Q1:07 VC Funding Hit New Record High: Investors From At Least One Major Firm Are Looking Forward

Q1:07 VC Funding Hit New Record High - Investors From At Least One Major Firm Are Looking Forward

Preliminary results indicate that venture capitalists invested a record amount, nearly $2.8 billion, in health care companies during the first quarter ended March 31, 2007. At least 130 deals with prices were announced during the quarter, the highest number we have on record for any single quarter. Total funding for this quarter is 25% higher than it was during the first, third and fourth quarters of 2006, which each saw $2.2 billion raised in health care venture capital. Biopharmaceutical companies attracted more than 26% of the total capital raised during the first quarter of 2007—more than twice as much as they did in the year-ago quarter. Most of the biopharmaceutical deals were larger, too, with an average size of $31.6 million, and including only a handful of rounds for less than $10 million. Biotechnology saw the greatest change in number of deals, with ten more announced during the first quarter of this year than last year, but saw a decrease in the total amount invested.

The two largest deals of the quarter, both announced in March, were the $175.0 million round raised by EUSA Pharma and the $110.0 million round raised by CardioNet. EUSA Pharma, a specialty pharma, used the proceeds from its March financing to acquire OPi SA, an integrated biopharma based in France. With offices in the United Kingdom and the United States, EUSA is working to create a platform for building a significant transatlantic business, starting with the OPi deal, which was funded by Essex Woodlands, 3i, Goldman Sachs and other investors. The third-largest deal of the quarter, a $70.0 million round, was announced in February by Targanta Therapeutics, a biopharma focused on developing and commercializing novel antibacterial agents to address unmet medical needs in the hospital market.

As the M&A market continues to provide many venture-backed companies with an exit opportunity, investors continue to fund growing health care companies that are expected to serve large markets or unmet medical needs. Recently, some of the partners at MPM Capital, a venture capital firm that just closed a $550.0 million fund dedicated to health care, offered some comments on the state of the industry right now. Not long after the firm announced the closing of its BioVentures IV fund, MPM announced that the new fund had actually made its first investment during the second quarter of 2006. MPM indicated that BioVentures IV is already generating a double digit internal rate of return for its investors, fueled by strong early performances from Memory Pharmaceuticals (NASDAQ: MEMY) and Peplin (ASX: PEP).

Founding general partner Ansbert Gadicke observed, "When we launched MPM, IPOs were the preferred exits; more recently, M&A has provided superior returns." Interestingly, we suspect that lately it has become a bit of a fashion statement for some companies to file for an IPO, when they really are trying to attract an M&A suitor, and that may not be a bad strategy. Others may just be focusing on getting some press, and we admit to wondering about a certain global private equity firm, plus a few health care companies that have filed and withdrawn IPOs two or three times in the past few years. MPM relates that the firm is ready to capitalize on current demand for promising opportunities primarily in the technology segment of health care.

Dr. Ashley Dombkowski, general partner of MPM Capital, commented, "Medical device investing continues as a critical component of our strategy. This is particularly true given the pressures on large and even mid-sized device companies to replenish their pipelines with innovative, high-growth products." She continued, "We have seen that if a device company has compelling proof-of-concept clinical trial results, and if the potential product looks like it could be a blockbuster, it may not need to go all the way to IPO to produce superior returns for its investors." The medical device arena, she noted, is fiercely competitive and, "Innovation is creating new blockbuster categories."

Regarding Pharmaceuticals, MPM general partner Dr. William Greene expressed optimism, remarking that the globalization of the biotechnology and pharma industries is, "far more than just outsourcing. MPM is well-positioned to lend support and experience as the worldwide life science industry creates jobs, improves health care access and provides new avenues for job creation." Insights from Steven St. Peter, M.D., an MPM general partner, include, "The boundaries of venture capital have extended well into the world of buyouts and private equity. As the buyout firms have moved up-market into mega- and club-deals, the opportunity to participate in health care growth opportunities in the middle market has been vacated." MPM Capital is confident about and prepared to play an important role in these types of investments.

So what prognostications does that lead us to, for health care venture capital fundraising during the rest of the year? Well, we hear the M&A market is not slowing down, and we know the health care IPO pipeline is continuing to fill, in part with companies we have seen raising venture capital over the past few years. With a growing number of venture-backed health care companies reaching phase III clinical development, big pharmas and biotechs in search of a promising compound or licensing deal should have a fair amount of strategic investment, partnering, licensing and M&A opportunities to choose from. Assuming the markets continue to offer VCs options for cashing out at attractive premiums, we presume VCs will keep funneling capital back into health care—especially as technological advancement, entrepreneurial innovation and, of course, financial and management prowess, continue to thrive in and drive the health care markets. Right now, it appears that the health care venture capital market is poised for another record year of fundraising.

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