Times are tough in the life science financing environment, as underscored by numerous recent news stories as well as quarterly statistics from Dow Jones VentureSource and The MoneyTree Report.   

However, Fenwick’s First Half 2012 Life Science Venture Capital Survey highlights a few potential bright spots as well.  In particular, while the number of life science financings declined significantly during the first half of 2012, our survey indicates that valuations have improved modestly, and we also see evidence that large biopharma and medical device companies are increasing their support of startup ventures.

Fenwick’s latest survey analyzes venture financings for 186 U.S.-based life science companies over the first half of 2012. One metric used to assess the health of the life science funding environment is to look at the change in share price from one round of funding to the next.  In 2012, the trend has been positive, with average price increases of 19% and 26% for Q1 and Q2, in comparison to average price increases of 4% and 11% for Q1 and Q2 of 2011.

Another way to look at the data is to measure how many funding rounds occurred where the price per share increased (up rounds) or decreased (down rounds) from the previous round.  For the first half of 2012, up rounds outpaced down rounds 53% to 19%, with 28% flat. This is a modest improvement over results from 2011, which averaged 47% up rounds and 25% down rounds, with 28% flat.

It is important to put these valuation trends in context: fewer life science financings are occurring, and the life science valuation figures trail those of other industries covered by our Silicon Valley Venture Capital Survey.  However, the upward trend in valuations is an indication that startups are continuing to develop promising technologies that can justify a step up in valuation – in other words, there is a healthy supply of promising new ideas.

Likewise demand for new ideas with demonstrated potential, in the form of acquisitions of life science startups by large life science companies, also continues to be strong.  A recent report from Silicon Valley Bank, as well as blog posts by Bruce Booth (Atlas Ventures) and Bijan Salehizadeh (NaviMed Capital), highlight the continuing strength of the current life science M&A market.

But while these supply and demand factors continue to be strong, there is currently less funding available to life science startups that seek to develop and advance new ideas.  So it is perhaps unsurprising that we also see large biopharma and medical device companies – who continue to rely on acquisitions of startups to help refill their product pipelines – becoming more involved in providing funding to the life science startup sector, and more creative in the means by which they do so. For example:

  • The venture arms of larger corporations have always played a role in the life science sector, but participation has been increasing recently, with the National Venture Capital Association and Thompson Reuters reporting that corporate venture capitalists participated in 17.5% of all life science financings during the 2011 through 1H 2012 period, up from 15.3% of all financings during the 2010 through 2011 period.
  • In addition, some large corporations are partnering with established venture capital firms, both by making direct investments into venture capital funds and by forming innovative collaborations that combine corporate and venture capitalist resources and expertise, to identify and develop promising early stage technologies. Recent examples of this trend include collaborations between Merck and Flagship Ventures (2012), Johnson & Johnson, GlaxoSmithKline and Index Ventures (2012), and Shire Pharmaceuticals and Atlas Ventures (2011).
  • And in some cases, large corporations are providing funding and resources directly to early stage companies, such as Johnson & Johnson’s recent announcement that it would establish “innovation centers” in San Francisco and three other cities.

The increased involvement of large life science companies in supporting early-stage innovation in the sector is a welcome development.  However, even with more involvement from large life science companies, the overall shortage of funding for life science startups is likely to continue for some time, and therefore capital efficient development strategies and creative business and financing models will continue to be of paramount importance.