Life sciences venture capital funding shrinks for fourth straight quarter

August 2012

Dollar drought

www.pwc.com

US venture capital funding for the life sciences sector,1 which includes biotechnology and medical devices, fell 39% in dollars and 22% in number of deals during the second quarter of 2012 from the same quarter of last year, according to the MoneyTree™ Report from PricewaterhouseCoopers (PwC) LLP and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters. Venture capitalists invested $1.4 billion in 174 life sciences deals, continuing a decline spanning four consecutive quarters.

Life sciences also declined quarter over quarter, with a drop of 9% in dollars invested and 6% in number of deals from the first quarter of 2012.

Compared with the same quarter of last year, US venture funding for all industries slowed. This year, 898 deals brought in $7 billion during the second quarter, a decline of 12% in dollars and 15% in deals from the same quarter of 2011. The quarter-over-quarter view, however, showed a gain of 17% in dollars and 11% in number of deals. The average deal size, at $7.8 million, was higher when compared with the previous quarter and with the same quarter last year.

The life sciences share of total venture funding fell to 20% during the second quarter of 2012, the lowest level since the third quarter of 2002. In terms of share, biotechnology, raising $697 million in 90 deals, placed fourth behind software, which drew $2.3 billion in 290 deals, industrial/energy, and medical devices.

On a year-over-year basis, biotechnology funding fell by half. The industry dropped 52% in dollar value and 30% in number of deals. On a quarter-over-quarter basis, biotechnology investment declined 17% in both dollars and deals.

With $700 million in 84 deals during the quarter, medical device industry funding also decreased year over year. The drop was 17% in dollars and 11% in deals. On a quarter-over-quarter basis, the numbers of deals increased 11%, but deal value was flat.

“The long time horizon often required for a liquidity event, regulatory challenges, and large amount of capital often needed to fund life science companies likely contributed to this sector’s investment decline during the past four quarters,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.

Figure 1: Life sciences funding compared with total venture funding

-60

-40

-20

0

20

40

60

% c

hang

e (Y

/Y)

Life sciences funding Total venture capital

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

1 The MoneyTree life sciences sector includes the biotechnology and medical device and equipment industries. Biotechnology is defined as “developers of technology promoting drug development, disease treatment, and a deeper understanding of living organisms; includes human, animal, and industrial biotechnology products and services. Also included are biosensors, biotechnology equipment, and pharmaceuticals.”

Medical devices and equipment industries are defined as those that “manufacture and/or sell medical instruments and devices including medical diagnostic equipment (X-ray, CAT scan, MRI), medical therapeutic devices (drug delivery, surgical instruments, pacemakers, artificial organs), and other health-related products such as medical monitoring equipment, handicap aids, reading glasses, and contact lenses.”

PwC2

Life sciences funding by quarter

Investment in the life sciences sector declined quarter over quarter and year over year.

Figure 2: Life sciences funding trends by quarter 2009–2012

0,0

0,5

1,0

1,5

2,0

2,5

Q4Q3Q2Q1

$ in

bill

ions

2009 2010 2011 2012

Life sciences deal volume by quarterThe number of deals for the sector dropped to its lowest level since the first quarter of 2009.

Figure 3: Life sciences deal volume by quarter 2009–2012

0

60

120

180

240

300

Q4Q3Q2Q1

No.

of d

eals

2009 2010 2011 2012

Life sciences average deal size by quarterAverage deal size decreased by 22% year over year, falling to $8 million. When compared with the first quarter of 2012, average deal size declined by 3%.None of the life sciences deals made it to the top 10 venture capital deals for the quarter. MoneyTree’s industrial/energy sector took four of the top 10 spots and captured the largest deal at $147.6 million

Figure 4: Life sciences average deal size by quarter 2010–2012

5

6

7

8

9

10

11

$ in

bill

ions

• Average deal size, (bubble size denotes total funding in billions)

2.1

1.5 1.4

1.6

2.3 1.9

1.8

1.5 1.4

2.2 1.8

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

Funding for biotechnology and medical devicesQuarter over quarter, the gap in venture capital funding between biotechnology and medical devices almost disappeared. The medical device share increased from 45% during the first quarter of 2012 to slightly more than 50% during the second quarter. Biotechnology’s share shrank to just under 50%, compared with 55% during the first quarter.

Figure 5: Life sciences investment split for the second quarter of 2012

Medical devices

Biotech

50%50%Medical devices

Biotech

3Dollar drought

Figure 6: Biotechnology and medical devices funding trends 2009–2012

0.0

0.5

1.0

1.5

2.0

2.5

$ in

bill

ions

Medical devices and equipment Biotechnology

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2012

Q2

2011

Q3

2011

Q4

2012

Q1

Biotechnology funding by subsegmentCompared with the second quarter of 2011, funding for the biosensors subsegment jumped 7,280% to $6 million; and biotech equipment rose 5% to $53 million.“The sizable increase for biosensors was due primarily to negligible funding activity during the same quarter last year,” Lefteroff said.All the other subsegments’ funding fell during the second quarter of 2012:

• Biotech research, 96% to $3 million

• Biotech industrial, 82% to $34 million

• Biotech human, 51% to $496 million

• Biotech animal, 48% to $17 million

• Pharmaceutical, 13% to $89 million

Figure 7: Biotechnology funding by subsegment 2009–2012

0.0

0.5

1.0

1.5

2.0

$ in

bill

ions

Biotech human Biotech industrial Biosensors

Pharmaceutical Biotech animal Biotech research

Biotech equipment

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

PwC4

Medical device funding by subsegmentMedical devices saw only one subsegment increase during the second quarter of 2012 when compared with the same quarter of 2011. Funding for medical/health products increased by 111% to $137 million, while funding for other subsectors declined:

• Medical diagnostics, 44% to $54 million

• Medical therapeutics, 26% to $508 million

Figure 8: Medical devices and equipment funding by subsegment 2009–2012

0.0

2.0

4.0

6.0

8.0

10.0

$ in

bill

ions

Medical therapeutics Med/health products

Medical diagnostics

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

Life sciences funding by stageOn a year-over-year basis, life sciences early-stage2 funding declined sharply by 36% to $598 million during the second quarter of 2012. Quarter over quarter, early-stage funding declined by 14%.

Early-stage deal volume declined by 16% compared with the same quarter last year but remained constant at 98 deals when compared with the first quarter of 2012. Average deal size shrank 24% year over year and 14% quarter over quarter to $6.1 million.

“The drop in early-stage funding could have implications for the life sciences sector into the future,” Lefteroff said. “If the number of new venture funds continues to contract as it has in recent years, there may be less capital available to support start-ups.”

Late-stage3 funding also declined, dropping 41% year over year and 6% quarter over quarter to $798 million.

Late-stage deal volume followed a similar trend, falling 28% year over year and 13% quarter over quarter to 76 deals. Average deal size decreased 18% year over year but grew 8% quarter over quarter to $10.5 million.

Figure 9: Life sciences funding by stage 2009–2012

0.0

0.5

1.0

1.5

2.0

2.5

$ in

bill

ions

Late stage Early stage

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

Biotechnology funding by stageFor the biotechnology sector, early-stage funding decreased by 49% from the second quarter of 2011 to $324 million, while late-stage funding declined by 54% over the same period to $372 million. Compared with the first quarter of 2012, early-stage funding dropped 38%, and later-stage rose 17%.

Figure 10: Biotechnology funding by stage 2009–2012

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

$ in

bill

ions

Late stage Early stage

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2 “Early stage” combines the MoneyTree categories of start-up/seed and early stage.

3 “Late stage” combines the MoneyTree categories of expansion and late stage.

5Dollar drought

Medical device funding by stageFor the medical device industry, early-stage funding decreased 10% to $274 million during the second quarter of 2012 compared with the previous year. Late-stage funding also fell over the period by 22% to $426 million.

Compared with the previous quarter, early-stage funding jumped 60%, but late-stage fell 19%.

Figure 11: Medical device funding by stage 2009–2012

0,0

0,2

0,4

0,6

0,8

1,0

$ in

bill

ions

Late stage Early stage

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

First-time funding compared with follow-on fundingDuring the second quarter of 2012, initial investments in the life sciences sector fell to $130 million, a 61% drop from the same quarter last year. Follow-on funding also decreased from the same period of last year by 35% to $1.3 billion.

Quarter over quarter, both initial investments and follow-on funding fell, by 3% and 10%, respectively.

First-time deals in the life sciences sector averaged $4.8 million, and follow-on deal size averaged $8.6 million during the second quarter of 2012.

Figure 12: Life sciences follow-on compared with initial investments 2009–2012

Follow-on investment Initial investment

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

0%

20%

40%

60%

80%

100%

Table 1: 2012 Second-quarter growth factors (Y/Y growth)

% Change in Deal Volume

% Change in Avg Deal Size

% Change in Investments

First-time -46% -28% -61%

Follow-on -15% -24% -35%

Regional funding trendsSan Francisco Bay4, Boston, San Diego Metro, Seattle, and New York Metro received the most life sciences venture capital dollars during the second quarter of 2012. “San Francisco led the regions, attracting $470 million in venture funding for life sciences this quarter,” Lefteroff said. “Of that total, $185 million went into biotechnology, and the remaining $285 million went into medical devices.”

Figure 13: Top five metropolitan regions second quarter 2012

0 200 400 600Deal value ($ in millions)

New York Metro

Seattle

San Diego Metro

Boston

San Francisco bay

Medical devicesBiotechnology

Investment dropped year over year in four of the top regions. Boston fell farthest by 58%. Seattle jumped 292% with $78 million in funding during the second quarter of 2012.

4 San Francisco Bay area includes SF/Berkeley and San Jose.

PwC6

Figure 14: Life sciences funding trends in top five regions 2009–2012

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

San Fransisco Bay Boston San Diego Metro

Orange CountyNY Metro

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

Venture capital outlook“Software and Internet companies continue to be attractive industries for VCs [venture capitalists] since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate,” PwC’s Lefteroff said. “VCs also find the potential for profitable liquidity events to be attractive for these companies. It will continue to be challenging for life sciences to raise funds until the regulatory environment becomes transparent for biotech and medtech companies trying to move new products into the market.”5

Fundraising

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said NVCA President Mark Heesen. “Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology.”6

Thirty-eight US venture capital funds raised $5.9 billion during the second quarter of 2012, according to Thomson Reuters and NVCA. This level marks a 12% increase by dollar commitments and a 22% decline by number of funds compared with the first quarter of 2012, which saw 49 funds raise $5.3 billion. The top five funds accounted for nearly 80% of total fundraising this quarter as the number of funds raising money during the period fell to its lowest level since the third quarter of 2009.7

IPOs

By number of deals, 11 venture-backed companies went public in the United States during the second quarter of 2012, a decline of 42 percent from the first quarter of this year and down 50 percent from the second quarter of 2011, according to the Exit Poll report by Thomson Reuters and NVCA. Among those 11, two life sciences companies, one biotech and one medtech, went public during the quarter.8

The $16 billion Facebook IPO boosted the quarter to the strongest on record for venture-backed initial public offering (IPO) activity in terms of dollars raised. That single IPO overshadowed the other 10 offerings during the quarter. The total raised in the two life sciences IPOs was $131 million.9

Mergers and acquisitions

For the second quarter of 2012, 102 venture-backed M&A deals were reported for all industries, 27 of which had an aggregate deal value of $5.5 billion, a 61% increase from the first quarter of 2012. Life sciences companies closed 15 venture-backed M&A deals during the quarter. Seven of those had an aggregate value of $1.7 billion.10

“The pace of venture-backed exits we saw for life sciences companies during 2011 should encourage investors,” Lefteroff said. “If M&A activity picks up during the second half of this year, investors should continue to see a clearer path to returns, which potentially could attract more money to be invested in this sector.

“Additionally, the new Jobs Act could spur more confidential IPO filings, creating the opportunity for more exits. This act makes it easier for start-ups with under $1 billion in annual revenue to go public by relaxing Sarbanes-Oxley requirements for five years.

“Finally, the recently passed user fee legislation contains some incentives for companies to develop breakthrough therapies for infectious and rare diseases,” Lefteroff said. “These include extended market exclusivity for qualified infectious disease products and expedited FDA review for therapies that address unmet medical needs to treat rare and life-threatening diseases and conditions. Such incentives could pique the interest of investors in companies developing innovative products that might have a shorter path to market.”

5 Thomson Reuters and NVCA news release, “Venture Capital Investments Experience Double-Digit Increases in Dollars and Deal Volume in Q2 2012,” July 20, 2012.

6 Ibid.

7 Thomson Reuters and NVCA news release, “Venture Capital Firms Raised $5.9 billion in Q2 2012,” July 9, 2012.

8 Thomson Reuters and NVCA news release, “IPO Market Stalls in Second Quarter Despite Largest Venture-backed Offering on Record,” July 2, 2012.

9 Ibid.

10 Ibid.

7Dollar drought

About PwC’s Pharmaceuticals and Life Sciences Industry Group PwC’s Pharmaceuticals and Life Sciences Industry Group (www.pwc.com/us/pharma and www.pwc.com/us/medtech) is dedicated to delivering effective solutions to the complex strategic, operational, and financial challenges facing pharmaceutical, biotechnology, and medical device companies. We provide industry-focused assurance, tax, and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience, and solutions to develop fresh perspectives and practical advice.

pwc.com/us/pharmapwc.com/us/medtech

ContactsTracy Lefteroff, Partner+1 (408) 817-4176tracy.t.lefteroff@us.pwc.com

Attila Karacsony, Director+1 (973) 236-5640attila.karacsony@us.pwc.com

© 2012 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY-13-0050