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VC ends '12 on a high note, outlook ranges from tough to terrific

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Last year ended on a high note in the venture capital arena, with $1.3 billion injected into the biotech industry in the final three months of the year. That's a solid record, accounting for a slight surge over the $1.25 billion in venture investing tracked in the previous quarter. But the strong finish in the second half of the year was still well off the pace set in 2011 and couldn't make up for all the sour notes that came earlier in 2012.

The MoneyTree report--a collaboration involving the National Venture Capital Association and PricewaterhouseCoopers with data provided from Thomson Reuters--concluded that $4.1 billion was invested in biotech last year, well short of the $4.9 billion that was pumped into developers in 2011 and just slightly above the $3.9 billion invested in 2010. The biotech industry was hit with an anemic second quarter in 2012 that highlighted a generally constrained environment for new venture investing, with a particularly painful track record on first-time financings throughout the year. 

The biotech and medical device industries combined collected 25% of the VC cash invested last year, in line with 2011.

Here's a list of the top 15 deals in 2012.

The bump in second-half activity had a lot to do with the top deals in the pack, with fewer biotechs attracting the lion's share of the cash, says Tracy Lefteroff, PwC's longtime life sciences consultant. And that fits into an overall trend expected to play out in 2013, as most venture players continue to focus on later-stage deals largely reserved for a pack of seasoned entrepreneurs.

"Long runways to successful exits are only getting longer," NVCA President Mark Heesen told analysts, adding that first-time financings in the life sciences are scraping along the lowest rate of new deals since 1995. Factor in 5 straight years in which life science VCs raised less than they invested, he adds, and it's "likely we'll see fewer and fewer dollars invested in 2013."

Not that Sofinnova Ventures' Jim Healy, a general partner, is bummed out by that prospect. In fact, he rather likes the lay of the land in biotech right now, calling the overall outlook "terrific." Sure, some venture firms are struggling to raise cash from investors, he says, and it's harder for many startups to raise money as well. But when you step back from the micro trouble, a healthier overall picture emerges.

"We do see that macro trends are very positive," says Healy. The healthcare market--and specifically the biopharmaceutical market--is stable. There's a growing number of older people in the country in need of ongoing care. The FDA has presided over a rising tide of approvals, which jumped from an annual rate of just over 20 to close to 40 over the past three years. And each new approval marks a new product that can inspire new businesses, push fresh IPOs and generally support the industry's growth.

Healy operates along with his colleagues according to the Rule of Threes: Invest in Phase III drugs and target a 3x return in three years. That's why he's particularly bullish on orphan drugsophthalmology and dermatology. With an orphan drug, for example, it's possible to short circuit the development process with fast track status, with dermatology and ophthalmology looking equally appealing on development cycles.

Healy says 2013 should also be a "terrific" time to invest, provided you factor in some realities: Fundamentals will remain strong, larger pools of capital will be controlled by fewer VCs, fewer companies will get backing but high-quality companies can thrive, with the best being well capitalized for the work they are doing.

That may not be an ideal outline, but the picture he paints is a long way from grim.

To give you a better idea of just what Healy means by the best, we gathered a list of the top 15 biotech investments in 2012. You'll note that many of these figures are smaller than the rounds that were reported last year, as the score keepers focus on the actual cash that flowed to biotechs rather than the tranched rounds that were announced. -- John Carroll, Editor-in-Chief. Follow me on Twitter and LinkedIn.

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