U.S. VC funding flat in 2005 while life science funding grows

U.S. VC funding flat in 2005 while life science funding grows

As the topic of financing is vital to a biotech company (it is priority #1, #2, and #3) and biotech (and I use “biotech” in the broadest sense) companies are continually faced with the challenge of raising money due to the long product development cycle, this week’s article will focus on venture capital financing results for 2005.
Last week, we focused on VC financing results from Burrill and Company’s data. Burrill’s perspective is more towards the drug part of biotech, and doesn’t really include either diagnostics or medical devices.
To get this additional perspective on VC financing results in 2005, let’s turn to PriceWaterhouseCooper’s MoneyTree report for 2005.
U.S. VC Funding 2005 ($ Millions) (PWC MoneyTree Report 2005)

2003 2004 % Change 04/03 2005 % Change04/03
Total VC Funding $19,585 $21,635 +10% $21,680 0%
# of Deals 2,865 2,966 +4% 2,939 <1%>
Average Deal Size $6.8 $7.3 +7% $7.4 +1%

Total VC funding for 2005 was just a touch ahead of 2004 but basically flat (2004 itself was a good year – up 10 percent over 2003)! The number of deals was down just slightly.
Actually, since the “go-go” years of 1999-2001, which saw annual funding of $54 billion, $105 billion and $41 billion respectively, VC funding has run between the $19 billion to $22 billion/year level pretty consistently, with no major bumps up or down! The number of deals done and funding per deal are pretty consistent as well.
According to PWC, VC deal funding of $5.1 billion in the fourth quarter of 2005 was down from the $5.4 billion of the 3rd quarter, but within the ranges seen over the last 14 quarters.
The PWC definition of the Life Sciences sector is composed of three different segments: biotechnology, medical devices, and healthcare services. Let’s take a look at how this sector performed as well the different segments:
U.S. life science venture capital funding 2005 (PWC MoneyTree Report 2005)

2003 2004 % Change 04/03 2005 % Change 05/04
Total VC Funding $19,585 $21,635 +10% $21,680 0%
Life Science Sector $5,496 $6,274 +14% $6,413 +2%
Biotechnology $3,640 $4,147 +14% $3,862 <7%>
Medical Devices $1,597 $1,706 +7% $2,114 +24%
Healthcare Services $259 $421 +63% $437 +4%
% LS of Total VC Funding 28% 29% 30%

While VC funding was flat for 2005, Life Science funding was up slightly, with biotech funding down, medical device funding up significantly and healthcare services up slightly as well. Overall, life science sector funding as a percent of total VC funding has increased over the last few years from 28 percent of total VC funding to 30 percent of funding.
MoneyTree reporting of biotech funding varies a bit from Burrill’s level for the year – $3.9 billion versus $3.5 billion, or a $400 million variance – which I can’t explain.
U.S. VC deals 2005 (PWC MoneyTree Report 2005)

2003 2004 % Change04/03 2005 % Change05/04
Total VC Deals 2,865 2,966 +4% 2,939 <1%>
Life Science Deals 620 657 +6% 675 +3%
Biotechnology deals 308 340 +10% 357 +5%
Medical Device deals 241 249 +3% 251 +1%
Healthcare Services deals 71 68 <4%> 67 <1%>
% LS of Total VC deals 22% 22% 23%

Although the overall number of VC deals was down for 2005, the life science sector was up (with the exception of healthcare service deals), one top of a solid 2004.
U.S. VC funding per deal 2005 ($millions) (PWC MoneyTree Report 2005)


2003 2004 % Change 04/03 2005 % Change05/04
Average VC Deal Size $6.8 $7.3 +7% $7.4 +1%
Life Science Sector $8.9 $9.5 +7% $9.5 0%
Biotech $11.8 $12.2 +3% $10.8 <11%>
Medical Device $6.6 $6.9 +5% $8.4 +22%
Healthcare Services $3.8 $6.2 +63% $6.5 +5%
% LS +30% +28%

Interesting to see that the average VC deal size continues to grow while the average life science deal size has flattened out, with biotech deal sizes declining and medical device deal sizes growing.
The typical life science deal is about 30 percent larger than the average VC deal with Biotech deals garnering the largest amount and healthcare services winning a much smaller deal size. This relationship makes sense in that most drug-related companies need more money to get their product to the market place due to the cost of drug development and the longer development time.
Next week we will look at stage of performance by regions of the country and by stage of performance.
See you next week!

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services including financing, business and corporate development to start-up and early stage life science companies such as Renovar, a Wisconsin-based in-vitro diagnostics company. Rosen is also a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at rosenmichaels@aol.com

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