Friday, February 22, 2008

DC Region: Plenty of Research, Not Enough Capital...

Another good article by Vandana Sinha of the WBJ...

Friday, February 8, 2008
Region rich with biotech research fares poorly with investors
Washington Business Journal - by Vandana Sinha Staff Reporter

The Washington area boasts some of the highest public-dollar figures for biotechnology research in the country. If only the private investors were nearly that interested.

Venture capital for the region's biotech community plummeted by 45 percent last year, compared with 2006, even as biotech investments reached record highs nationally and the industry became the most venture-backed sector last year, according to a new report by PricewaterhouseCoopers and the National Venture Capital Association.

For 2007, nearly $1 of every $3 in venture capital nationally went to a life sciences company. In this region -- which includes Maryland, Virginia, D.C. and West Virginia -- the ratio dropped to a little more than

$1 of every $10 for biotech companies.

Even though the Washington area is considered one of the country's top five biotech markets it slipped into 10th place among 17 regions in biotech venture financing.

Without funding, startups can rarely attract experienced managers and push their products forward in one of the most expensive industries in the world. And yet without tested entrepreneurs and later-stage clinical trials, venture capitalists aren't as apt to take notice. The local market got only 3 percent of last year's national biotech deal flow.

Some biotech experts speculate that part of the problem is the high proportion of early stage companies here.

They also mention two other difficulties: attracting seasoned, serial entrepreneurs who catch the attention of venture capitalists and moving research from federal labs and academia into the marketplace.

"There's a disconnect between the amount of research in the region and startups," said Bill Gust, managing partner of Baltimore-based Anthem Capital Management.

That's partly because the National Institutes of Health discourages commercializing its research, and The Johns Hopkins University has a "puny, puny flow of commercialization," he said.

The startups that do emerge in the Washington area today must confront the effects of a Wall Street that is sour on biotechs.

As the stock market continues to batter publicly traded biotechs and drag down their valuations, venture capitalists realize they must invest more dollars and wait longer for that money to pay off in an IPO or sale.

"If that's the world you're dealing with, then there's a tendency to look only at later-stage deals," said Jim Barrett, general partner at New Enterprise Associates, a venture capital firm in Chevy Chase. "So the question becomes who is bringing these companies along to the point of late-stage deals? That's what everyone is grappling with."

Venture capitalists say a crucial element sometimes missing in local biotechs is tested management.

Some of the biggest deals of 2006 flowed to Cogenesys, founded by Human Genome Sciences Inc. executives, MacroGenics, founded by MedImmune Inc. executives, and Supernus Pharmaceuticals Inc., founded by Shire Laboratories Inc. executives.

Those deals illustrate the importance of developing a "critical mass" of biotech companies that can spin off new businesses, said Steve Mayer, a former HGS finance chief who spun out Cogenesys in 2005. The company announced last month it would be sold to an Israeli pharmaceutical for $400 million.

San Francisco and Silicon Valley, where biotech spinoffs are common, got $1.2 billion in biotech financing in 2007, more than a fifth of the country's biotech money.

New England rung up $897 million and San Diego raked in $973 million.

In comparison, the Washington area raised only $158 million last year in biotech venture capital. The region has stuck to an average, and slender, 4.5 percent slice of the national biotech VC pie in the last decade.

With more biotech buyout activity anticipated in the area and more companies reaching maturity, many hope those numbers will start rising this year.

"With where we were in 2007, it wouldn't take a lot to make 2008 a pretty interesting year," said Bruce Robertson, a managing director who heads the Rockville office of Atlanta-based HIG Ventures, which is eyeing two area biotech companies.

No comments: