Billion-dollar baby: Biotech still on a roll with VC funds
Frazier Closes $600M Fund; VCs Say Bio Interest 'Robust'
By Donna Young
Washington Editor
Although venture capital investing in the biotechnology arena slowed in the third quarter of 2007, with fewer deals completed and dollars invested than in the two previous quarters, the space continues to have strong interest for VC firms, said Mark Heesen, president of the National Venture Capital Association.
Biotechnology had $1.1 billion going into 99 deals in the third quarter, Heesen told BioWorld Today. VCs invested $1.2 billion in biotech in 124 deals in the second quarter, and in the first quarter, "the strongest quarter ever recorded for the amount of money" for biotech, VCs invested $1.5 billion in 106 deals, he added.
"What we've seen thus far this year is a continuation of what happened in 2006, and that is a marked increased interest in the life science category in general," Heesen said.
Currently, said James N. Topper, general partner for veteran venture capital firm Frazier Healthcare Ventures, there is a very robust environment for funding in biotech companies. "They've got innovative programs and are doing interesting therapeutic development," he said. "We think the sector is very strong. It's a sector that's had consistent returns over the last 20 years."
Topper said that Frazier plans to invest roughly half of its sixth fund, $600 million in committed capital, in biotechnology firms.
The firm announced Monday that the fund, FH VI, reached its hard cap of limited partner commitments in a first and final close, bringing total capital under management to about $1.8 billion.
About 25 to 35 percent of the money will go to growth-equity health care companies, and the remainder of the fund will be targeted for medical device firms, he said.
"One of the nice things about having those three areas is having the flexibility," Topper said. "If one or more of those areas become very attractive or, alternatively, very challenging, we can push those allocations up or down a bit."
He noted that his firm invests across all stages of product development, from preclinical to late stage, and focuses on companies that are developing novel therapeutics that target unmet medical needs.
In addition, Topper said, Seattle-based Frazier is a national investor, which considers firms throughout the U.S. Although, he acknowledged that about half of Frazier's investments have been in West Coast firms.
"But we have no geographic bias. We will invest anywhere," he said.
One of Frazier's recent investment successes, Topper noted, involved antibiotic developer Alameda, Calif.-based Cerexa Inc., which was acquired in December 2006 by New York-based Forest Laboratories Inc. in a cash-for-stock deal worth about $600 million.
Investments in Cranbury, N.J.-based Amicus Therapeutics Inc., San Diego-based Cadence Pharmaceuticals Inc. and Seattle-based Trubion Pharmaceuticals Inc., which recently all completed initial public offerings, also panned out in a big way for Frazier and its investors, he said.
Topper noted that fewer and fewer VCs are investing in early stage product development firms.
However, he said, his firm is "still very amenable to early stage investing."
"We need early innovation to continue to keep the sector healthy," Topper contended.
Heesen noted that one issue that could crimp the interest by VC firms in biologic, pharmaceutical and medical device makers, whether they are early stage or late-stage firms, is the direction the Centers for Medicare & Medicaid Services will take in covering products for beneficiaries and the current discussion of health care reform triggered by the upcoming presidential election.
"We saw back in the early '90s when there was talk of health care reform when President Clinton first came in there certainly was a downturn in venture investing in that space," Heesen said. "So there is history there to show that venture capitalists may be looking elsewhere if it looks like, at the end of the day and after many, many years of investing and hours putting into growing these companies, that you can't get a proper price for your drug or device."
It's very clear, Topper said, that the U.S. spends too much money on health care.
"As health care investors, we support reform in health care because it's the right thing for the industry and it's the right thing for the country," he said.
But, Topper said, he thinks it is unlikely that there will be any sort of near-term major negative impact on the biotech and other life science industries because of the health care reform debate or outcome of the presidential election.
Venture capitalists, Heesen said, also must keep in mind that the outcome of the presidential election will have an impact on the FDA.
"Venture capital is just going to have to be aware that the FDA premarket approval process very likely could be a bit more complicated over the next year and a half as Bush appointees leave and whoever the president is starts bringing people," he said.
Despite the potential drawbacks of health care reform and changes at the FDA or CMS, Heesen said, there are many intriguing ideas brewing involving the life sciences industries, such as personalized medicine, that will continue to spark the interest of VCs.
"We are seeing some very interesting ideas coming out of the labs," he said.
Published November 29, 2007