"IPOs are definitely coming back, but M&A is still the dominant way that VCs are going to exit their companies," David Barry, managing editor of Dow Jones Venture Capital Analyst, said during the late-October Dow Jones VentureOne Exchange Conference at the Logan Hilton Hotel in Boston. His comments opened the two-day event, during which venture capitalists and emerging company CEOs provided their perspectives on the state of fundraising to conference participants. Citing VentureOne/Ernst & Young as his source, Barry noted that the median size of funds greater than $20 million increased to $148 million in the first half of this year, compared to $100 million median VC fund size in 2003. He also said that "equity into venture-backed healthcare companies was up in the second quarter this year" (117 deals, $1.5 billion invested vs. 114 deals, $1.4 billion invested in 2Q03).
"Medical devices [are] rebounding at the expense of biopharma," Barry said, with med-tech representing 29% of healthcare investment allocation, compared to 54% for biopharma. "But investors continue to favor later rounds, with 38% of the deal flow in the first half of this year being allocated to later-stage companies." He noted that the median amount invested in later rounds – $10 million – was an increase over 2003. Regarding corporate investment in venture-backed companies, Barry said, "Corporations are simple partnering with VC-backed companies as opposed to putting equity into them," pointing out that only 12 corporate deals amounting to $69 million were consummated in 2Q04.
"As far as valuations are concerned," he added, "they've crept up, but I look at this right now as sort of an 'I'm okay, but everybody else isn't okay' kind of mode. If you speak to early-stage VCs, they will tell you that everything is fine at the early stage – but at the late stage, things are getting out of control. Then you talk to late-stage investors and they'll say everything is okay, we're not overpaying for these companies – it's the early-stage guys who are driving things up too far. Ultimately, it will come down to what kind of exit they get that will determine who did pay too much or not, but there does seem to be that sense of 'it's the other guys' who are driving up valuations in the industry right now."
However, the facts show that valuations are stable in early-stage deals, with median pre-money valuations remaining at about $2 million. "The late stage is rising," Barry said, "with median pre-money valuations in the first half of this year at about $32 million, as VCs try to get into more of these promising companies before they have an exit." IPOs are definitely coming back, he said, but about 84% of VC-backed liquidity events year-to-date have been M&A events.
Cardiovascular breakthroughs were highlighted at the conference, with four emerging companies – CoreValve (Paris), CHF Technologies (Danville, California), Hydra Biosciences (Cambridge, Massachusetts) and Pervasis Therapeutics (also Cambridge) – featured.
BioWest focuses industry interest on Colorado
As the BioWest 2004 conference wound down in late October, event sponsors described how they hope their aggressive efforts to promote the state of Colorado to the bioscience industry will reap big dividends on the financial front, as well as potentially add many new well-paying jobs for the state's population. According to Denise Brown, executive director of conference sponsor Colorado Bioscience Association (CBSA; Aurora, Colorado), the conference – which covers companies in the medical device, biotechnology and pharmaceutical fields – was an opportunity to convene the roughly 270 bioscience companies within the state and give them a forum to promote the pros of starting such a business in Colorado.
Not only does the conference give visibility to the individual companies, Brown told The BBI Newsletter, but it also gives the entire state a higher profile. "What we're hearing . . . is that we're reaching critical mass in Colorado, the industry is doing very well in Colorado but not enough people know that [yet]." On the medical device side, Brown said that most of the companies that fit that definition are smaller, with a few exceptions. "Colorado is a small-company state when it comes to medical devices," she said, noting that there are roughly 137 firms that can be characterized as device technology entities within the state. Most of these she characterized as being "start-up, but beyond prototypes into early-stage manufacturing."
A short-list sampling of some of the device companies operating within the state:
Cardio-Optics (Boulder), which has patented a method using infrared light to directly visualize flowing blood and examine tissues and anatomical structures inside the heart and blood vessels.
Encision (Boulder) which has developed electrode monitoring technology that it claims will revolutionize minimally invasive surgery.
HEI Advanced Medical Operations (Boulder), which makes high-performance components, medical software, medical devices and non-medical products used for hearing and medical applications, communications and high-speed data processing.
Light Force Therapy (Elizabeth), which designs light-emitting diodes that produce a unique combination of frequency and wavelength to elevate muscle tissue temperature and increase circulation to relieve pain and relax muscles.
Brown said the device industry does well in Colorado because there is "fairly good availability" of early financing for the industry. In fact, Colorado touts itself as being consistently in the top five states for placement of venture capital. She also noted that some of the mature companies within the sector are doing spin-offs and providing financial support to those new entities. Colorado always has had "a real entrepreneurial environment," according to Brown, "so it's a place where you're going to find sort of a disproportionate amount of inventors within the population."
And, of course, there's the scenery. She said that bioscience executives will come into the state for a job and tend to remain there even if their original position is eliminated. "Those people tend to stay," she said, not only because they love it, but "because their families love it."
Another factor that contributes to the state's success on the bioscience front is a fertile university system that churns out many new ideas. These include the University of Colorado (Boulder) and Colorado State University (Fort Collins). "The University of Colorado last year alone, in addition to regular licensing activity, also spun out 10 new companies, five of which were bioscience companies," Brown said. She noted that more than half of the total research dollars that come into the state are for the life science industry "which is a disproportionately high percentage as compared to other states." Most of the industry is clustered around a 120-mile corridor that runs roughly parallel to the Front Range from Fort Collins in the north to Colorado Springs in the south.
Taking advantage of its location within this zone is another sponsor of the conference, the Fitzsimons Redevelopment Authority (FRA), a new redevelopment project located on the former U.S. Air Force base in Aurora, located on a 578-acre site. The $4.3 billion redevelopment effort is anchored by the 227-acre campus of the University of Colorado Health Science Center, which moved onto the grounds after it needed to expand and could not do so in its original Denver location due to space limitations. The FRA master plan calls for up to 15 million square feet of phased new construction. At build-out, more than 32,000 people could be employed at Fitzsimons. On the other half of the property, a research park is being developed so that the academic and private bioscience industry can work together.
Vicky Jenings, director of FRA research park operations, said the FRA is being touted as the largest medical redevelopment project in the country. She said the state is hoping that Fitzsimons "will be the launch pad for biotech and bioscience for the whole region."
California's Shasta County also attractive
Another area primed and ready to attract med-tech firms is California's Shasta County, about 200 miles north of San Francisco at the tip of the Sacramento Valley. In a state defined mainly by its major metropolitan zones such as the San Francisco Bay Area, Los Angeles and San Diego, companies producing such goods as arthroscopic and orthopedic surgical systems, sterile fluid packaging for the medical manufacturing industry and electric breast pumps for nursing mothers have discovered a home in the more affordable "Upstate" region. And Shasta County developers think that trend will continue.
"Our area of the state is distinctly different," Jim Zauher, president of the Economic Development Corporation of Shasta County (Shasta EDC; Redding, California), told BBI. Strategically located equidistant from Los Angeles and Seattle, Shasta County includes the cities of Anderson, Shasta Lake and Redding, which is the center of trade and commerce for the region.
Zauher explained why some medical manufacturers are migrating north: "No. 1, the medical device industry in California is huge. There's a lot of new product development that goes on here. The interesting part of the industry is that most of the new products are not developed by big companies; they're developed by entrepreneurs," he said. "For an area like ours, it becomes a good fit because typically the companies are small and entrepreneurial, they're developing products that are for the most part easily shipped, and so they can be pretty much anywhere they want to be as long as they've got access to good overnight shipping," Zauher said, adding that the county has hubs for all the major carriers. "So if you have the transportation and the strategic location [I-5 runs through Shasta County], then it becomes an area where people would like to live and do business."
He also cited the lower cost of doing business that Shasta County offers compared to other parts of California. "Because we have so much plentiful land, our operating costs up here are a lot less," Zauher noted. Small business owners often dream of being able to own their own building. He said that dream becomes a reality in Shasta County. "That's why we become such a good alternative for companies seeking not only a better place to live ... but from a cost standpoint to know that you can actually own your own building here, that you could buy ready-to-go industrial ground from $1 to $2 a square foot," roughly one-fifth the cost of the Bay Area, he said.
The efforts of Shasta EDC seem to be paying off. "We've seen a surge in activity over the last year as the manufacturing sector continues to expand," Zauher said. Medical device companies that call Shasta County home include Arthrotek/Biomet (Redding), Limerick (Shasta Lake/Burbank) and Newport Biosystems (Anderson).