Beyond Borders: Global biotechnology report 2010

The momentum continued to build in the
second half of the year, with a boost from
more good news on the clinical trial front,
this time from Human Genome Sciences
(HGS). In the second six months of the
year, capital raised through US follow-on
public equity offerings increased more than
threefold. However, this financing rebound
did not extend to all companies equally. In
fact, three companies — HGS, Dendreon and
Vertex Pharmaceuticals — accounted for 44%
of the more than US$5 billion raised through
US follow-on offerings in the second half of
the year. In Europe, follow-on fund-raising
was even more skewed, with one transaction
by QIAGEN accounting for 77% of Europe’s
follow-on funding for the entire year.
Despite this concentration, increased
investor interest in offerings by existing
public companies can be an early indicator
of the return of the IPO market. Indeed,
four IPOs were completed in the US and
Europe in the second half, although two
were by profitable companies and a third
was by a company preparing to launch
an approved product. Still, many others
started queuing up to test the IPO waters
in 2010. As we go to press in April, seven
US companies have completed IPOs, while
several are in the queue. No European
companies have gone public so far in
2010, and only one has filed to do so. The
most significant debut was by Ironwood
Pharmaceuticals. The company raised
about US$215 million at a US$1 billion
post-money valuation with significant
support from existing investors. In a sign
of the times, most companies in the IPO
queue are more mature than the typical
IPO candidate of four or five years ago.
While this presents a challenge for venture
investors seeking timely exits, it is a plus for
IPO investors seeking less risky investments.
As the global financial environment
improves, we expect the appetite for IPOs
to increase, but we anticipate that the bar
placed by investors will remain high.
Public investors are not the only ones
raising the bar on their investments. In
Europe, venture investing fell 21%, with total
venture capital falling to the lowest level of
the decade. The year was one of only two
years when the industry raised less than
€1 billion (US$1.4 billion). For companies
that did succeed in raising venture capital,
it frequently came at a lower valuation than
the previous funding round.
There were a number of causes for this
decline in venture investing. Profitable exits,
either via the public market or through
acquisition, remain challenging, and VCs
understand that they will have to reserve
more capital to fund their existing portfolio
companies longer. As a result, investors
are being more and more selective in the
types of technologies and therapies they
are willing to back, favoring those that are
most likely to interest a big pharma or big
biotech buyer within a reasonable period
of time. In addition, while some prominent
firms such as NEA, Index Ventures and
Domain, were able to close significant
new funds in 2009, the National Venture
Capital Association reports that overall
inflows into the US venture capital industry
declined by 47% in 2009 to the lowest
level since 2003. A similar phenomenon
occurred in Europe, with some specialized
life sciences funds seeking liquidity in their
existing portfolio investments in order to
demonstrate the returns necessary to raise
new capital. While some of the lower capital
inflows were the result of firms choosing
to stay on the sidelines in a difficult year,
2010 promises to continue to present a
challenging fund-raising environment, with
the net result being fewer venture funds and
lower amounts of investable capital across
the industry.
These challenges are driving changes in
the biotech investment model itself. VCs
are experimenting with new investment
strategies, including funding projects
to important value-inflection points for
eventual sale to a larger company, rather
than building stand-alone companies with
the attendant infrastructure. As a result,
we may see a continued decline in total
capital invested, but perhaps not in the
number of products under development.
Companies are still likely to be built around
innovative platform technologies, whereas
product stories with more binary outcomes
will increasingly fall under these new
models. And where will all these product
candidates come from? In large part from
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