deals during the third quarter of 2012. When compared with the same quarter of last year, that performance represented a drop of 12 percent in dollars and 8 percent in number of deals. Quarter-over-quarter life sciences funding fared better, gaining 16 percent in dollars but declining 2 percent in number of deals. A 64 percent leap in biotechnology funding drove the quarter-over-quarter increase.

"The 16 percent gain for the life sciences sector reversed a four-quarter decline," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US. "Yet the sector won't outpace 2011 unless it gets a boost during the final quarter. Regulatory uncertainty, capital intensity, and investment time horizons remain challenging issues for would-be investors in the sector."

For all sectors, venture capitalists invested $6.5 billion in 890 deals in Q3 2012, a decrease of 10 percent in dollars invested and a 12 percent decline in deals, compared to $7.3 billion going into 992 deals in the third quarter of 2011. The Life Sciences share of total venture capital dollars invested rebounded to 26 percent in Q3, a six percent increase from Q2 2012, which was the lowest level since the third quarter of 2002.

Biotechnology investing jumped by 64 percent in dollars and 22 percent in deals compared to the prior quarter, with $1.2 billion going into 116 deals in Q3 2012, which placed it a distant second behind the Software industry in terms of dollars invested during the quarter. On a year-over-year basis, biotechnology investments rose 7 percent in both dollars and the number of deals.

In Q3, Medical Device investments dropped to the lowest dollar level since 2004 and fell to sixth place among all industries for the quarter, a big drop from being the second largest industry category in the prior quarter.  With $434 million going into 65 deals in Q3, investments into the Medical Device industry dropped 37 percent in dollars and 27 percent in deals from Q2 2012.  On a year-over-year basis, dollars invested fell 42 percent in dollars and 27 percent in deals.

"The gains in biotechnology funding can be attributed to some big follow-on rounds. It's unclear whether the biotechnology industry can maintain these gains through the end of the year," Lefteroff said.  "Despite regulatory uncertainty and a long path to exit, venture capitalists are still willing to invest in the life sciences sector, but they are cautiously looking for innovative products targeting unmet needs."

First-Time Financing
During the third quarter of 2012, 32 Life Sciences companies received venture capital funding for the first time, capturing $170 million. This represents a decrease of 30 percent in dollars invested and no change in the number of deals compared to the third quarter of 2011. First-time deals in the Life Sciences sector averaged $5.3 million in the third quarter of 2012 compared with an average deal size of $7.5 million in the third quarter of 2011.

Funding by Sub-segment
Three of the seven Biotechnology sub-segments exhibited growth in the third quarter of 2012 compared to the third quarter of 2011. The Industrial Biotech subsegment rose 196 percent to $250 million, the Animal Biotech subsegment rose 66 percent to $42 million, and the Biotech Equipment subsegment rose 62 percent to $47 million.  Funding for all other subsegments decreased during the third quarter. The Human Biotechnology subsegment captured the largest share in the third quarter with $816 million going into 77 deals but declined slightly year-over-year in both dollars and deals. 

Within the Medical Device industry, only the Medical/health Products subsegment saw an increase in Q3 2012 from Q3 2011, increasing only 4 percent in dollars to $78 million. The Medical Diagnostics and Medical Therapeutics subsegments both experienced declines during the same time period, however, the Medical Therapeutics category still accounted for 72 percent of the dollars and 50 percent of deals in the third quarter with $311 million going into 33 deals.

Investments by Region
The top five metropolitan regions receiving Life Sciences venture capital funding during Q3 2012 were San Francisco Bay ($366 million), Boston ($344 million), San Diego Metro ($183 million), Chicago ($106 million) and Philadelphia ($99 million).  Four of the five regions saw increases in investing in Q3 when compared to Q3 2011.  San Francisco Bay was the only region of the five that experienced a decrease in this timeframe, dropping 44 percent in dollars invested.

Investments in Biotechnology accounted for 83 percent of the dollars invested in the top five regions in Q3 2012. The top five regions captured 66 percent of the dollars invested in Life Sciences companies in the third quarter of 2012.