Venture capitalists invested $1.8 billion in 170 Life Sciences deals, reflecting a continued interest in venture investment but still the lowest number of deals since the first quarter of 2009. Investment in the Life Sciences sector increased 22% year over year. However, dollars invested and deal volume declined 18% and 21%, respectively, compared with the $2.2 billion invested in 214 deals during the previous quarter.
"VCs are saying that challenges in the regulatory environment for life sciences companies are prompting them to look to other industries to put their money to work for a faster return on their investment," noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US. "When investors see a lack of exits for their companies, it depresses their appetite for funding on the front end. The nearly shut IPO window and volatility in the equity market during the third quarter contributed to the slowdown in life sciences venture funding."
For all sectors, venture capitalists invested $7.0 billion in 876 deals in Q3 2011, a 31 percent increase in dollars and a 3 percent increase in deals year-over-year. Compared with the previous quarter, dollars investment fell 12%, and the number of deals declined 14%. The average deal size for all industries increased for the fourth consecutive quarter and stood at $7.9 million. The life sciences share of total venture capital declined moderately from 28% for the second quarter of 2011 to 26% for the third quarter. The sector followed a similar trend during 2010.
In Q3 2011, Biotechnology investing increased by 26 percent in dollars and dropped 14 percent in deals year over year with $1.1 billion going into 96 deals. Medical device investments increased 17 percent in dollars and declined 20 percent in deals, compared to the same quarter a year ago, as 74 deals captured $728 million in funding during the third quarter of 2011.
During the third quarter of 2011, 21 Life Sciences companies received venture capital funding for the first time, capturing $181 million. This represents a decline of 54 percent in the number of companies but a six percent increase in dollars invested, compared to the third quarter of 2010. First-time deals in the Life Sciences sector averaged $8.6 million in the second quarter of 2011, a 131 percent jump year over year and notably higher than the average first-time deal size of $7.9 million for all industries during the quarter.
"Continued conservatism and caution on the part of venture investors make it challenging for fledgling companies to obtain first-time funding," Lefteroff said. "Investors are weighing the risk and time involved in funding companies that had not previously received venture capital but are still willing to invest in what they see as game-changing technology."
Funding by Subsegment
Four of the seven Biotechnology subsegments exhibited growth in the third quarter of 2011 compared to the third quarter of 2010. The Human Biotechnology subsegment captured the largest share in the third quarter with $826 million going into 61 deals, a 36 percent increase in dollars but a 20 percent decrease in deals from Q3 of 2010. Dollars invested in the Biotech Research, Biotech Equipment, and Biosensors subsegments rose 262 percent, 27 and 5,444 percent, respectively.
Funding for two of the three Medical Device subsegments decreased in Q3 2011, compared with the same quarter of 2010 - Medical/Health Products fell 51 percent and Medical Diagnostics dropped 38 percent in dollars. However, dollars invested in the Medical Therapeutics category increased by 53 percent during the third quarter of 2011, compared to the same time a year ago. This subsegment also accounted for nearly two-thirds of the deals and more than four-fifths of the dollars during the third quarter of 2011 with $602 million going into 48 deals.
Investments by Region
The top five metropolitan regions receiving Life Sciences venture capital funding during Q3 2011 were San Francisco Bay ($625 million), Dallas ($300 million), Boston ($248 million), New York Metro ($144 million), and Twin Cities ($77 million). Investments in Biotechnology deals accounted for 58 percent of the dollars invested in the top five regions in Q3 2011.
Funding for each of the top regions increased on a year-over-year basis. During the third quarter of 2011, Dallas, one of the new entrants to the list, logged a $300 million biotechnology investment - the quarter's top venture capital deals - and recorded the highest year-over-year increase among all metropolitan regions at 403 percent.
About PwC's Pharmaceutical and Life Sciences Industry Group
PwC's Pharmaceutical and Life Sciences Industry Group (http://www.pwc.com/us/pharma and http://www.pwc.com/us/medtech) provides clients with audit, tax and advisory services. The firm has extensive experience in delivering industry-tailored solutions on a wide range of strategic, financial and operational issues. The Pharmaceutical and Life Sciences Industry Group is part of PwC's larger initiative for the health-related industries that brings together expertise and allows collaboration across all sectors in the health continuum. Follow PwC Health Industries on Twitter at http://twitter.com/PwCHealth.
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