By JENNIFER BOGGS
Medical Device Daily
and DON LONG
Medical Device Daily

Venture capital investing last year clearly took on the look of what in sports is called a “rebuilding“ year – nowhere near the heady championship-style numbers of the dot-com explosion, but appearing to build a solid foundation for 2006.

A report in The Los Angeles Times this week put the total for all venture capital investing in 2005 at $22.1 billion, up 2% over 2004, and the Times writer singled out medical devices as being a big part of the mild resurgence, at $2 billion representing about 9% of the total. The $2 billion figure represented the most directed at this sector since 2000.

Private financing in the biotech sector showed a slight decline in 2005 but, for the most part, held steady at the record venture capital levels seen a year earlier.

The 2005 MoneyTree venture capital survey showed a slight increase in venture financing compared to 2004, with the entire life sciences segment – including the medical device and biotech sectors – capturing roughly 30% of all VC money. The survey was conducted by PricewaterhouseCoopers (PWC), Thomson Venture Economics and the National Venture Capital Association.

By region, the San Francisco Bay Area dominated the nation in 2005 with 731 deals and $7.7 billion invested, accounting for about a third of all deals and of the total capital invested. New England, with 272 deals and $2.8 billion, was second, followed by Southern California, with 203 deals and $2.1 billion invested. The New York metropolitan area had 159 deals and $2.2 billion invested.

VC money in biotech dipped about 7%, said Tracy Lefteroff, global managing partner of venture capital and private equity practice at PWC. But figures still “are way up from where they've been, historically, over the last 10 to 15 years.“

MoneyTree's survey showed that nearly $3.9 billion was invested in biotech in the U.S. last year, down from about $4.1 billion in 2004.

BioWorld Today, a sister publication to Medical Device Daily, reported that, worldwide, private companies raised a total of $4.8 billion in 2005, compared to $4.9 billion in 2004.

“This year might have seemed a little flat, but it's flattened out at the top of a curve,“ Lefteroff said.

The survey indicated that in 2005, information technology and life sciences garnered the majority of the private investment dollars throughout the year, and, in the fourth quarter, those two sectors combined to capture 85% of private funding.

For the fourth straight year, the amount of money going to late-stage companies increased. Mary MacDonald, vice president of investment banking at Thomson Venture Economics, reported that investors placed $9.7 billion into more established firms, up from $8 billion in 2004.

During a conference call, she said that “45% of the total amount invested went to later-stage companies, which is the highest share ever in MoneyTree history.“

That trend is due to perceived lower risk in late-stage companies, so the larger financing rounds are done for firms that already have generated trial data and boast a pipeline that has more than a single product.

“There's always an exception here and there, but most VCs demand to see that clinical data before they're going to take the bet and put money in,“ Lefteroff said.

A difficult public market also is forcing later-stage companies that normally would have gone public to rely on private investments longer than originally anticipated.

John Taylor, vice president of research for NVCA, compared these companies to “an entire generation of college seniors deciding all at once, at the end of their senior year, that in order to get a good job, they really should stay around for a fifth year of college.

“So they tell their parents, 'I need a fifth year so I can see what the market conditions are like a year from now, and, by the way, tuition has gone up, and I'm bigger and my expenses are a bit bigger,'“ he added.

Medical Device Daily last year reported on 14 initial public offerings by medical device/med-tech firms – compared to 20 in 2004 – raising about $660 million (MDD, Jan. 3, 2006). The blockbuster of these IPOs was that of ev3 (Plymouth, Minnesota), which raised $155.5 million.

BioWorld Today reported on 33 companies going the IPO route in 2005, four fewer than in 2004, those offerings generally drawing significantly less money than expected. Altogether, biotech raised $1.5 billion in initial offerings, which averaged about $45.5 million each. The 37 IPOs priced in 2004 brought in a total of $2 billion, with an average of $55.25 million apiece.

Lefteroff said he expects plenty of VC investment in biotech this year.

“The pharma sector continues to lose blockbuster drugs to expiring patents and to generics that are eating away market share,“ he said. “It's driving them to look to biotech to provide products to fill their drug pipelines back up.“

Plus, the aging population keeps growing and “people are looking at the demographics and realizing there's going to be a tremendous demand for these medical products,“ Lefteroff added. “That bodes very well for the sector, and I continue to believe you'll see investments at these levels in the foreseeable future.“

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