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| Top Tier Capital Partners Managing Director Lisa Edgar--Courtesy of Top Tier Capital Partners |
Sofinnova Ventures has evolved rapidly over the past decade to suit the times, from a diversified early stage biotech and IT investor to focusing solely on later stage biotech. And LPs seem to think it is making all the right moves; it has closed a ninth fund at $500 million, the hard cap for the fund that was initially targeting $425 million.
The firm has also specified that specialty pharma and orphan drugs, areas in which it has found success already and where there's ample corporate strategic appetite, will be a particular focus with this fund.
The new fund size is a step up from the $440 million it raised in its 8th fund that closed in 2011. That fund marked the first time the firm declared its intention to focus on later stage biotech; prior to that with its $375 million seventh fund that closed in 2006, Sofinnova declared allegiance to early stage companies with about one-third of that fund slated for IT companies.
That 7th fund was the top performer last year among 30 U.S. venture capital funds with a 2006 vintage of a size between $250 million and $500 million, according to PitchBook. It listed that Sofinnova fund as having a 19.83% IRR at the time. TPG Biotech also made the top 5 in that list of venture performers.
Life science venture firms sometimes struggle to compete with what can be the outsized performance of their IT-focused peers, which at least have a shot at garnering a single investment with enormous multiples. And while the drive for LP diversification can help to buoy some life science venture firms, investors are also looking to make sure they can compete with peers across the board.
Managing Director Lisa Edgar at Top Tier Capital Partners said her fund-of-funds firm has consistently invested about 20% to 25% in healthcare. Its first investment with Sofinnova Ventures was in the 2011 fund. The size of Top Tier's investment was consistent in both the 2011 and 2014 funds, which Edgar said is in line with the firm's strategy.
She said that while the firm's healthcare allocation has remained stable, the healthcare firms it invests in have changed over time. "Some of the folks we invested with early on haven't been the ones that have successfully delivered returns post-2005," Edgar noted. "We've switched out names, added new names. But we don't lower the bar for healthcare funds. Cambridge Associates produces healthcare-only benchmarks, but we don't use those. We are not trying to find the best healthcare fund; we are trying to find the best fund."
Edgar noted that healthcare funds are useful since they can be countercyclical, always an attractive quality when other asset classes are deteriorating. But she knows there are limits for healthcare funds as well.
"You are just not going to get the Ubers of the world; that's not available in healthcare. There are limits on that, possibly because of regulation and reimbursement issues. There's some cap on that. But you can see the proverbial 10x; we are trying to find the groups with the potential to deliver those," Edgar concluded.
Sofinnova has found success matching its investments to strategic acquirers. Recent Sofinnova acquisitions include migraine treatment company Labrys, which was acquired by Teva ($TEVA) in June for $200 million with another up to $625 million in milestones; eye disease player SARcode, which Shire ($SHPG) bought last year for $160 million plus undisclosed milestones; and specialty pharma NextWave, which Pfizer ($PFE) bought in 2012 for $255 million upfront and up to $425 million in milestones. Edgar observed that milestones are standard M&A fare now and that although they add to the time and risk of an investment, they can also offer a 5x upfront with the potential for a 10x return.
The firm's latest IPOs include specialty pharma ZS Pharma, endocrine disorder company Versartis ($VSAR), and glaucoma player Aerie ($AERI).
Edgar sees the ability and interest of healthcare VCs to invest in public companies via vehicles including PIPEs (private investment in public equity) as essential to returns. Investing in late-stage private companies that have natural buyers is core to Sofinnova's strategy, as is the ability to keep looking and buying once companies are public.
"Most VCs that have been successful are going into the public markets and buying undervalued, underfollowed assets. They believe they have some additional knowledge about them and buy a nice position," Edgar said. Sofinnova has made money on public investments, including those for companies such as oncology player Tesaro ($TSRO) and cardiovascular lipid company Amarin ($AMRN).
Another Sofinnova LP, Managing Director Tim Maloney of Abbott Capital Management, added Sofinnova to its holdings for the first time with the latest fund. Maloney said Abbott has only three or four life sciences venture investments and that some of those are legacy funds; the new commitment to Sofinnova is the first new life science fund commitment his firm has made in a few years, he said. (Despite the name, the firm has no connection to Abbott Laboratories.) Abbott Capital has about $7.5 billion under management; one-third of that is in venture capital and growth equity with a minority portion of that invested in the life sciences, Maloney said.
"I credit the firm tremendously with its shift in strategy," he said. "Since 2009, life sciences has been a good place to invest. But Sofinnova's numbers still stood out. They were at the top of the market and best-in-class, one of a handful of leading players in the market."
Sofinnova isn't the only life science venture firm to close in on new cash lately. Earlier this month, Versant Ventures said it was ready to close a $300 million fund, while Essex Woodlands has raised $221.5 million of a planned $750 million fund.
All three join the slew of biotech VCs amassing or unveiling new funds over the last 12 months. Arch Venture Partners said in an April filing that it is raising $250 million. In February, the U.K.'s Abingworth closed a $375 million raise, while early stage backer 5AM Ventures revealed a $250 million second close in December, and VC giant OrbiMed launched a $735 million fund the month prior. VC mainstays Frazier Healthcare, NovaQuest, Third Rock and Atlas also unveiled funds in 2013, totaling more than $1 billion.
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