VC Community Shares Perspectives on Midwest Life Science Funding

CHICAGO—Last week, we looked at the performance of Midwest publicly traded biotech companies, the U.S. biotech IPO market and the overall performance of the major U.S. stock indices. The Amex and Nasdaq stock indices in particular really measure the biotech sector in different ways.
The Amex Biotech Index includes only about 20 biotech stocks (most of which are the large-cap biotech stocks, which are usually the best performers). No Midwest biotech companies are listed on this index. Interestingly, the Amex index is not about Amex stock. Rather, virtually all the stocks on this index are Nasdaq stocks.
The Nasdaq Biotech Index has expanded significantly. When I looked at this index about a year ago, the index had about 74 biotech stocks. Today, this index has doubled with more than 150 stocks that cover a much broader spectrum of stocks in the sector. By the way, there are about 350 publicly traded stocks in the U.S.
The Midwest has three company stocks listed in this index. While not great, this at least is a start. They are MGI Pharma in Minnesota, NeoPharm in Illinois and Northfield Labs in Illinois.
As more than 90 percent of our Midwest array of 350 or so biotech companies are privately held companies, enough about the public sector for now. Also by the way, I use the word “biotech” in the broadest concept. I include medical device companies, bioinformatics, diagnostics and the typical drug-oriented biotech companies.
Last Friday, the Illinois Biotechnology Industry Organization (IBIO) (disclosure: columnist has a role with IBIO) held a life sciences venture capital event. The gathering featured five of the Midwest’s venture capital firms that are playing in the life science arena and actively investing in Midwest companies:

• Venture Investors (in Madison, Wis.)
• Essex Woodlands Health Ventures (in Chicago)
• Baird Venture Partners (the Chicago office of the Milwaukee-based investment bank)
• CID Equities (the Columbus, Ohio office of the Indianapolis-headquartered company)
• Beecken Petty O’Keefe (in Chicago)

Panel moderator Al Heller of One Equity Partners (a private equity group that is now part of JP Morgan Chase) and a former senior pharmaceutical executive with Baxter and Searle led this panel and commented on the status of venture funding in the U.S. and the Midwest during the first quarter of 2004. Second quarter results are not yet available.
According to Heller, VC funding in the U.S. for the first quarter was about $4.6 billion versus about $4.2 billion during 2003. This is a 10 percent increase. Let’s take a look at some of Heller’s key highlights:

In looking at the above, we see that VC funding started out strong this year with a healthy chunk devoted to life science companies. When we see the portion of Midwest VC funding (money invested in the Midwest), it seems surprisingly low.
When we think about this in reality, it’s not so strange given the difficulty of Midwest companies in general to get VC funding versus their east coast and west coast counterparts. However, when we look at Midwest life science funding, the situation worsens as a paltry $56 million was invested.

The amount of Midwest VC funding for life science deals has been scarce. The Midwest accounts for only approximately 4 percent of total life science VC funding for the first quarter. In terms of number of companies actually funded, the Midwest accounts for about 6 percent of the companies funded nationwide.
By the way, the average deal size in the Midwest is smaller by about 30 percent with medical device deals being much smaller than the drug products-related deals. This makes sense to the degree that drug development is far more costly than device development and has a much longer product development and approval cycle.
Another interesting analysis that was shown in this meeting was VC investments by stage of development of a company. Let’s take a look:

The bad news is that there wasn’t a lot of money for start-ups and seed funding (the first stage of funding) in the U.S. for the first quarter and there was even less in all of the Midwest. The trend from above on a national level basically says that it gets easier to attract large funding as you get closer to an IPO.
Of course, this is a VC risk triage process: invest when most of the risk has been wrung out of a company. The counter balance is that the return may not be as good. Start-up and seed funds look at trying to get back between six and 10 times their investment while the late-stage VCs may only be looking to double their money (but with much less risk).
The interesting thing about the IBIO VC panel is that two of the Midwest VCs presenting do start-up and seed-stage funding and it appeared that all five were involved in early stage funding. The mood of the panel generally was upbeat and optimistic, which was nice for a change. Let’s hope that the second quarter results paint a better picture.
Another good point that was highlighted by the panel was the emergence of the Mid-America Healthcare Investor Network (MHIN), which is an informal group of VCs in the Midwest (and perhaps as far west as Colorado) involved in life science investing. The group meets on a quarterly basis to share information about what’s happening and to potentially syndicate deals.
This is excellent news. In California when VCs get together, they usually are all clustered on Sand Hill Road in Silicon Valley and are sometimes so close that they can get together in the parking lot to syndicate a deal.
Because our Midwest VC cluster is a little more geographically disparate, the MHIN gatherings augur well for our life science industry (even though it is a Midwest approach to doing things).
Next week, I’ll focus on the emergence of other life science start-up and seed-funding vehicles in the Midwest (particularly in Illinois and Wisconsin) as this is clearly an area where most of our companies dwell (financially speaking, of course). See you next week!
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Michael S. Rosen is president and CEO of Barbeau Pharma and a founder and board member at the Illinois Biotechnology Industry Organziation (IBIO). He can be reached at rosenmichaels@aol.com. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters.
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