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Economy catches up with biotech investing
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Early in 2008, life science investment was on a roll. It seemed as though the industry wouldn't be bothered by many problems affecting the rest of the economy, and that it was a safe haven compared to other more volatile markets. But Robert Dellenbach at Genetic Engineering News observes that the poor economy has caught up with the industry.
"Despite an abundance of funding as well as scientific and technological progress, the environment for investing in the life science industry seems to have changed dramatically," said Dellenbach.
In the last quarter of 2007 and the first quarter of 2008, life sciences enjoyed a record level of investment. But by the second quarter of this year, there were only 215 investments totaling $1.9 billion; that's compared to 315 investments totaling $3 billion in the first quarter. For the biotech industry, the numbers are even worse. "The number of biotechnology venture backings fell by nearly 50 percent, and the dollar amount invested fell by more than 40 percent from the first quarter...Outside the U.S., the venture financing value fell nearly 50 percent in the same period." On top of that, the IPO market is downright bleak--there were no VC-backed IPOs in the second quarter.
According to Dellenbach, three factors are having a negative impact on the level of life science investment:
- Biotech is notoriously risky and investors may be waiting for a better economy.
- Drug development investments are longer-term than medical device and other healthcare ventures. Investors looking for a quicker return are drawn to these options.
- The emergence of clean and green tech investment opportunities have given VCs an alternative to biotech investment.
Because of the long-term nature of life science investments, the industry should be somewhat insulated from the current economic downturn. But increased caution on the part of life science VCs is causing them to wait for a better time to invest.
- see the GEN article
Related Articles:
Venture groups switching to survival mode
Venture funding slides as IPOs go into deep freeze
Analysts predict more M&A as capital shrinks
Rocky market puts freeze on biotech deal-making
Comments
By David Miller | Posted 6:49pm | August 29, 2008
Biotech is not immune from the forces ripping apart the credit markets and financial sector. Insofar as neither has hit bottom, it well might get worse in biotech before it gets better.
The debacle in the credit markets unexpectedly affected biotech. Like most people, I believed biotech would be mostly immune since development-stage biotechs tend not to be debtors. The declines in biotech that occurred around the same time the financial stocks and credit markets were melting down appeared to be caused simply by "normal" declines due to an increase in risk-aversion.
It made no sense to our firm that biotech’s decline started accelerating beyond the rest of the market. Then we found out Funds of Funds had to re-classify their bad credit bets into their “high risk” pool. This debt was not liquid, so to meet portfolio balance requirements between their low, medium, and high-risk pools they had to sell what *was* liquid out of their high-risk pools. That meant stocks, and biotech in particular, were disproportionally hit in the debacle that followed.
More recently, liquidity has been draining out of biotech hedge funds. Broker/dealers, worried about the risk on their balance sheet, are decreasing the leverage offered to clients. This is happening across the board, but biotech seems to be a special concern.
Several of our hedge fund clients have been given only days to cover what are normally thought of as modest margin positions (under 20%). This was caused by new rules that lowered margin availability. Some were able to raise new cash, but others had to sell favorite stocks to meet the requirements of these more conservative rules.
Those of us who have been around a while have been discussing whether 2008 is a rerun of 2002. In that year, of course, biotech bounced in the summer and went on to have an incredible 2003. Our model portfolio was up 88% in 2003 and the NBI was up 45%.
Lately, we've been wondering if this is 2001. In that year, a biotech rally confined to larger names brightened prospects. A couple of adverse binary events later, and things got ugly for another 9 months.
By Anonymous | Posted 12:14pm | September 5, 2008
4th reason:
With tight capital sources, likely that VC's are retaining their cash for additional rounds in existing portfolio companies, rather that starting new ones
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