Wanted: A cure for capital market panic
This article was originally published in Scrip
My favourite biotech cartoon pictures a physician sitting at his desk holding a piece of paper and saying to his patient: "I don't usually recommend biotech shares but this one has come up with a cure for stock market panic." In recent weeks, the news that a number of venture capitalists are walking away the life sciences suggests an urgent unmet medical need for a capital market calming treatment.
Scale Venture Partners, which has ophthalmology specialist Alimera Sciences and Alzheimer play Sonexa Therapeutics in its portfolio, is the latest VC to say it will no longer invest in healthcare opportunities because of regulatory risks, capital requirements and the slow and uncertain return on investment. Add this to the news that long time blue chip funds Advanced Technology Ventures and Morganthaler would be spinning out their life sciences activities while Prospect Ventures threw in the towel and decided not to raise a fourth $250 million healthcare fund and it looks like there might be a trend.
While it is true that others have raised new money – Sofinnova Ventures recently closed its life sciences only VIII fund at more than $400 million and venBio's strategic fund exceeded its $175 million target by bringing on board three corporate investors as limited partners - there can be no doubt that biotechs (and pharma, by association) are the victim of a double whammy. First, investors are allocating smaller sums to venture capital, and second, despite its long term reputation as a defensive sector, money is migrating out of healthcare.
The emergence of more active philanthropic investors coupled with a rising interest among corporates is unlikely to fill the growing investment deficit.
To preempt those who think this thesis is overly negative and that three or four data points no matter how close temporally do not make a trend, my concerns about the future of biotech investing were confirmed by a conversation that I had with 2011 Scrip Lifetime Achievement award winner Steve Burrill who described the current climate as the worst it has ever been. In 30 years of interactions, I had never heard Steve, a long time cheerleader for the industry, sound so pessimistic.