Metasurvey Says: Fewer Biopharmas Capturing More Venture Dollars

Xconomy National — 

In biotech, young companies have been raising money from public and private investors alike at an astounding rate. But all the rain isn’t letting a thousand flowers bloom.

In other words, there’s more money going into new biopharma companies, but the cash is not being spread widely. That’s according to a new survey released today by the Biotechnology Industry Organization, biotech’s top trade group.

The survey itself amalgamates four sources of venture data—sources that can have notable differences, as I wrote several years ago here. A meta-VC survey in this space is a welcome thing, although this particular survey comes with the caveat of not including 2014 data.

Writers and readers alike tend to fixate on big, bold startups. The latest example is Revolution Medicines, which Third Rock Ventures launched on its own with a $45 million Series A round last week.

That kind of outlay is driving the BIO data. As compelling as they are, stories like Revolution—not to mention blockbuster fundraisers like Juno Therapeutics (NASDAQ: JUNO) and Moderna Therapeutics—actually obscure the fact that fewer biopharma startups are being created.

Only 63 biopharmas received Series A funding in 2013, down from the peak of 89 in 2006. But the dollar totals are on the rebound, with about $1.2 billion spread across those 63 startups in 2013. The years before the recession had higher dollar figures, but not by much.

The BIO surveyors also noted the difference between money going to novel drug programs and what they call “drug improvement”—new formulations of old drugs, and the like. Those improvements can be important for patients, but they’re not considered cutting edge or high risk. The survey showed 82 percent of all Series A money since 2004 has gone into novel R&D, but the percentage has been highest over the past three years.

Another indicator of investment risk is the stage of the company when it receives its Series A cash. The BIO survey, which began with 2004 data, showed that in 2013, more than two thirds of all Series A cash went to preclinical companies—the highest total in the survey’s 10 year span.

In other words, VCs are investing more cash, but in fewer new companies, and that cash is going toward riskier projects. That said, nearly all financing rounds are tranched with companies required to hit pre-arranged milestones to unlock the next slice of cash.

The BIO survey also dove into investments by disease area. For Series A investments, oncology led the pack, with $2.2 billion. The survey split the previous ten years into two time periods, 2004-2008 and 2009-2013.

Even though the second five-year period was consumed in large part by the Great Recession and its aftermath, half of the 14 disease areas surveyed received more funding in that period than the previous five-year period. However, overall Series A funding from 2009 to 2013 was down 7 percent. (One might guess that a slight shift of the post-recession window to 2010-2014 would tip that advantage in the other direction.)

Biopharma Series A Funding (in millions)

VC tableSource: Biotechnology Industry Organization

A few more notes and comments about the chart:

—The boost for the “Other” category came in part from women’s health investments, according to the survey authors.

—Neurology got a small boost in Series A dollars. Overall, the category was dominated by investments in pain medications, often reformulations and me-too drugs. Investments in some of the greatest unmet medical needs—breakthroughs for Alzheimer’s and Parkinson’s disease, as well as multiple sclerosis, were “shockingly low” compared to the outlay for pain, said BIO’s director of industry research and analysis David Thomas.

—“Platform” indicates companies whose underlying technology hasn’t produced a lead candidate with a specific disease target.

The survey delves into each of the categories above beyond Series A investments. It’s too much data to break out here, but we’ll highlight oncology, which attracted the most venture funding overall: The amount invested decreased 13 percent from $4.9 billion in 2004-2008 to $4.2 billion in 2009-2013. But the number of companies rose, to 68 from 57.

Going beyond disease areas, the survey also showed that in 2013, for the first time, investment in biologics (monoclonal antibodies, other protein-based drugs, and vaccines) caught up with investment in more traditional small molecule drugs. Each camp attracted about $1.8 billion.

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One response to “Metasurvey Says: Fewer Biopharmas Capturing More Venture Dollars”

  1. SFBurke says:

    As the article alludes to, the change in investment strategy of VCs makes this data difficult to interpret. On the surface, it looks like lots of money is going into big Series A rounds but those deal are tranched. So what is really happening is that some of that money is going into what would traditionally be considered a Series A round and the later tranches are supporting activities that previously would have been supported by Series B or Series C rounds. Effectively, fewer companies (as noted) are getting an initial round of VC funding and while the amount seems larger than before, it really isn’t. All that is happening is that entrepreneurs are no longer able to enjoy a step up in value between rounds — instead the VCs get to continue to invest (and dilute the founders) at the Series A price.