Venture capital and biotech: Who’s going to fund the next big breakthrough?

by Kristi Park, July 31st, 2008, 5:54 am

The world of monoclonal antibodies and genetic testing may seem far removed from the realm of mortgage-backed securities and the other bogeymen of the current credit crisis, but the biotech industry is still feeling the fear. Despite an increasing number of profitable biotech companies, like Genentech and Applied Biosystems, the industry is still dominated by unprofitable start-ups that rely heavily on venture funding and capital from the public markets. And the economic environment being what it is, companies are having a hard time going public or getting attractive acquisition offers from larger life sciences companies.

That leaves the venture capitalists in a bind. Venture capital firms like to cash out their investments – either through IPOs or sales of a company – in about five to seven years. But with “exit opportunities” limited right now, they are having to put more of their money into bankrolling later-stage biotech companies while they wait for a better IPO environment or a juicy acquisition deal to come along.

The good news is, venture firms are still ponying up lots of cash. The MoneyTree report for the second quarter of 2008 (produced by PriceWaterhouseCoopers and the National Venture Capital Association) shows that overall funding from venture capital firms has held steady so far this year. But there is a difference in where all that money is going and what it’s being used for.

According to the report, investment in life sciences companies (which includes both biotech and medical device firms) went down 14% in the quarter. Perhaps more importantly, the amount of money going into later-stage companies – the ones that at another time would probably be going public – has gone up, potentially leaving the next crop of new, innovative start-ups without the money to, well, start up.

So what’s the solution to the capital quandary? Some analysts think that, with the IPO option not available, the life sciences sector will see more mergers and acquisitions in the vein of Thermo Fisher Scientific’s acquisition of Open Biosystems (a maker of RNA research tools) and Invitrogen’s proposed merger with Applied Biosystems Group. Experts are also optimistic about the growth of emerging markets like India and China and the likely increase in funding from government sources like the NIH. But even with those bright spots, early-stage biotechnology companies may have to get creative when it comes to finding the money to fund their innovations.