Editor

After a strong first half that almost put the pre-recession days of 2007 within reach, a steep decline in third-quarter biotech fundraising had most folks reaching for the TUMS.

Biotech companies raised just $2.8 billion in the third quarter, according to data from BioWorld Insight. That's a 60 percent drop from the $7.2 billion raised in the second quarter.

Some of the decline was likely seasonal: July and August are typically slow months for fundraising. But even so, third-quarter 2011 lagged third-quarter 2010 by 48 percent.

"It's just a horrible market, and people are afraid to take risks," said Matthew Geller, president of investment bank Geller Biopharm.

Shiv Kapoor, managing director at investment bank Morgan Joseph TriArtisan, agreed the fundraising lull has "nothing to do with biotech" and whether or not biotech companies are doing good work. Instead, it's all about macroeconomic issues and the economic climate in Europe, as well as concerns about whether the U.S. is headed into another recession. In such uncertain times, the money is headed for safer harbors than biotech.

But despite the poor third-quarter performance, biotechs still raised $16. 1 billion in the first nine months of 2011 – an 18 percent increase over the $13.6 billion raised in the same period last year. Whether those gains hold through the rest of the year depends almost entirely on what happens in the broader markets.

Public Financings Slump

With stock prices in the tank, it was no surprise to see public offering activity lag in the third quarter. Biotech companies raised $556.8 million through public offerings in Q3, down 61 percent from $1.4 billion in Q2 2011 and down 25 percent from $737.7 million in Q3 2010.

Many of the biggest public offerings this quarter came from specialty pharma: Zogenix Inc. raised $60 million in a stock sale, Horizon Pharma Inc. raised $49.5 million in its initial public offering, and BioSante Pharmaceuticals Inc. raised $48 million in a stock sale. The biggest, however, was not specialty pharma, but InterMune Inc.'s $231 million stock and convertible note raises to fund the European launch of idiopathic pulmonary fibrosis drug Esbriet (pirfenidone). (See BioWorld Today, Sept. 15, 2011.)

Public companies raised an additional $833.3 million in the third quarter through private placements, registered direct offerings, royalty monetization, at-the-market deals, loans and other such financing alternatives. That's a whopping 82 percent decrease from the $4.6 billion raised through such deals in Q2 2011, though it should be noted that the second quarter total was boosted by Amgen Inc.'s $3 billion senior note deal. The Q3 2011 number was also a 43 percent decline from the $1.5 billion raised in this category in Q3 2010.

The biggest public company alternative financings this quarter were MannKind Corp.'s $370 million senior secured discount note deal, Vivus Inc.'s $45.8 million registered direct offering and QRxPharma Ltd.'s $38 million combination placement and rights issue.

In general however, Geller noted that the dilution for financings is "really awful these days," so a lot of companies are seeking alternatives, including creative deals with groups like Celtic Pharmaceutical Holdings LP, which combine equity financing with development partnerships.

"In general I'm seeing far more interest for licensing than for financing," Geller told BioWorld Insight. He said biotechs have been particularly active in raising money through regional licensing deals in territories where they wouldn't be able to manage sales anyway, such as China, Korea and Japan.

Although both public offerings and public company alternative financings slumped in the third quarter, the nine-month totals for each are still better than in the first nine months of 2010.

Biotech public offerings raised $5.1 billion in the first nine months of this year vs. $3.4 billion in the same period last year, while public alternative financings raised $7.4 billion so far this year vs. $6.3 billion last year.

Venture a Bright Spot?

While public biotech financings lost ground in the third quarter, financings for private biotechs gained momentum. Private firms raised $1.4 billion in the third quarter, up 10 percent from $1.27 billion in the second quarter and up 5 percent from $1 .3 billion in the third quarter of 2010.

Granted, the Q3 2011 total includes $600 million from newly formed nanotech company Pro Bono Bio, half of which came from the Russian government's state-owned private equity/venture capital firm Rusnano, and half of which came from Celtic. But even without Pro Bono, the third quarter numbers would show a relatively modest 37 percent decline from the second quarter – still better than the public sector fared.

Pessimists could argue that private company financings didn't have as far to fall: private biotechs raised $3.5 billion in the first nine months of 2011, still trailing the $3.8 billion raised in the same period last year. But "the floor is not dropping out," noted Wende Hutton, general partner with Canaan Partners, and that in itself is encouraging.

Behind Pro Bono, the biggest private company financings of the quarter included $57.4 million for French nuclear medicine specialist Advanced Accelerator Applications SA, $50 million for China-based start-up Hua Medicine, $44 million for SARcode Bioscience Inc. and $40 million for Enobia Pharma Inc.

For those keeping score, the top three private biotech financings this quarter were ex-U.S. companies taking in largely ex-U.S. money. Hutton noted that because of the "fragility of the financing environment," smart management teams and smart venture teams are starting to look for some alternatives. But she added that such international deals tend to require a lot of time and effort to assemble, so she sees them as more of an exception than a way to sustain the industry.

A recent analysis of U.S. biotech venture funding by BioWorld columnist Cynthia Robbins-Roth showed that about 24 percent of the venture money raised in the third quarter went into seed and Series A rounds. That's down from about 30 percent in the first half of this year. (See BioWorld Today, Oct. 5, 2011.)

"Because of the nature of VCs, we're always captivated by early innovation," Hutton told BioWorld Insight. But it's a slow process to put those financings together, she noted, and there's an increasing trend to "squeeze out levels of risk" by structuring early stage rounds with many milestone-driven tranches.

On the whole, Hutton said VCs have remained cautious because of the difficult regulatory environment and global financial issues, but a strong flow of innovative science and big pharma's need to fill its pipeline keep the deal flow from stagnating.

She added that venture capitalists are looking for deals where they "can navigate to value-creating milestones on venture money alone," but there is no one-size-fits-all formula for such deals. As an example, she said Canaan invested in both a tiny seed round for a preclinical start-up and a large syndicate for a specialty pharma firm in the third quarter, and she is "equally excited" about both of them.