Life sciences venture capital funding drops 14% during 2012 but improves at year-end

February 2013

Double-digit dip

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US venture capital funding for the life sciences sector,1 which includes biotechnology and medical devices, dropped 14% in value and 7% in volume during 2012, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters. Venture capitalists invested $6.6 billion in 779 life sciences deals during the year, compared with $7.7 billion in 836 deals during 2011. First-time financings for the sector reached the lowest dollar level since 1998 and the fewest number of deals since 1995.

On a quarterly basis, sector performance improved. During the fourth quarter of 2012, investment in the sector rose 11% to $1.9 billion from $1.7 billion during the third quarter. The number of life science deals rose 12%, from 187 during the third quarter to 209 during the final quarter of 2012.

Total US venture capital investmentUS venture funding among all industries fell 10% in value and 6% in number of deals from 2011 to 2012. Venture inves-tors funneled $26.5 billion into 3,698 deals during 2012. For the fourth quarter of 2012, US venture investment fell 3% in dollars but rose 5% in deal volume over the third quarter.

“Last year’s investment levels came in lower than what we saw during 2011,” noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US. “General economic uncertainty continued to hinder capital investments.

“As the number of new funds being raised continues to shrink, venture capitalists are being more discriminating with where they’re willing to place new bets. At the same time, they’re holding on to reserves to continue to support the companies already in their portfolio. Both of these factors are taking a toll on the amount of capital available for young start-ups, which is reflected in a 38% drop in the number of seed-stage companies receiving VC dollars in 2012.”

Life sciences venture capital investment

The life sciences share of total venture funding declined from 26% for 2011 to 25% for 2012. The sector took a larger share of 29% during the fourth quarter of 2012.

Biotechnology, raising $4.1 billion in 466 deals during 2012, placed a distant second behind software, which drew $8.3 billion in 1,266 deals. Biotechnology venture investment for the full year 2012 fell 15% in value, while volume was flat.

On a quarter-over-quarter basis, biotechnology investment rose 3% in dollars and 13% in deals. Biotechnology raised $1.3 billion in 135 deals during the fourth quarter of 2012, compared with $1.2 billion in 119 deals during the third quarter.

The medical device industry finished 2012 down 13% in dollars and 15% in deals for the full year, capturing $2.4 billion in 313 deals. On a brighter note, quarterly venture funding for the medical device industry rose for the first time during 2012 in the year’s final quarter. Medical device funding jumped 32% in value over the third quarter to $581 million and climbed 9% in number of deals to 74.

1 The MoneyTree life sciences sector includes the biotechnology and medical device and equipment industries. Biotechnology is defined as “developers of technology promoting drug development, disease treatment, and a deeper understanding of living organisms; includes human, animal, and industrial biotechnology products and services. Also included are biosensors, biotechnology equipment, and pharmaceuticals.” Medical devices and equipment industries are defined as those that “manufacture and/or sell medical instruments and devices including medical diagnostic equipment (X-ray, CAT scan, MRI), medical therapeutic devices (drug delivery, surgical instruments, pacemakers, artificial organs), and other health-related products such as medical monitoring equipment, handicap aids, reading glasses, and contact lenses.”

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Figure 1: Life sciences funding compared with total venture funding

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Life sciences funding by quarter

Although life sciences investment rose 11% quarter over quarter, dollar value dropped 2% year over year.

“Venture investment in the life sciences sector was down for the full year 2012,” Lefteroff said. “The pickup during the third quarter for biotechnology, and for both industries during the fourth quarter, wasn’t enough to outpace lower funding levels during the first half of 2012. Global economic uncertainty, capital intensity, regulatory risk, and more discriminating investors were all potential factors that weighed on sector performance for the year.”

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Figure 2: Life sciences funding trends by quarter 2010–2012

Life sciences deal volume by quarter

The number of life sciences deals rose 12%, from 187 during the third quarter to 209 during the fourth quarter. Compared with the same quarter of 2011, the number of deals during the final quarter of 2012 came in flat.

Looking at the total number of deals for the full year, volume dropped 7% to 779 during 2012, compared with 836 during 2011.

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Figure 3: Life sciences deal volume by quarter 2010–2012

Life sciences average deal size by quarter

Average life sciences deal size at $9 million for the fourth quarter of 2012 decreased 2% year over year and 1% quarter over quarter. For the full year 2012, average deal size fell 8% from 2011 to $8.5 million.

Life sciences captured three of the top 10 deals for the quarter — two biotech and one medtech. The largest deal was $155.9 million to a California biotech, Intarcia Therapeutics.

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Figure 4: Life sciences average deal size by quarter 2010–2012

Funding for biotechnology and medical devicesBiotechnology captured 69% of total life sciences invest-ment during the fourth quarter of 2012. Similarly, the split for the full year 2012 was 63% for biotechnology and 37% for medical devices.

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Figure 5: Life sciences investment split for the fourth quarter of 2012

3Double-digit dip

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Figure 6: Biotechnology and medical devices funding trends 2010–2012

Biotechnology funding by subsegment

For the full year 2012, the biotech-human subsegment led in life sciences venture capital funding at $3.2 billion. But all of the life sciences subsegments fell in funding level for the full year 2012 when compared with the full year 2011.

Compared with the third quarter of 2012, funding for three biotech subsegments rose during the final quarter of the year:

• Biosensors, +415% to $20 million

• Biotech research, +58% to $7 million

• Biotech-human, +41% to $1.1 billion

Four subsegments fell during the fourth quarter of 2012, when compared with the third quarter:

• Biotech equipment, -27% to $34 million

• Biotech-animal, -78% to $9 million

• Biotech-industrial, -90% to $26 million

• Pharmaceutical, -61% to $31 million

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Figure 7: Biotechnology funding by subsegment 2010–2012

Medical device funding by subsegment

For the full year 2012, medical therapeutics attracted $2 billion, leading the three medical device subsegments. Medical thera-peutics was down 10%, however, when compared with the full year 2011.

On a quarterly basis, the medical therapeutics subsegment jumped 65% over the third quarter of 2012 to $520 million.

The two other medical device subsegments fell during the final quarter of 2012, when compared with the third quarter:

• Medical/health products, -36% to $51 million

• Medical diagnostics, -78% to $10 million

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Figure 8: Medical devices and equipment funding by subsegment 2010–2012

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Life sciences funding by stageFor the full year 2012, early-stage funding fell 14%; and late-stage, 15%. A total of $2.9 billion went into 427 early-stage deals, and $3.7 billion went into 352 late-stage deals during 2012.

During the fourth quarter of 2012, 115 early-stage deals raised $907 million, an increase of 39% over the third quarter. A total of 94 late-stage deals for the final quarter of 2012 brought in $964 million, a decrease of 7% from the third quarter.

Compared with the fourth quarter of 2011, early-stage invest-ment for the sector declined 11%, but late-stage investment rose 9%.

Average early-stage deal size dropped 6%, from $7.2 million during 2011 to $6.7 million during 2012. Average late-stage deal size fell 10%, from $11.7 million in 2011 to $10.5 million in 2012.

“Late-stage funding outpaced early-stage,” Lefteroff said, “as a more disciplined venture capital industry continued to place its bets on companies closer to an exit.”

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Figure 9: Life sciences funding by stage 2010–2012

Biotechnology funding by stage

For the full year 2012, early-stage biotechnology funding dipped 19% to $2 billion, compared with $2.5 billion for 2011.

Late-stage funding for biotechnology also declined, from $2.4 billion during 2011 to $2.1 billion during 2012, a drop of 11%.

During the final quarter of 2012, early-stage biotechnology funding climbed 31% from the third quarter to $648 million in 77 deals. Late-stage funding dropped 15% over the same period to $641 million in 58 deals.

Year over year, early-stage biotechnology funding dropped 21%, but late-stage grew 14%, compared with the fourth quarter of 2011.

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Figure 10: Biotechnology funding by stage 2010–2012

Medical device funding by stage

For the medical device industry, early-stage companies saw a slight increase of 1% in funding for the full year 2012. They brought in $881 million in 153 deals, compared with $869 million for 2011.

Venture funding for late-stage device and equipment compa-nies dropped 20%, from $1.9 billion for the full year 2011 to $1.6 billion in 160 deals for 2012.

Quarter over quarter, both early- and late-stage medical device funding gained. Early-stage funding leapt 62% to $259 million in 38 deals compared with the third quarter of 2012. Late-stage funding rose 15% to $322 million in 36 deals.

Year over year, fourth-quarter early-stage funding gained 29% for medical devices, but late-stage funding was flat.

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Figure 11: Medical device funding by stage 2010–2012

5Double-digit dip

First-time funding compared with follow-on fundingBoth first-time and follow-on funding for the life sciences sector fell from 2011 to 2012.

“The year 2012 marked the lowest deal activity level since 1995 for first-time financings in the life sciences sector,” Lefteroff said. “Venture capitalists continued to support companies already in their portfolios rather than taking a chance on new investments.”

The full year 2012 saw $664 million in 135 first-time funding deals, a drop of 41% in value from 2011. A much larger share, $5.9 billion, went into follow-on funding in 644 deals during 2012, but that tracked 10% below the 2011 investment level.

First-time deals in the life sciences sector averaged $4.9 million for 2012; and follow-on deals, $9.2 million.

During the fourth quarter of 2012, both initial and follow-on life sciences investments grew by 11% over the third quarter. Follow-on funding, reaching $1.7 billion, overshadowed first-time funding at $190 million.

Year-over-year quarterly performance dropped 48% for first-time funding but rose 10% for follow-on.

During the final quarter of 2012, biotechnology closed 21 first-time deals; and medical devices, 14.

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Figure 12: Life sciences follow-on compared with initial investments 2010–2012

Table 1: 2012 life sciences fourth-quarter growth factors (Y/Y growth)

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Regional funding trendsFor the full year 2012, San Francisco Bay led in venture capital funding for the life sciences sector, bringing in $1.7 billion. San Diego Metro came in second at $709 million, and New York Metro was third with $415 million.

San Francisco Bay2, Boston, New York Metro, San Diego Metro, and Great Lakes received the most life sciences venture capital dollars during the fourth quarter of 2012.

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Figure 13: Top five metropolitan regions fourth quarter 2012

San Francisco Bay closed 42 deals during the final quarter with an average size of $14 million and attracting a total of $589 million. Boston came in second for the same quarter, with $278 million in 34 deals. New York Metro followed, with $214 million in 14 deals.

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Figure 14: Life sciences funding trends in top five regions 2010–2012

Venture capital outlook“Several recent developments may bode well for the life sciences sector when it comes to venture investing during

2 San Francisco Bay area includes SF/Berkeley and San Jose.

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2013,” Lefteroff said. “Product approvals at the FDA reached a 16-year high for the calendar year 2012. Products targeting critical unmet needs are getting approved, and at a quicker pace. And with the renewal of the user fee legislation last year came several improvements to the regulatory process that could start yielding greater efficiency.

“On top of these FDA-related developments, the Supreme Court’s decision to uphold the Affordable Care Act and the end of the election season brought more certainty about the health-care industry’s future,” Lefteroff added.

“At the same time, significant challenges remain. The time and cost and uncertainty of new product development have increased substantially over the course of several decades, and the willingness of healthcare systems in the US and around the world to pay for innovative new products is an area of concern for the future.

“Despite the challenges, venture capitalists will likely continue to seek out the most innovative companies with the business models and products to meet the growing demand for better health outcomes and higher value to the healthcare system.”

Fundraising

During the full year 2012, 182 US venture capital funds raised $20.6 billion, according to Thomson Reuters and NVCA. This level represented a 10% increase by dollar commitments and a 3% decline by number of funds from 2011.3

During the fourth quarter of 2012, 42 US venture capital funds raised $3.2 billion. Dollar commitments dropped 35% from the third quarter; and number of funds, 25%.

“The venture capital fundraising environment has settled into a ‘new normal,’ which is characterized by a barbell structure of larger funds, which are stage- and industry-agnostic on one end and smaller, early-stage, industry- or region-specific funds on the other,” said Mark Heesen, NVCA president. “It is on these two ends of the spectrum where capital is concentrating and successful firms are raising follow-on funds. 4

“Simultaneously, new funds continue to enter the asset class almost exclusively at the smaller end of the spectrum,” he added. “This structure, coupled with increasingly discerning limited partners, has kept the overall size of the venture industry below $25 billion each year since 2009, a size that many believe to be optimal for successful investing and maxi-mizing returns.”5

3 Thomson Reuters and NVCA news release, “Venture capital funds raised $20.6 billion during 2012,” Jan. 7, 2013.

4 Ibid.5 Ibid.

IPOs

For the full year 2012, venture-backed initial public offerings (IPOs) raised $21.5 billion from 49 listings. The Facebook offering drove last year to the strongest annual value since 2000. At the beginning of 2013, 30 of the 49 offerings were trading above their offering price.6

Eight venture-backed IPOs raised $1.4 billion during fourth quarter 2012. Volume declined slightly from the third quarter, but dollars raised grew 23%. Two biotechnology offerings raised more than $167 million during the fourth quarter.7

“Valuations of companies at IPO were good during 2012, particularly for the biotech industry,” Lefteroff said. “That could encourage more companies to go public in 2013.”

Mergers and acquisitions

Acquisitions of venture-backed companies totaled $21.5 billion during 2012, an 11% decline from 2011. The fourth quarter saw 95 venture-backed mergers and acquisitions (M&A), 26 of which had a disclosed total dollar value of $3.5 billion. That total represented a 57% drop from the third quarter of 2012.8

The information technology sector led the venture-backed M&A landscape with 65 of the 95 deals of the quarter. Life sciences captured 18 of the M&A deals, with two for biotech-nology and 16 for medical/health. And 12 of the life sciences deals had a total disclosed value of $1.6 billion.9

“Corporations rich with cash and eager to acquire biotech and medtech companies with promising products may step off of the sidelines in greater numbers this year,” Lefteroff said. “Consolidation among payers and providers also will continue to drive M&A activity in the healthcare realm.”

About PwC’s Pharmaceuticals and Life Sciences Industry Group PwC’s Pharmaceuticals and Life Sciences Industry Group (www.pwc.com/us/pharma and www.pwc.com/us/medtech) is dedicated to delivering effective solutions to the complex strategic, operational, and financial challenges facing pharmaceutical, biotechnology, and medical device companies. We provide industry-focused assurance, tax, and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 180,000 people in 158 countries across our network share their thinking, experience, and solutions to develop fresh perspectives and practical advice.

6 Thomson Reuters and NVCA news release, “Venture-backed exits enjoyed higher average values on lower total volumes in 2012,” Jan. 2, 2013.

7 Ibid.8 Ibid.9 Ibid.

7Double-digit dip

pwc.com/us/pharmapwc.com/us/medtech

ContactsTracy Lefteroff, Partner+1 (408) 817-4176tracy.t.lefteroff@us.pwc.com

Attila Karacsony, Director+1 (973) 236-5640attila.karacsony@us.pwc.com

2013 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. LA-13-0176