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Early stage biotechs face funding gap as VCs seek surer bets, stronger returns

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Biotechnology companies seeking venture capital got some sobering perspective at the CED Biotech/Life Science Conference this week. Despite the talk of improving market conditions and loosening purse strings leading up to the conference in Raleigh, North Carolina, venture capitalists explained why their grip on their money remains as tight as ever.

Augustine Lawlor, managing partner of Healthcare Ventures and one of four venture capitalists on a panel discussing the state of the capital markets and the changing funding model, offered perhaps the most stark assessment. He said five years from now, 50 percent of the venture capital firms that you think of as sound won’t be in existence. Access to capital now is very different than it was five years ago, and it will be even more different five years from now as changes and challenges ripple through the industry.

Some of the reasons for these changes don’t come as a surprise. Jennifer Jarrett, managing director of CitiBank and moderator of the panel, pointed out clinical trials have only gotten longer and more expensive, and many of the financing options that companies relied on are no longer readily available, if they are at all. U.S. Food and Drug Administration regulatory uncertainty makes it harder for VCs to make their investment decisions. Jarrett noted that in response, VCs have changed their investment strategies. Rather than looking for early stage drug candidates, such as those they might have invested in years ago, they’re opting for compounds in later stages of development, or they’re investing in other categories altogether such as IT or medical devices, which require less money and move more quickly through the regulatory process.

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So where do early stage companies get the cash to develop their products? The panel didn’t close the door to investing in early stage companies, but they’re not opening it very far. VCs want novel products that are more likely to make a strong market impact and give them strong returns. Todd Brady, principal at Domain Associates, suggested that early stage companies turn to grants for money. But that’s not a good option for many early stage companies. An executive I spoke to afterward noted that the government agencies awarding grants favor companies that create a large number of jobs or make significant capital investment in a community. Small biotech companies don’t do either. Even when they raise money, they are likely to stay small, outsourcing much of their work to keep their costs low. Angels are being called on more for additional funding. But they don’t have pockets deep  enough to provide the earlier rounds that VCs used to fund.

So what about large companies as investors? Robert Cascella, president and CEO of Hologic (NASDAQ:HOLX), a company that generates about $1.7 billion in annual revenue focusing on women’s health, said that the Massachusetts-based firm invests in small companies in part as a way to access new technology. But he cautioned that Hologic evaluates its investments and acquisitions with a very selective eye. These companies must fit into the specific areas of focus staked out by Hologic. Pharma companies, too, are also becoming more selective in choosing their partners. In re-balancing their pipelines, they are looking at product candidates further along in development and better fits for their portfolios. As they evaluate acquisition targets, they too are trying to reduce their risk exposure.

A securities  attorney I spoke to told me that in his view, venture capitalists have every right to adjust their investing decisions to reduce risk. After all, investors are in the business of making money. But he added that what’s good for investors may not be good for science. There’s a lot of science that’s sitting on the shelf because the early stage companies can’t find the cash to move it forward. A funding gap remains for many of these companies. What will fill it?

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Biotechnology companies looking for cash from venture capitalists got some sobering perspective at the CED Biotech/Life Science Conference this week. Despite the talk of improving market conditions and loosening purse strings leading up to the conference in Raleigh, North Carolina, venture capitalists explained why their grip on their money remains as tight as ever.

Augustine Lawlor, managing partner of Healthcare Ventures and one of four venture capitalists on a panel discussing the state of the capital markets and the changing funding model, offered perhaps the most stark assesment. He said five years from now, 50 percent of the venture capital firms that you think of as sound won’t be in existance. Access to capital now is very different than it was five years ago, and it will be even more different five years from now as changes ripple through the industry.

Some of the reasons for these changes don’t come as a surprise. Jennifer Jarret, managing director of CitiBank and moderator of the panel, pointed out clinical trials have only gotten longer and more expensive and many of the financing options that companies relied on are no longer readily available, if they are at all. Regulatory uncertainty makes it harder for investors to make their investment decisions. Jarret noted in response, VCs have changed their investment strategies. Instead of looking for early stage drug candidates they’re opting for compunds that are in later stages of development or they’re investing in other categories altogether such as IT or medical devices which require less money and move more quickly through the regulatory process.

So where do early stage companies get the cash to develop their products? The panel didn’t close the door to investing in early stage companies, but they’re not opening it very far. VCs want novel products that are going to make money and give them strong returns. Todd Brady, principal at Domain Associates, suggested that early stage companies turn to grants for money. But that’s not a good option for many early stage companies. An executive I spoke to afterward noted that the government agencies awarding grants favor companies that create a large number of jobs or make significant capital investment in a community. Small biotech companies don’t do either. Even when they raise money, they are likely to stay small, outsourcing much of their work to keep their costs low. Angels are being called on more for additional funding. But they don’t have pockets deep enough to provide the earlier rounds that VCs used to fund.

So what about large companies as investors? Robert Cascella, president and CEO of Hologic, a company that generates about $1.7 billion in annual revenue focusing on women’s health, said that the Massachusetts-based firm invests in small companies in part as a way to access new technology. But he cautioned that Hologic evaluates its investments and acquisitions with a very selective eye. These companies must fit into the specific areas of focus staked out by Hologic. Pharma companies too, are also more selective in choosing their early stage partners. In rebalancing their pipelines, they are looking at product candidates fur

Biotechnology companies looking for cash from venture capitalists got some sobering perspective at the CED Biotech/Life Science Conference this week. Despite the talk of improving market conditions and loosening purse strings leading up to  the conference in Raleigh, North Carolina, venture capitalists explained why their grip on their money remains as tight as ever.

Augustine Lawlor, managing partner of Healthcare Ventures and one of four venture capitalists on a panel discussing the state of the capital markets and the changing funding model, offered perhaps the most stark assesment. He said five years from now, 50 percent of the venture capital firms that you think of as sound won’t be in existance. Access to capital now is very different than it was five years ago, and it will be even more different five years from now as changes ripple through the industry.

Some of the reasons for these changes don’t come as a surprise. Jennifer Jarret, managing director of CitiBank and moderator of the panel, pointed out clinical trials have only gotten longer and more expensive and many of the financing options that companies relied on are no longer readily available, if they are at all. Regulatory uncertainty makes it harder for investors to make their investment decisions. Jarret noted in response, VCs have changed their investment strategies. Instead of looking for early stage drug candidates they’re opting for compunds that are in later stages of development  or they’re investing in other categories altogether such as IT or medical devices which require less money and move more quickly through the regulatory process.

So where do early stage companies get the cash to develop their products? The panel didn’t close the door to investing in early stage companies, but they’re not opening it very far. VCs want novel products that are going to make money and give them strong returns. Todd Brady, principal at Domain Associates, suggested that early stage companies turn to grants for money. But that’s not a good option for many early stage companies. An executive I spoke to afterward noted that the government agencies awarding grants favor companies that create a large number of jobs or make significant capital investment in a community. Small biotech companies don’t do either. Even when they raise money, they are likely to stay small, outsourcing much of their work to keep their costs low. Angels are being called on more for additional funding. But they don’t have pockets deep  enough to provide the earlier rounds that VCs used to fund.

So what about large companies as investors? Robert Cascella, president and CEO of Hologic, a company that generates about $1.7 billion in annual revenue focusing on women’s health, said that the Massachusetts-based firm invests in small companies in part as a way to access new technology. But he cautioned that Hologic evaluates its investments and acquisitions with a very selective eye. These companies must fit into the specific areas of focus staked out by Hologic. Pharma companies too, are also more selective in choosing their early stage partners. In rebalancing their pipelines, they are looking at product candidates further along in development. As they evaluate acquisition targets, they too are trying to reduce their risk exposure.

A securities  attorney I spoke to told me that in his view, venture capitalists have every right to adjust their investing decisions to reduce risk. After all, investors are in the business of making money. But he added that what’s good for investors may not be good for science. There’s a lot of science that’s sitting on the shelf because the early stage companies can’t find the cash to move it forward. A funding gap remains for many of these companies. What will fill it?

ther along in development. As they evaluate acquisition targets, they too are trying to reduce their risk exposure.

A securities attorney I spoke to told me that in his view, venture capitalists have every right to adjust their investing decisions to reduce risk. After all, investors are in the business of making money. But he added that what’s good for investors may not be good for science. There’s a lot of science that’s sitting on the shelf because the early stage companies can’t find the cash to move it forward. A funding gap remains for many of these companies. What will fill it?

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By Frank Vinluan

Frank Vinluan is the North Carolina Bureau Chief for MedCity News.
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