UPDATED: Biotech rattled as Q1 first-time VC deals plunge to 18-year low

Another quarter brings more abysmal statistics for venture investment in biotech. The VC industry turned in bleak numbers for biotech deal-making in the first quarter of 2013, with one key measure of early-stage activity in the life science sector falling to its lowest level in almost 18 years.

Numbers plummeted down to new lows for the decade and the 21st century in life sciences (biotech and medical devices), according to the MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association based on Thomson Reuters data. The report compared deals from the first three months of 2013 with the fourth quarter of 2012, finding overall declines of 12% in dollars and 15% in deals across all industry sectors, which hauled in a total of $5.9 billion in 863 deals.

Yet the declines in biotech were way steeper than the overall drops. While biotech companies fetched the second-most amount of money in the venture industry with $875 million through 96 deals, total dollars in the sector plunged 33% and the number of deals dropped by 30% in the first quarter compared with the last three months of 2012. The 23% drop in life sciences deals was the lowest since the first quarter of 2009, when the national economy was imploding.

For biotech companies and other healthcare outfits grappling with capital shortages, execs face some tough choices about how to advance research programs, said Michael Greeley, a general partner at Flybridge Capital Partners in Boston, and a board member at the NVCA, via email.

"Companies are having to make very drastic trade-offs/modifications to product development strategies: fewer studies, smaller trials, fewer development programs in parallel," Greeley said. "The implication to the above is, on average, companies look less like platforms and more like single product companies which may actually make them more risky. And they are generating less clinical data which flies in the face of what the FDA is looking for--more data, more efficacy studies, etc. [The] risk is many of these companies and the FDA are talking past each other."

Now gird for the worst of the first-quarter findings: First-time deals for life sciences suffered a "dramatic drop," according the venture industry, declining 52% in dollars to $98 million from the prior quarter, the poorest quarterly sum for this category since the third quarter of 1996. And only 20 companies scored venture deals for the first time in the first three months of the year, the lowest number since the second quarter of 1995. 

Keep in mind that these are the top-line statistics, and mostly the dour ones that the venture industry highlights. And anyone with a few hours could probably find some something sanguine from the overall numbers. However, there's plenty to worry biotech entrepreneurs and the early-stage life sciences here, as venture capital has always been a significant source of money for translating lab work into human therapies. These numbers suggest that it's as hard as any time in recent history to win venture dollars for the first time, and even an uptick in investment from corporate pharma groups and wealthy cats in early-stage companies hasn't completely filled the void.

"Lower investment levels in the first quarter were driven by a number of factors, none of which were unexpected," said John Taylor, head of research for NVCA, in a statement. "The venture industry has been raising less capital than it has been investing now for several years, and ultimately this dynamic flows through and manifests itself in lower investment levels overall. Additionally, we are seeing less money going into traditionally capital-intensive sectors such as clean tech and life sciences, especially in first-time deals."

Rather than biotech, more venture bets are being made in the software industry where capital requirements are lower and product development timelines are much shorter. The best shot for biotech groups nowadays seems to be focusing on an area of critical patient need, which could make their programs eligible for money not only from VC firms but also from disease foundations and even NIH sources for early-stage work.

- here's the release
- get more on the med tech outlook from FierceMedicalDevices

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

Editor's Note: Updated with comments from Michael Greeley.

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