Biotech VC Funding Slowing


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 05-26-2015 13:53

  

Venture capital funding is an important measure of the health of emerging biopharmaceutical companies. A recent PwC study of venture capital funding for the first quarter shows some weakness as the amount of dollars invested declined, but the number of deals increased. Is this reflective of declining investor interest or just a typical first-quarter slowdown following recent strong financing trends into the biotech sector? DCAT Value Chain Insights (VCI) takes an inside look.

The biotechnology industry captured $1.7 billion in financing in the first quarter of 2015, going into 124 deals, a 14% decline in dollars invested but a 14% increase in deals from the prior quarter. So what was behind the decline and how is the industry faring?

Examining the trends
To consider the performance of biotech financing, it is important to examine it in the context of overall venture capital (VC) funding and the competition for VC funding. Venture capitalists invested $13.4 billion in 1,020 deals in the first quarter of 2015, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly VC investment declined 10% in terms of dollars and 8% in the number of deals, compared to the fourth quarter of 2014 when $14.9 billion was invested in 1,103 deals. The first quarter is the fifth consecutive quarter of more than $10 billion of venture capital invested in a single quarter.

“Although down slightly from the end of last year, the venture ecosystem deployed a healthy amount of financial capital to the startup ecosystem at the start of 2015, surpassing the $10 billion mark for the fifth consecutive quarter and setting the stage for what we expect to be another busy year for startup investing,” said Bobby Franklin, President and CEO of NVCA, in PwC press release. “Last quarter, it was great to see healthy first-time funding levels and that the majority of deals were seed and early stage. Balancing the investment in megadeals, venture capital investors remain focused on building the next generation of companies.”

As the PwC study pointed out, first-quarter results are not necessarily a reflection of what is to come in a given year as historically, first-quarter VC investing is typically slower comparative to the rest of a given year. "Historically, VC investing in the first quarter of the year is typically slower than the rest of the year. So, the drop in dollars invested compared to Q4 is not necessarily indicative of what’s to come in 2015. In fact, the $13.4 billion invested in Q1 of this year is the highest first quarter total we’ve seen since 2000 and is also a 26% increase in dollars compared to Q1 of last year,” said Tom Ciccolella, US Venture Capital Leader at PwC, in commenting on the results. “We saw 12 deals over $100 million, including two $1 billion investments in Q1, continuing the megadeal trend. One of the billion-dollar investments was in the later stage of development which contributed, in part, to dollars invested in later-stage companies doubling in Q1 compared to the prior quarter.”

On an industry level, the software industry continued to receive the highest level of funding of all industries, despite being down for the quarter. Venture capitalists invested $5.6 billion during the first quarter of 2015, down 8% compared to the fourth quarter when total venture investment into the software industry reached $6.0 billion. The software industry also counted the most deals in the first quarter of 2015 at 434, down 6% compared to the fourth quarter of 2014.

The biotechnology industry captured the second largest total during the quarter with $1.7 billion going into 124 deals, a 14% decline in dollars invested but a 14% increase in deals from the prior quarter. Overall, investments in the first quarter of 2015 in the life sciences sector (biotechnology and medical devices combined) received $2.2 billion going into 193 deals, an 18% decline in dollars and 3% drop in deals when compared to the fourth quarter of 2014.

The industrial/energy industry was the third largest industry for dollars invested with $1.4 billion going into 63 deals, up 13% iin dollars invested and 5% in total number of deals. Part of the increase in dollars can be attributed to the second largest deal of the quarter falling in the industrial/energy category, a $1 billion investment. Overall, five of the 17 MoneyTree industries experienced increases in dollars invested in the first quarter, including telecommunications (308%increase), healthcare services (141% increase), and financial services (80% increase). Venture capitalists invested $3.1 billion into 231 Internet-specific companies during the first quarter of 2015. This investment level represents a 4% increase in dollars but a 2% drop in deals compared to the fourth quarter of 2014 when $3.0 billion went into 236 companies. “Internet-Specific” is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

Stage of funding
Another important barometer is to examine investor interest in the stage of company development and specific to biotech VC funding. Overall, seed-stage investment was down 32% in dollars and 35% in deals with $126 million invested into 26 deals in the first quarter, the lowest quarterly deal count since the MoneyTree began tracking VC investments in 1995. Early-stage investment was down 34% in dollars and 14% in deals with $3.7 billion going into 492 deals. Seed/early-stage deals accounted for 51% of total deal volume in the first-quarter 2015, compared to 55% the prior quarter. The average seed-stage deal in the first quarter was $4.8 million, up from $4.7 million in the fourth quarter of 2014. The average early-stage deal was $7.5 million in the first quarter of 2015, down from $9.8 million in the prior quarter.

Expansion-stage investment was down 15% in terms of dollars in the first quarter of 2015 but flat in terms of the number of deals, with $5.4 billion going into 295 deals. Overall, expansion-stage deals accounted for 29% of venture deals in the first quarter of 2015, up slightly from 26% in the fourth quarter of 2014. The average expansion-stage deal was $18.3 million, down from $21.7 million in the fourth quarter of 2014.

Investments in later-stage companies rose by 50% to $4.2 billion going into 207 deals in the first quarter, the largest quarterly total of dollars invested in later-stage companies since the fourth quarter of 2000. Later-stage deals accounted for 20% of total deal volume in the first quarter of 2015, up slightly from the prior quarter. The average later- stage deal in the first quarter was $20.3 million, up from $14.1 million in the prior quarter, attributable in part to four of the 10 largest deals in the first quarter falling into the later stage of development.

First-time financing (companies receiving venture capital for the first time) dollars decreased 30% to $1.8 billion in the first quarter of 2015 while the number of deals was down 18% from the prior quarter, dropping to 305. First-time financings accounted for 14% of all dollars and 30% of all deals in the first quarter. Of the companies receiving venture capital funding for the first time in the first quarter of 2015, software companies captured the largest share and accounted for 36% of the dollars and 46% of the deals with 139 companies capturing $657 million. First-time financings in the life sciences sector (biotechnology and medical devices) was up 7% in dollars from the prior quarter with $440 million going into 42 companies, compared with 33 such companies receiving $410 million in the fourth quarter of 2014. The average first-time deal in the first quarter was $6.0 million, down from $7.0 million in the prior quarter. Seed/early-stage companies received the bulk of first-time investments, capturing 78% of the dollars and 82% of the deals in the first quarter of 2015.

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