Third-Quarter 2010 Life Sciences Investing Declines from Strong Q2, But Remains on Pace to Surpass 2009 Levels, According to PwC/NVCA MoneyTree™ Report

NEW YORK, Nov. 5, 2010 /PRNewswire/ -- Third-quarter venture capital (VC) funding in the life sciences sector, which includes the biotechnology and medical device industries, declined from a strong second quarter but remained on pace to surpass 2009 levels, according to a new report, "Second-quarter gains fade," that highlights findings from the MoneyTree™ Report from PwC US and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters.  As it did for the first half of 2010, the life sciences sector captured the largest share of funding, totalling $1.52 billion in 190 deals. This represents a 30 percent decrease in dollars and 25 percent decrease in number of deals compared with last quarter.

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The life sciences sector followed a trend similar to most industries during the third quarter, when overall US venture capital investment fell 31 percent in terms of dollars and 19 percent in number of deals.  Life sciences funding decreased 5 percent in terms of dollars and 3 percent in deal volume, compared to the third quarter of 2009.  For all sectors, venture capitalists invested $4.82 billion in 780 deals during the third quarter of 2010, compared to $6.9 billion in 962 deals during the second quarter.  Among single industries, software surpassed biotechnology as the top venture capital investment, pulling in $1 billion in funding compared to $944 million for biotech.

"Compared with the third quarter of 2009, biotechnology investing remained relatively flat," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. "Despite declines for this quarter, funding for the life sciences sector remains on course to pass investment levels of 2009."

The investment split for the life sciences sector remained consistent with recent years. During the third quarter, biotechnology accounted for 62 percent of funding, while medical devices claimed 38 percent.  In comparison, during the third quarter of 2009, biotechnology captured 59 percent of investment in the sector while medical devices received 41 percent.

The biotechnology industry received the second highest level of funding for all industries in the third quarter, but dipped below $1 billion for the second time this year with $944 million going into 108 deals.  This represents a 32 percent decrease in dollars and a 29 percent decrease in deals compared to the second quarter, when $1.4 billion went into 152 deals.  Medical Devices and Equipment, which ranked third overall for the quarter, saw a 27 percent decline in dollars and 18 percent decline in deal volume in the third quarter with $573 million going into 82 deals.

Investments by Stage of Development

Compared with the same period a year ago, early-stage life sciences funding contracted 20 percent in the third quarter of 2010 to $644 million, while late-stage funding grew 9 percent to $872 million.

Year-over-year, early-stage life sciences deal volume decreased 5 percent to 104 deals and average deal size shrank to $6.2 million. Late-stage funding saw flat volume at 86 deals, but average deal size increased 9 percent to $10.1 million.

Overall U.S. venture capital funding and deal volume declined across all stages of investment in the third quarter of 2010.  Thirty-five percent of total deal volume - the same as the second quarter - was completed in the early stage with $1.3 billion going into 271 rounds of financing. The average early-stage deal in the third quarter was $4.8 million compared to $4.9 million the second quarter.

Early-stage funding in the biotechnology industry increased 4 percent from the third quarter of 2009 to $513 million, while late-stage funding contracted by 4 percent over the same period to $431 million.  For the medical device industry, early-stage funding decreased 57 percent to $131 million in the third quarter year-over-year, while late-stage funding increased 26 percent to $441 million over the same period.

Funding by Subsegment

Four of seven biotechnology subsegments received increased funding during the third quarter of 2010 compared with the prior year, while two subsegments experienced decreased investment. Those gaining include biotech animal (6,567 percent increase), biotech industrial, (35 percent), biotech research (30 percent) and pharmaceutical (2 percent).  Biotech equipment and biotech human funding decreased by 23 percent and 5 percent, respectively, while biosensors did not receive any funding during the third quarter.  

The large percentage jump in biotech animal was caused by a single $20 million deal, the only one for this subsegment in the third quarter of 2010, which compared to a single deal of $300,000 for the same period of 2009. Compared with the second quarter of 2010, however, when biotech animal received $33.2 million in five deals, investment in the subsegment decreased 40 percent.

Funding for most medical device subsegments decreased year-over-year in the third quarter, with medical diagnostics and medical therapeutics falling 51 percent and 14 percent, respectively.   A notable exception is medical/health products, where investment increased 137 percent following a period of decline.

Regional Trends

Companies in the San Francisco Bay region, which includes Berkeley and San Jose, received $447 million in life sciences venture capital in Q3 2010, with $235 million flowing into biotechnology. Rounding out the top five metropolitan areas for life sciences venture capital funding were Boston ($185 million), San Diego ($129 million), Seattle ($94 million), and Dallas ($59 million).

Except for Dallas, venture capital funding for the top regions decreased on a year-over-year basis during the third quarter. San Francisco Bay received $115 million less than the same period of the prior year. However, the region continued to outpace all others, gaining more than twice as much life sciences investment capital as any other market.

A Look Ahead

Mobile health and personalized medicine is expected to act as driving forces that encourage innovation and entrepreneurial activity in the life sciences sector.

"Although the overall IPO market remains weak, exit opportunities for the life sciences sector look promising based upon deal activity this year," Lefteroff said. "Advances in mobile healthcare and personalized medicine and device innovation are expected to pique the interest of investors and help offset their anxiety over healthcare reform and increased regulatory scrutiny."

The mobile health industry is bringing new devices, services, and applications to consumers and improving the efficiency and reach of care delivery. The annual consumer market for remote/mobile devices is estimated at $7.7 billion to $43 billion. [PwC Health Research Institute, "Healthcare unwired: New business models delivering care anywhere," 2010.]

The US personalized medicine market is expected to double by 2015 to more than $450 billion annually. The core diagnostic and therapeutic segment of the market — primarily comprising pharmaceutical, medical device, and diagnostics companies — is estimated at $24 billion, and is expected to grow by 10 percent annually, reaching $42 billion by 2015. [PwC, "The new science of personalized medicine: Translating the promise into practice," 2009.]

About PwC's Pharmaceutical and Life Sciences Industry Group

PwC's Pharmaceutical and Life Sciences Industry Group (http://www.pwc.com/us/pharma) 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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© 2010 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate and independent legal entity.

SOURCE PwC