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New biotech deals scrape record low as VC groups lose steam

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More grim news on the venture front arrived today, with the latest figures from PricewaterhouseCoopers and the National Venture Capital Association showing that venture cash flow into U.S. biotech companies dropped for the second consecutive quarter. Over the last three months biotech companies grabbed $697 million in 90 deals, a painful 42% slide compared to the same period a year ago and the lowest level the association has seen since the first quarter of 2003.

In a broad perspective, venture investing in the MoneyTree report looked healthy in the early part of the year. Most industries saw a rise in numbers, with some fields shooting up over 50%. But even if you combine both the biotech and medical device groups, the numbers slid 9% in total dollars invested and 6% in deal volume. All combined the life sciences industry attracted one in every $5 invested in the quarter, a big drop from the 29% share recorded in 2011.

In terms of first-time financings, software and internet companies looked strong in the second quarter.  But once again life sciences dragged behind, with a modest three percent drop in dollars as $130 million was funneled into 27 companies. The NVCA figures--drawn from Thomson Reuters--also indicate that the second quarter numbers shriveled compared to the same period a year ago, when venture investing was rebounding after a slow start. The second quarter figure for 2012 dived 42% compared to the same stretch in 2011. In the first half of this year the NVCA counted 189 deals that attracted $1.47 billion, compared to 201 deals worth close to $2 billion in the first half of 2011.

As we've seen in the past, the NVCA blamed the downward trend on regulatory challenges, which have hurt the industry's rep with investors.

"I wasn't surprised by the numbers," says Jimmy Rosen at Intersouth Partners. And despite recent guidance to the FDA in the PDUFA reauthorization legislation, nobody expects the regulatory environment to clear up until after the election, he adds, which pits two candidates opposed over the future course of healthcare. But what shakes him up the most about the venture trend is a 10-year low in new biotech deals.

"The number of new deals we're seeing is as low as we've seen it in a decade or more," says Rosen. "As someone interested in biomedical innovation, this is a very disconcerting number." The mean average for all second-quarter biotech investment figures for the past decade is around $1.2 billion. And while future quarters are likely to fluctuate somewhat, Rosen hopes we'll be seeing average level of investment that will hover around the $800 million to $900 million a quarter through the lull. "Eventually we'll crack a billion dollars again."

Rosen's explanation for the trend is clear: There are three groups--Rosen calls them buckets--of venture firms at play here. One group, like Third Rock, is flush with cash and making new investments while backing their portfolio. The second group includes venture firms which only have the money needed to back portfolio companies. And the third group, he says, are simply tapped out or just barely able to keep up with the portfolio. That is not a formula for growth.  

In recent days we've been treated to a lineup of investment trend stories that cast a long shadow over the industry. And while everyone seems to count the numbers in a different way, no matter which way you slice it the figures add up to a shrinking piece of the venture pie for biotech.

At the beginning of the week an industry confidence survey from the NVCA and Deloitte put biotech in with a group of cellar-dwellers earning only lukewarm respect. Days before Bloomberg Industries noted that it counted only 59 biotech deals in the last quarter, with a woeful average of $9.3 million a deal. That amounts to the smallest financing amounts since '07, the Boston Business Journal reported. Overall, global VC flow into biotech plunged 43%, down to $550 million, with the lion's share going to U.S. companies. 

To cap it off, BioWorld concluded that total dollars raised by private and public biotechs in the first half amounted to only $7.9 billion, down 40% from the same period in 2011. And FierceBiotech noted that Deloitte Recap's data demonstrates that licensing deals for most companies was down in total deal size.

For an industry that relies on venture bucks to start new companies and sustain its fledglings, it's a worrisome trend. None of this means that the venture parade for biotech is over. But the music these days includes a number of sour notes.

- here's the press release

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