Sofinnova Ventures Surpasses Target, Raises $440M Health Fund

October 17, 2011 - Dow Jones VentureWire Lifescience

by Brian Gormley

Sofinnova Ventures has surged past the hard cap set for its eighth fund to gather $440 million for what will be its first partnership devoted entirely to health care.

Sofinnova set out in mid February with a $325 million target for Sofinnova Venture Partners VIII LP and secured more than $250 million in a first closing in late June, said General Partner James I. Healy. Seeing strong interest, the firm asked limited partners for permission to exceed the $400 million hard cap of the fund, which closed on Friday, Healy said.

The firm's success bucks a negative trend in venture capital fund-raising. In a sign that the industry is going through a shakeout, venture-investment totals have outpaced fund-raising tallies since 2008, according to VentureSource, which is owned by Dow Jones & Co., publisher of VentureWire.

With the venture industry failing to deliver good returns in recent years, many institutional investors are losing interest in the asset class. As a result, a number of venture investors have struggled to raise new funds, including some well-established firms. Recently, health-care investor Prospect Venture Partners released limited partners from their commitments to its fourth fund after concluding that it wouldn't be able to raise enough capital to execute its strategy, for example.

Sofinnova, with its good track record and deep well of previous investors, quickly built momentum during its fund-raising. The firm, drawing mostly on return investors, boosted the fund size to broaden its investor base. Even so, it had more demand than it could accommodate, according to Healy. A number of LPs committed more this time than they did to the firm's $375 million seventh fund, he said. Healy declined to discuss the new fund's terms.

Return investors include California State Teachers' Retirement System, Oregon State Treasury, San Francisco Employees' Retirement System and University of Texas Investment Management Co. New backers include Teachers' Retirement System of the State of Illinois. Sofinnova's decision to raise a health care-only fund isn't a dramatic shift. It invested about 80% of fund seven in medical companies, Healy said. Over the years, however, it's become increasingly important to have deep expertise in specific industries, which led the partners to conclude that specialized funds work best, he said.

The firm, whose technology portfolio includes Crocus Technology, a developer of magnetic random access memory technology for the semiconductor and electronics-systems industries, expects to raise a tech fund at some point, Healy said.

Sofinnova's health-care strategy calls largely for backing drug companies whose products are already in human studies. The first of the 20 to 22 investments the firm expects to make from the new fund is in SARcode Bioscience Inc., which will use a $44 million round that Sofinnova led in July to run Phase III trials of a dry-eye disease drug, for example. The firm, which plans to sink 70% to 75% of the fund into mid- to late-stage health-care products, sees strong opportunity to spin companies with these types of products out of larger players, Healy said. As drug manufacturers reassess their priorities, they're increasingly willing to part with non-core products, a trend that enables venture firms to build on the investment that's already gone into these programs.

"We've seen an increase in the number of spinout opportunities," Healy said. "We're seeing better deal-flow, higher-quality opportunities that have much more clinical data."

One of Sofinnova's recent exits came from Shire PLC's 2010 purchase of Movetis NV, a Belgian company formed around products and technologies licensed from Janssen Pharmaceutica NV and Ortho-McNeil Pharmaceutical Inc. Sofinnova participated in Movetis's Series A round, disclosed in January 2007.

Other recent successes include Anthera Pharmaceuticals Inc. and Trius Therapeutics Inc., which went public last year, PregLem Holding SA, acquired by Gedeon Richter PLC late last year, and Vicept Therapeutics Inc., sold to Allergan Inc. in July.

In addition to later-stage drug companies, Sofinnova will consider other types of health-care products that fit the firm's criteria of manageable risk and the potential to make good returns in two to four years, Healy said. Though most of Sofinnova's investments will be in the U.S., the firm also considers companies in Europe and other international markets, he said. In addition to Healy, the Sofinnova health-care team includes General Partners Garheng Kong and Michael Powell; Partner Anand Mehra; and Executive Partners Lars Ekman and David Kabakoff. The technology team includes General Partner Eric Buatois and Partner Brian Wilcove.