VC Outlook Positive On Biotech IPO, M&A Activity
This article was originally published in Start Up
Executive Summary
Things are looking up for biotech VCs. The third quarter of 2014 was the sixth consecutive quarter in which the number of US initial public offerings by venture-backed biotech firms was in the double digits, and pharmaceutical companies show no sign that they're done sourcing R&D via mergers and acquisitions.
Conditions can't get much better for venture capital investors who put money into biotechnology companies unless even more VC firms raise new funds.
The third quarter of 2014 was the sixth consecutive quarter in which the number of US initial public offerings by venture-backed biotech firms was in the double digits, according to the National Venture Capital Association (NVCA). And pharmaceutical companies show no sign that they're done sourcing research and development via mergers and acquisitions. (See (Also see "A Banner Year For Pharma: M&A Tops 2009 Merger Mania" - In Vivo, 18 Sep, 2014.).) Altogether, the vigorous pace of biotech IPOs and M&A activity during the past two years has made it possible for VC firms to raise new capital.
New funds closed in 2014 include: a $400 million effort from ARCH Venture Partners, at least half of which will be invested in biotech companies; a $450 million high-tech and health care fund raised by Venrock; and a $500 million biotech-focused fund raised by Sofinnova Ventures.
Also, the University of California (UC) Board of Regents recently voted in favor of a proposal to establish a $250 million venture capital fund called UC Ventures, which will invest in companies that spin out of the university system's 10 campuses, five medical centers, three affiliated national laboratories, and 20 technology incubators.
The UC system previously missed opportunities to invest in companies that licensed biotech innovations developed by university researchers, such as Kite Pharma Inc., which launched a $127.5 million IPO in June [See Deal], and the sister biotech firms Aragon Pharmaceuticals Inc. and Seragon Pharmaceuticals Inc., which were acquired by Johnson & Johnson in 2013 and Genentech Inc. in 2014, respectively, for up to $2.4 billion combined. [See Deal] [See Deal]
European investors are seeing increased interest in venture capital as well. Forbion Capital Partners recently raised the first €92 million of its third fund, which the VC firm hopes to increase to €150 million to €200 million.
IPO And M&A Impact
"We have seen a very robust inflow of deals in 2014, which I think reflects investment in public markets and the new funds raised," says Canaan Partners general partner Wende Hutton.
Pharma-backed corporate venture capital funds filled some of the gap that opened a few years ago when private VC firms couldn't raise a new fund, but both corporate venture and private funds are needed to put together syndicates that invest in biotech company funding rounds.
"The environment certainly felt stressed about two or three years ago when syndicate building had a thin set of players, because many were focused on reinvesting in their own portfolios," Hutton says. "But with a very broad-based M&A market and a very broad-based IPO market, we're finding that venture players are able to raise money. Putting together syndicates is actually more competitive."
Eighteen of the 23 venture-backed IPOs during the third quarter of 2014 were life science IPOs, according to the NVCA, while 15 out of 119 venture-backed M&A deals during the third quarter involved life science companies.
Nine companies have exited Canaan's portfolio since 2012 – four via IPO and five via M&A deals. The venture capital firm previously backed Dermira Inc., which plans to gross $125 million from its IPO that launched on October 3 [See Deal], and Civitas Therapeutics Inc., which is being acquired by Acorda Therapeutics Inc. for $525 million. [See Deal]
Hutton says pharma companies have an appetite for anti-infective medicines, drugs that treat central nervous system diseases, and cancer therapies. But, she notes, there have been some attractive M&A transactions in dermatology, respiratory, and rare diseases.
"We are very careful when we assess a potential asset, because we know these robust [IPO and M&A] markets will come and go," Hutton says. "But we look very closely at where demand is coming from in pharma, and they have increasingly outsourced their R&D, and they have bought later-stage assets that fit their pipeline. We don't see that slowing down."
As long as capital continues flowing in, VC firms will keep investing in biotech companies that could meet the needs of Big Pharma or that may whet the appetite of IPO investors.
Adapted from Scrip
, October 7, 2014.