Diagnostics & Imaging Week Washington Writer

Venture capitalists are putting money into life sciences companies at a clip that could meet or exceed last year’s total, according to a quarterly analysis released last week. Notably, the sector has drawn more than one-quarter of all VC investments for the first nine months of 2005.

According to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, the life sciences sector received $1.6 billion in 3Q investments into 155 companies, outpacing the prior quarter.

Tracy Lefteroff, of PricewatershouseCoopers, pointed to “a couple of factors driving investments in life sciences. No. 1, M&A activity seems to be pretty active, which encourages venture capitalists to continue to fund companies in this space. IPOs that are getting out are still predominantly life sciences IPOs, even though they’re at much-reduced rates compared to prior years.”

And she added “a third thing ... that venture capitalists are really looking at the worldwide demographics of an aging population base.”

Lefteroff said that “while the IPO window certainly isn’t wide open, I think for life sciences companies there is a crack and we are seeing some of them make it out into the market.”

She said, “With healthcare spending setting pace to double over the next 10 years and the FDA approving the first brain stem cell transplant last week, I can’t say that the interest has ever been higher in this space than what we’re seeing right now, and the activity in public markets reflects it.”

The life sciences VC funding through the first nine months of the year broke down to $2.75 billion for biotech firms and $1.46 billion for medical device companies. While not “life sciences” companies, healthcare services companies – considered at least supporting players in the Medical Device Daily universe – added another $338.65 million in financings through 3Q05.

Four of the 10 biggest VC deals in the quarter involved biotech companies: Replidyne (Louisville, Colorado) raised $62.5 million; Affymax (Palo Alto, California) brought in $60 million; Cerexa (Alameda, California) received $50 million; and Esprit Pharma Holding (Princeton, New Jersey) raised $45.4 million.

The largest medical devices VC deal in the quarter was the $40.8 million raised by TherOx (Irvine, California), a developer of systems for delivering oxygen to ischemic tissues. That ranked just outside the top 10 in the 11th spot.

The life science sector’s nine-month total was $4.2 billion, equal to 26% of all year-to-date VC investing, a pace that will match or surpass last year’s total of $5.8 billion – and that total represented a three-year high.

Through the third quarter, medical device firms showed quarter-to-quarter growth: $422.06 million in VC funding in the first quarter, $476.14 million in the second and $557.81 million in the third. The $1.46 billion raised through the first nine months puts the sector on a pace to easily top 2004’s full-year total of $1.75 billion.

In the larger picture, total third-quarter VC investments across the board reached $5.3 billion in 714 companies, a slight dip from last quarter’s $6.1 billion but ahead of last year’s 3Q total of $4.6 billion. Still, it falls in the middle of a $4 billion to $6 billion quarterly range over the past three years.

“I think the overall strength of the venture market is really quite good,” said Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “We’re continuing to see year-over-year growth, albeit not huge growth, but there is growth there.”

For the first nine months of this year, VC investing totaled $16.3 billion, compared to $15.9 billion in the same period last year, meaning that full-year VC investing could meet or exceed 2002’s $21.7 billion, the highest level in the past three years. All in all, VC investments continue to exhibit steady growth in the period after the boom times between 1999 and 2001.

Further, Lefteroff noted that a look at comparable periods, such as the years prior to 1997 in relation to the past three to four years, show current VC investment levels to be higher. “Venture investing in general is still pretty robust,” he added, “even after the Internet bust and all the trouble that we’ve seen over the past five years. We’ve come back to a more normalized and sustainable level of venture capital investments.”

VC investing in later-stage companies over the past year continues to be a dominant theme. In the third quarter, later-stage funding rose slightly to $2.6 billion – a four-year high that follows an upward trend that began late last year. For the year to date, later-stage investments reached $7.2 billion, approaching last year’s total of $7.6 billion that was a three-year peak.

Commensurately, the average post-money valuation rose to $78.9 million for the 12 months ending in the second quarter, compared to $63.2 million for the first quarter. (Valuation data lags investment data by one quarter.)

However, funding for start-up and early-stage companies fell back to $1 billion for 216 companies. Also, early-stage companies’ average post-money valuations were essentially flat at $14.4 million for the year ending in the second quarter, compared to $14.2 million for the period ending in the first quarter.

While early-stage companies often bemoan a dearth of funding opportunities, Lefteroff noted that business’s self-valuations might not necessarily equal VC’s thoughts. “There’s a ton of money out there looking for investment,” he said, adding the caveat that high pre-money valuations are not affordable if VCs are to expect returns in the mid- to high teens, given lower exit values in IPOs and [mergers and acquisitions] as compared to the bubble years.

The year-to-date totals of $3.2 billion and 697 deals among early-stage companies are on track to match last year’s totals of $4.3 billion and 1,028 deals.

“There is plenty of capital for entrepreneurs,” Lefteroff said, adding that investing is definitely not hitting a trough. “The general health of VC-backed industry is good. We just need public markets, as well as M&A transactions, to ratchet up a little bit in valuation to see some of that valuation expansion accrue to founders and management teams.”

The MoneyTree Survey measures cash-for-equity investments by the professional venture capital community in private emerging companies in the U.S. The data are primarily obtained from a quarterly survey of venture capital practitioners, and information is augmented by other research techniques including other public and private sources.