At J.P. Morgan Conference, Life-Science Investors See Biotech Rising

January 10, 2013 - The Wall Street Journal, Venture Capital Dispatch - By Timothy Hay

In its 31 years of bringing together health-care industry executives, investors and entrepreneurs, the J.P. Morgan Healthcare Conference has become a top venue for deal making.

It’s also a place where you’ll hear plenty of complaints about industry woes, including the ongoing recession and the bureaucratic inefficiency of regulatory agencies.

But this year, some in the industry–especially biotech investors–are much more upbeat, saying 2013 will a time when promising new technologies will get the funding they need for development and eventual commercialization. “We’re deploying more capital, because there are quality deals,” said Heath Lukatch, a partner at Novo Ventures, the venture arm of Novo-Nordisk which invests in both privately held and public biotechnology companies. At the conference, the deal-making takes place away from the main events at San Francisco’s Westin St. Francis hotel, at nearby hotels where investors and executives take so many back-to-back meetings that many hardly see the light of day.

But venture capitalists, when they do emerge, say they are heartened by what they have been seeing behind closed doors: young companies with powerful technologies and reasonable valuations, less competition for deals and a whole industry buoyed by a spate of initial public offerings and other hopeful signs last year.

“We have seen an increase in the number and quality of deals,” said James Healy, a general partner with Sofinnova Ventures, an active life-sciences firm. “We see some good-looking returns. We’re looking at companies with pre-money valuations of $10 million to $50 million, which is reasonable.”

The coming year looks promising, he said, because of positive developments in the biotechnology industry in 2012, including successful IPOs and an improved environment at the Food and Drug Administration, which regulates new medical products. According to data compiled by Dow Jones VentureSource, an industry tracker owned by The Wall Street Journal parent company News Corp., 2012 saw 10 biotech startups go public, after eight biotech IPOs in 2011.

The summer was an especially lively time, with Hyperion Therapeutics, Durata Therapeutics and Tesaro debuting on the public markets, and Kythera Bioparmaceuticals and Merrimack Pharmaceuticals following not long after.But the data also shows a smaller number of funding rounds–for a smaller total value–for the first three quarters of last year compared to the same period in 2011. According to VentureSource, the first three quarters of 2012 saw 178 funding rounds for privately held biotech companies worth a combined $1.93 billion, down from the 223 rounds for such companies valued at $2.78 billion for the same period in 2011.

Despite the mixed data on funding rounds and IPOs, biotech investors said the picture is improving, and privately held companies have more confidence in their options as they negotiate with potential acquirers. Another boon for venture-backed drug makers is the availability of capital from nontraditional sources, including investors in public companies that recently have been making the jump into investing in smaller operations. Mike Dybbs, a principal with New Leaf Venture Partners, said he has seen a jump in “crossover investing,” or the participation in funding rounds by nontraditional players. In New Leaf’s portfolio is diabetes-treatment company Intarcia Therapeutics, which last year raised a whopping $210 million from a range of investors, including mutual-fund firm Fidelity Investments and hedge fund Baupost Group. Other notable 2012 deals that featured public investors side by side with venture capitalists included funding rounds for Foundation Medicine, Bluebird Bio and Ova Science, VentureWire records show.

The involvement of public investors takes some of the pressure off a cash-strapped industry still reeling from the recession, VCs said, and boosts the confidence of startups, who feel they can remain private for a longer period and be more selective as they are wooed by potential acquirers.

Investors also said there is less competition for deals, as the field of rivals has narrowed, with many firms running into problems raising new funds for medical-technology investing.In the past several years, some firms–for example Scale Venture Partners–announced they would no longer back health-care startups. Others, like Morgenthaler Ventures and Advanced Technology Ventures, have seen their health-focused investors leaving.

And last year, OVP Venture Partners, a firm with 29 years of investing in early-stage health-care companies, announced that it has ceased raising new funds.

While those sorts of changes might have come about because of hard times, investors still backing health-care startups say they were necessary changes, and have pave the way for a better environment in 2013.