Brian.oco 0 Posting Whiz

It’s back.

The bubble, that is. And with it comes a new wave of venture capitalists that are pouring money not just into Internet companies, but in life sciences companies, as well.
And in increasingly larger numbers.

An October article in The New York Times says it all. “Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.”

While The Times focuses more on technology companies like Facebook, Yahoo and Google, the evidence points to a burgeoning number of venture capitalists snapping open their checkbooks and waving them in the direction of biotechnology companies.

According to Healthcare Corporate Finance News, health care technology firms garnered roughly $2.5 billion of venture capital funding during the third quarter of 2007. That’s up 10% from the same period in 2006 in terms of new venture deals, and up 14% in terms of revenues pouring into health care companies.

The life sciences sector comprises the lion’s share of the new deals (see chart below)

Health Care Venture Capital Investments, Third Quarter Ended June 30, 2007

Sector Number of Deals Dollar Amount, in millions

Medical Devices 34 $622.65
Services & Other 8 $503.00
Biopharmaceuticals 20 $472.54
Pharmaceuticals 21 $390.50
Biotechnology 26 $358.15
e-Health 12 $106.30
Total 121 $2,453.14

In a study of venture fund activity throughout the first three quarters of 2007, Healthcare Corporate Finance reports that the medical device technology sector topped the list of life sciences companies gaining the most venture funding, with 25% of the quarterly dollar total for all sectors combined. “The second-largest deal of the quarter, a $110 million Series E financing for Globus Medical, a developer of spinal implant systems and biomaterials, was led by Clarus Ventures. Neuromed Pharmaceuticals, a biopharma developing drugs for chronic pain, announced the largest deal among pharma, biopharma and biotech companies, with a $53.3 million Series E financing led by MPM Capital.”, says the report.

In the entire health care technology field, the busiest companies were not attracting single venture investors, but sometimes four or five of them. That’s a telling sign. A rule of thumb on Wall Street is that if more than one venture firm is knocking on your door, then the investment purse strings are really loosening. That has to be considered good news in the technology sector, particularly for smaller start-up companies who should most benefit from a pumped-up venture funding climate. The evidence backs that theory up. Seed money into smaller companies accounted for 29% of all venture investments in the first quarter of 2007, up from 26% during the same quarter in 2006.

The life sciences sector hasn’t seen this big a pipeline since the 2001, when venture firms turned away from internet companies and toward biopharm companies in a desperate bid to stem the losses incurred when vast armies of dinosaurs went belly-up. The fact that, as The Times points out, the rise in venture funding in the life sciences market this year coincides with the rise in venture funding in the Internet market, is somewhat worrisome. After all, it was only six or seven years ago when an estimated $1.5 billion was lost by venture capital firms. Shouldn’t they be worried about history repeating itself?

Maybe not. One reason for optimism is that in those last seven years, the baby boomers have gotten seven years older. In the mind of many Wall Street mavens, that means more consumer demand for the kinds of disease-fighting and life-enhancing products pouring out of life sciences companies these days. It doesn’t take a rocket scientist to figure out that as the Boomers advance in age, the market for health-related technologies will grow along with them. In addition, the Boomers are sitting on some pretty fat wallets, and are only too willing to pay to stay fit and healthy.

Another reason for the expanded financial pipelines is that Wall Street has noticed that the biopharm sector has, by and large, increased its research and development capacities.
According to the Journal of Life Sciences, the pharmaceutical and biotechnology sector is now the largest market in terms of research and development investment, leapfrogging over the technology hardware and equipment sector last year. It’s only fair to mention that the big boys are amping up the R&D machines, with Pfizer setting the tone with total research & development investment of $7.6 billion, an increase of 2.1 percent over the previous year. Others are gearing up R&D investment, as well. Among the biopharm firms among the list of the top 50 R&D investors that demonstrated big spikes in R&D spending last year were Merck (up 24.3 percent from the previous year), AstraZeneca (15.5 percent), Roche (15.5 percent), Johnson & Johnson (12.9 percent), Novartis (10.7 percent), and GlaxoSmithKline (10 percent). Worldwide, investment in R&D rose 10 percent over 2005.

Traditionally, research and development has been a sore spot for Wall Street investors, which pushes and pulls money in and out of life sciences in a reactionary fashion. If biotech companies demonstrate that they’re serious about creating new vaccines and treatments then, as the saying goes, the money will follow. And, increasingly, the benchmark that investors use to gauge the seriousness of biopharm companies is research and development funding.

The increase in biopharm funding might be also be tied to some ulterior motives on the part of venture investors. We’re in an age of major merger and acquisition activity in the life sciences market. Venture capitalists seem willing to pour more money into promising biopharm firms to hopefully catch the eye of a big pharma company on the prowl for new M&A opportunities. Much like a homeowner sprucing up the joint before putting his house on the market, venture investors are earmarking more funds for things like mid-stage clinical trials of experimental drugs to make potential suitors sit up and take notice.

So where is all this new money coming from - - and will it continue to flow? The New York Times article says it’s a combination of Wall Street and academia, particularly endowment funds groaning under the weight of new investment money and from hedge funds looking for new profit opportunities.

That’s another good sign for technology companies looking for new investors. For the reasons mentioned above, investor’s eyes have turned to the biotech sector. There’s something in the air, and it all points to a financially flush venture funding environment heading into 2008.

Let’s just hope that, as far as bubbles go, history doesn’t repeat it self.