Are venture capitalists ready to resume biomedical investing?

Several attendees of the J.P. Morgan Healthcare Conference 2009 — the premier event for industry leaders, emerging companies, technology innovators and investors — came away cautiously optimistic that a lull in biomedical investing could soon end.

The lull started around September when the gloom of a plummeting stock market, billions of dollars in investment firm losses, and a U.S. economy deep in recession caused investors to close their wallets — even to promising biomedical companies.

Meanwhile, the exit doors for investors slammed closed. Only a handful of initial public offerings, in which investors sell companies to public shareholders, occurred in 2008.

The mergers and acquisitions market for buying and selling companies went dormant by year’s end. Big investors like pension funds eyeing millions of dollars of losses in their portfolios were not inclined to commit new money to venture capital firms trying to raise funds.

Corporate giants like Boston Scientific went so far as to warn biomedical start-ups not to expect much investment in 2009.

“It is only in almost rare instances that we get out our checkbook and write a check,” Boston Scientific CEO Jim Tobin said Nov. 12 at the Cleveland Clinic’s Medical Innovation Summit, according to The Gray Sheet, the well-regarded medical technology newsletter.

For all these reasons, many J.P. Morgan conference attendees expected a poor turnout of investment firms and companies this year, not to mention a poor attitude about investing. Some were pleasantly surprised.

“I’m generally optimistic coming out,” said Baiju Shah, president and chief executive of BioEnterprise, the biomedical company development organization in Northeast Ohio. “I had gone in expecting a story of uncertainty” that would keep investing on hold, Shah said. “That’s not what we found at all.”

The invitation-only conference is a four-day event during which about 200 large public companies make presentations to investors and others about their financial and development performance, said Jan Garfinkle, founder and managing partner for Arboretum Ventures.

At the same time, small and start-up companies meet behind closed doors with investors to try to win investments, said Garfinkle, whose Ann Arbor, Mich., venture capital firm invests mostly in early stage medical device and health care services companies.

“I’ve been to [the conference] five years in a row,” Garfinkle said. “It always is a big deal generator. It kicks off the year for everybody.”

At this year’s conference, investment firms tended to fall into two camps — firms with young funds that still have a lot of money to invest, and firms with older funds that have invested most of their dollars and needed to raise more.

Rather than invest in new companies, firms with mature funds are putting more money into companies in which they’ve already invested, Garfinkle said. But firms with young funds, such as Arboretum, are looking to make first-time investments in biomedical companies with game-changing technologies , she said.

Investors at the conference also tended to separate biomedical companies into two camps: companies that are close to having a product on the market, and those that are years away from having a product.

Cautious investors may be more willing to invest in companies that are close to having a marketable product, said Tom Sudow, a vice president of attraction for Team NEO in Cleveland. Sudow works exclusively with the Global Cardiovascular Innovation Center based at the Cleveland Clinic to attract heart-related technology companies.

That could mean some early stage medical device, therapy and drug companies go begging for investor dollars this year, Sudow said.

But if some investors shy away from early stage investing, that means more opportunity for firms like Arboretum, whose stated goal is to invest in young companies, Garfinkle said.

In addition, “We are seeing some great opportunities to participate in later-stage companies that once the strategic exit window opens again will be able to have a successful exit, and we’d be able to get in for a good price now,” she said.

Ian Lennox, chairman and chief executive of Ricerca Biosciencesin Concord Township, said he felt the J.P. Morgan conference was “quite positive.” Lennox was invited to make his company’s first presentation at the prestigious conference.

Ricerca is not looking for investors at the moment, he said. Though public markets may have largely closed to companies as funding sources, private markets — venture capital and private equity — are still very much open, Lennox said.

Tough public markets, though, may lead large companies to license technologies from small companies rather than buy those companies, he said.

Other likely biomedical investing trends for 2009 are:

The values investors place on biomedical companies have come down from what some call inflated highs. That means companies should expect smaller investments this year.

Economic stimulation legislation has proposed billions of federal dollars to speed development of health care information technology and treatments for some diseases, such as Parkinson’s. That might mean opportunities for some biomedical companies.

Federal and state grants could become more important to early stage biomedical companies as investments shift to later-stage companies and banks tighten lending standards.

Major pharmaceutical companies appear to be gearing up to buy competitors and start-ups with promising drugs. Small drug companies may partner earlier with large companies.

Cost effectiveness has emerged as a deciding factor for investors. Medical devices and drugs that can significantly cut health care costs could get closer looks.

Expect more syndication deals — investors getting together to make investments and share risk.