High-Risk, High-Reward, No Consensus


Trends inpact investment direction in life sciences


After a little more than four hard years of recession, investors see some hope that investments in the life sciences will increase this year.

The announcement by Boston-based Third Rock Ventures, which raised $516 million in March to create over a dozen new biotechnology companies over the next few years, showed increasing optimism among investors for life sciences start-ups.

Last year, U.S. venture capital funding in the life sciences sector, which includes the biotechnology and medical device industries, dropped 14 percent in dollars and 7 percent in deals. Venture capitalists invested a total of $6.6 billion in 779 life sciences projects during the year, compared with $7.7 billion in 836 deals during 2011. The number of life sciences companies receiving VC funding for the first time reached the lowest level since 1995 with only 135 companies receiving funding in 2012.

“The drop in investment last year sends up a cautionary flag of concern,” ~ Jeff Boily, former CEO, Center For Animal Health Innovation

“Third Rock’s recent announcement reminded me of the old days when things were good,” Nicholas Franano, CEO of Novita Therapeutics, a biopharmaceutical and medical device company, says. “Since 2008, there has been big attrition from venture capital partnerships in the life sciences.”

The life sciences, Franano says, have always proved to be a challenge for investors because it requires large amounts of capital and time to create products. “It is a high-risk, high-reward investment,” he says. “Life sciences require a lot of capital to create a product.”

Continued slow economic growth means that investors willing to take chances will more likely consider later-stage developed companies rather than start-ups.

“The drop in investment last year sends up a cautionary flag of concern,” Jeff Boily, an entrepreneur and private investor in life sciences in Philadelphia, says. Last year, Boily was the CEO of the Center for Animal Health Innovation in Olathe.

“The activity in early-stage businesses, early high-risk, that activity has decreased,” Boily says. “People are still holding back. It takes a toll on young companies.”

According to Boily, large pharmaceutical and biotech firms have begun looking at early-stage developments from academic institutions and not-for-profit organizations to share costs. “It’s a new way to do deals, to move forward on deals that bring value to the table.”

Food and agriculture start-ups are beginning to gain more interest from two kinds of investors, says Ron Meeusen, managing partner with Cultivian Ventures from Carmel, Indiana, a venture capital firm.

“One group is basically saying the return in traditional areas is down and they’re looking for new areas to invest in,” Meeusen says. “The other group of investors is interested because of trends: How has population demand caught up with supply? Will we have enough grain next year? More food requires new technology. It’s a long-term trend.”

With money tight at the federal level, now especially with sequestration, the developments in the areas of infectious diseases, cancer research and patient care delivery offering concrete results will rise on investor’s lists, says Lawrence Dreyfus, the University of Missouri-Kansas City’s vice chancellor of research and economic development.

“The focus is shifting more away from basic research,” Dreyfus says. “It’s short-sighted because the trend ignores what underpins everything and that is basic research.”

Despite improvement in the market and developing trends, risks abound for investors considering start-ups.

“Start-ups are so far away from where they need to be,” Dreyfus says. “They are in what we call ‘the valley of death.’ They’ve made a discovery to get traction in the market. But if for lack of investment they don’t get pushed forward, they go nowhere.”