Venture Financing: Ready To Rebound?
There’s little doubt that the financing window has opened up, but investors, analysts and biotech companies themselves are still questioning just exactly how wide it will be and how long it will last.
Venture capitalists (VCs), for example, keep a keen eye on the IPO window, for when late-stage, venture-backed firms go public, it frees up money for earlier-stage private companies, which are currently under intense pressure and are still finding it difficult to raise fresh funds.
Indeed, most VCs agree that private financing won’t start to pick up until the IPO window is unquestionably open. In general, “financing has improved [this year], but private funding is lagging,” explained Rodney Ferguson, co-head of the life science and healthcare infrastructure group at JPMorgan Partners. Speaking at last month’s BIO VentureForum West 2003, Ferguson added: “Unless and until we do about six IPOs, [financing for] private companies will be depressed.”
That means the venture money should soon start to flow, for a total of eight biotech and specialty pharma firms have priced their IPOs this fall. Unfortunately, the newest offerings – by NitroMed Inc. and Pharmion Corp. – were not particularly well received. Pharmion’s stock ended its first trading day unchanged, while NitroMed’s shares took a 16 percent hit.
Still, two earlier IPOs have performed very well in the after-market: As of market close on November 6, the stock of Canadian firm Neurochem Inc., which debuted in the U.S. in mid-September (but was already public in Canada), had gained 36 percent over its IPO price and shares of immunotherapy specialist Genitope Corp., which went public in late October, had risen by 39 percent. The stocks of newly public firms Myogen Inc. and CancerVax Corp. were also trading above their IPO prices on November 6, up 8 percent and 2 percent, respectively. But specialty pharmas Advancis Pharmaceutical Corp. and Acusphere Inc. have not fared so well: On November 6, Advancis closed down 13 percent from its IPO price, while Acusphere had slipped by 37 percent. (See the Signals article, "Eye On Wall Street,” for a detailed list of this year’s U.S.-based public offerings.)
It’s a mixed bag, all right, and certainly demonstrates that investors are still skittish about biotech.
VCs have remained cautious, too: At the end of September 2003, biotech venture financing was down 18 percent from the year-ago period. (See the Signals article, “Financing On Target For A Stellar Year,” for financing data for the first nine months of 2003.) This trend was also evident in 2002, when private biotechs raised 12 percent less cash than they had in 2001.
In fact, VCs have been retrenching ever since 2000, when they invested more than $106 billion in U.S. firms from all sectors of the economy. Overall funding fell to $41 billion in 2001, then to $21 billion in 2002, and reached a mere $13 billion in the first three quarters of 2003, according to the most recent PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey. But for the last five quarters, the investment pace has been steady, at about $4 billion per quarter. That’s a healthy, sustainable pace, according to the survey.
Interestingly, VCs poured more money into biotech in 3Q 2003 than any other industry – the first time this has occurred in seven years. “For the first time, we’ve seen a shift away from technology and towards the life sciences,” explained Mark Heesen, president of the National Venture Capital Association (NVCA). Speaking at the BIO VentureForum, Heesen said that “We’ve seen a lot of excitement in biotech in the last year or so,” leading him to predict that “we will see lots of companies raising money in 2004.”
Not everyone is so optimistic, however -- including Jonathan MacQuitty, managing director of Abingworth Management Ltd. “Biotech is not in the morgue [this year, as it was last year],” he said, “but it’s still in intensive care.” Today’s financing environment is “corrosive,” he continued. “There are lots of late-stage companies looking for money. They’re starting to run out of cash and they’re desperate.” Moreover, there’s been “an incredible foreshortening of valuation parameters. We see later-stage companies with the same valuations as early-stage companies. That makes it difficult for us to invest in early-stage companies.”
So, what does it take to get a venture deal done in this environment? According to John Parrish, president of fledgling firm Angiosyn Inc., “Venture money is looking for a home, but despite that, VCs are taking much longer to review deals. They are more careful and diligent” than they have been in the past, and valuations are lower than ever. Parrish, who has started five companies during his career, recently raised about $2 million in seed capital for Angiosyn, and it was at the “lowest valuation” for any of them, he said.
For VCs to fund a company these days, the technology has to address an unmet medical need; the technology should have substantial market potential; and management has to have a track record and contacts with VCs, Parrish said. “You need a champion” in the VC community.
Contacts also helped ChemoCentryx Inc. raise venture financing, according to VP of finance Linda Rubenstein. “A big piece of our investor base is in Europe. Some of the financing was the result of relationships our financial advisor at the time brought to bear,” she said.
It’s also possible for a young company to use an agent who has contacts with VCs – a strategy that Rinat Neuroscience Corp. used to raise $40 million in a Series B round this past August, according to president Ron Eastman. “The agent facilitated an intense, focused effort, which consisted of 53 meetings in six weeks,” he said.
“If you know folks, use them,” advised JPMorgan’s Ferguson. “We won’t do over-the-transom deals.”
Indeed, many VCs look at hundreds – if not thousands – of business plans annually. Abingworth Management, for instance, “sees 1,000 companies a year, but we only finance five of them,” MacQuitty said.
In today’s constrained financing environment, then – or perhaps even when the venture money starts to flow again -- having a contact can make all the difference.
originally published 11/07/2003