Financing Private Biotechs in 2005: Following the Money

Analyzing VC investments in private companies last year suggests that conventional wisdom is holding: oncology and specialty pharma firms did especially well, pulling in the biggest shares of biopharma private equity in 2005.

According to Windhover's Strategic Intelligence Systems (SIS), private biotech companies in 2005 managed to pull in nearly $3.8 billion in equity financing. (Debt rounds, such as the $80 million raised by Jazz Pharmaceuticals Inc. in June 2005, have been excluded from this analysis.) [See Deal] A look at where VC money was going by round—how much cash was invested in Series A rounds versus how much went toward boosting existing portfolio companies, for example--suggests that while total financing was spread evenly throughout the private company life cycle, the average rounds for maturing private firms had increased significantly. (See "Biotechnology Fundraising Reflects Bigger Start-Ups, Fewer IPOs in 2005," START-UP, December 2005 (Also see "Biotechnology Fundraising Reflects Bigger Start-Ups, Fewer IPOs in 2005" - Scrip, 1 Dec, 2005.).)

But what kinds of companies did VCs support in 2005? Analyzing VC investments in private companies last year suggests that conventional wisdom is holding. More than one fifth of the rounds tracked by SIS went to companies with a primary focus on developing cancer therapies—Affymax Inc. 's July 2005 $60 million fourth round and the creation of Light Sciences Oncology Inc. and that spin off's two-stage $67 million Series A were the biggest windfalls. [See Deal] [See Deal] That oncology company deals overall amounted to roughly one fifth of the total funds raised in 2005, or 21%, is no surprise, given the dealmaking and development bandwidth that this space is enjoying at the Big Pharma level.

Specialty pharmaceutical firms—in many ways attractive to VCs particularly at the start-up level because of their perceived lower risk—were buoyed by a handful of significant early rounds by the likes of Verus Pharmaceuticals Inc. and Cerimon Pharmaceuticals Inc. , and mezzanine financings by relatively more established players like Xanodyne Pharmaceuticals Inc. This group, which is on the whole exploring new in-licensing models, landed more than 11% of the VC money in 2005; CNS firms came a close third. [See Deal] [See Deal] [See Deal] (See "The New Out-Licensing Start-Ups: Securing Product Supply," START-UP, December 2005 (Also see "The New Out-Licensing Start-Ups: Securing Product Supply" - Scrip, 1 Dec, 2005.).)

Firms with preclinical products raised the most cash as a group in 2005, but averaged only $19 million per fundraising. Unsurprisingly, those firms with Phase II and Phase III projects raised more cash individually: bringing in $30 million and $27 million on average, respectively, generally reflecting the dealmaking potential these mid-stage projects offer.