The first-quarter 2011 MoneyTree Report by PwC US and the National Venture Capital Association, which tracks venture-capital
financing, presents a case for cautious optimism. The report, based on data from Thomson Reuters, showed modest growth of
5% in terms of dollars invested in the US biotechnology industry on a year-over-year basis. Funding rose to $784 million in
the first quarter of 2011, compared with $746 million in the first quarter of 2010. The increase followed a disappointing
second half of 2010, when the biotechnology industry slipped into second place behind the software industry in share of venture
dollars captured. The increase for the first quarter, although promising, lagged the 13.7% year-over-year growth rate of all
Deal volume presented a somewhat bleaker picture. Compared with the first quarter of 2010, the number of venture-capital deals
declined 21% from 107 to 85. The 2011 first-quarter deal volume marked the fewest number of biotechnology deals in a single
quarter since the second quarter of 2003. Deal volume for all sectors combined also declined, but the number for biotechnology
The average biotechnology deal size, however, was a bright spot, up 32% year-over-year to $9.2 million, which outperformed
the $8-million average for all industries. On the down side, the biotechnology industry captured only one of the top 10 venture-capital
deals in the first quarter—$72 million in early-stage financing for a provider of biotechnology research services.
Early-stage funding for biotechnology companies declined by 4% year-over-year to $442 million in the first quarter of 2011,
but late-stage funding increased by 19% to $342 million. First-time funding dropped dramatically by 44%, but follow-on funding
grew 18%. A total of $697 million went into 62 follow-on deals; $88 million went into 23 first-time deals.
Fewer deals and smaller deal size are the norm for fledgling companies. Early-stage biotechnology companies may be a decade
away from generating revenue. Lengthy and costly research and development and uncertainty in the regulatory approval process
continue to drive more investors toward follow-on and later-stage deals with companies that are closer to successful product
launches or the exit market.
Overall, the biotechnology industry dropped to third place behind the software and industrial/energy sectors in the dollar
amount invested in the first quarter of 2011, but the combined performance of biotechnology and medical devices, the other
life-sciences sector, showed continued strength. The mass exodus from biotechnology that some analysts had feared did not
happen. Considering the level of capital and time required for drug discovery and development, investors must sharpen their
pencils when looking at the potential return of biotechnology investment. Despite the challenges of long lead times to revenue
generation and the unpredictability of regulatory approval, investors recognize that demographic trends point to growth potential.
The global population is aging, which is expected to lead to higher consumption of pharmaceuticals. Chronic conditions, such
as diabetes and heart disease, already epidemic in the US, are rapidly extending into developing countries.
Competition for biotechnology investment dollars remained heated in early 2011. The San Francisco Bay area, New York Metro,
Boston, San Diego Metro, and the North Carolina Research Triangle area received the most biotechnology venture-capital dollars
during the first quarter of 2011. The San Francisco Bay area captured the highest amount at $248 million, but New York Metro,
at $130 million, showed the largest percentage increase.
Exit activity in the biotechnology industry has picked up since the doldrums of 2008 and 2009. Four of the 14 venture-backed
initial public offerings (IPOs) during the first quarter of 2011 were from biotechnology companies. Some analysts noted weakening
biotechnology demand because most of those companies that went public with venture-backed IPOs this year have seen offering
prices below what they had expected. Still, the acceleration in overall IPO activity bodes well.
The biotechnology industry captured only six of the 109 venture-backed mergers and acquisitions (M&A) for the first quarter
of 2011. M&A biotechnology deal activity is expected to pick up as the year progresses, and Big Pharma and Big Biotech continue
to ferret out deals to infuse their pipelines. Overall, for companies that can develop the right products, especially biologics,
to meet the high demand for treatments for cancer and rare diseases, investor interest is expected to remain high.
Tracy T. Lefteroff is partner in the life-sciences practice of PwC US, firstname.lastname@example.org