Q1 '16: Venture cash is still pouring into U.S. biotechs

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Even as share prices and biotech valuations wilted under the glare of a savage bear market during the first quarter of the year, venture capital groups showed no signs of slowing down from last year’s torrid pace. A roundup of U.S. venture activity concluded that VCs invested $1.8 billion in biotech companies--just a rounding error short of the $1.81 billion total tracked for the same period a year ago.

Add in $508 million for medical devices and the life sciences industry actually edged out last year’s fast-paced first quarter. Altogether there were 118 biotech deals tracked in the three months, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

The venture money in biotech tends to stay close to home in the U.S., and that was clearly apparent when you look over the top 10 biotech deals racked up in the quarter. Six of those rounds landed in the booming Cambridge/Boston hub, while the other four all fell to the Bay Area. Those two hubs still account for the lion's share of biotech investing in the U.S.

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Now that a wave of biotech IPOs shoved a phalanx of biotechs into the now stormy public market, it also wasn’t surprising to see that 7 of the top 10 biotech rounds were all either seed or early-stage rounds backing startups. 

The venture community in biotech has undergone a sea change over the past 10 years. After the 2008 financial crisis winnowed out a host of marginal players, a smaller group of dedicated investors remained to dominate the field. The IPO boom from late 2012 through 2015 allowed most of those firms to return cash to investors and then bring them back for billions more in new funds. And now by and large they’re well prepared to stick with their companies through the market squall.

A number of observers, though, will be closely watching the behavior of crossover investors--which help biotechs set themselves up to go public--in the months to come. Without a pickup on IPOs, they may well stand down until the generalist investors come back to the kind of high-risk, high-reward gambles that biotech epitomizes.

Most VCs would tell you that the fundamentals of their business haven’t changed much in recent years. Big Pharma still suffers from poor R&D productivity and needs the kind of assets biotechs can develop. And with a better knowledge of the biology of disease, developers can aim higher in shooting at an unmet medic al need--still the gold standard for defining success in drug development.

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