The contours of the venture capital funding biotech and the life sciences have shifted considerably in recent years. As BioPharma Dive explored in depth over the summer, the periods between 2004 and 2008 and 2008 to 2013 saw major changes in VC trends, including a significantly lower level of overall funding; a smaller concentration of recipients, with a focus on companies with highly specialized platforms (particularly in immuno-oncology); and a move towards larger and later-stage funding rounds.
There have also been some indications that investors, initially skittish in the wake of a global financial crisis which throttled funding streams in many major sectors (and particularly in the life sciences), are beginning to return to the fold.
PricewaterhouseCoopers released its latest MoneyTree report on venture capital funding for the life sciences in Q3 2015 earlier this week. And it's largely great news for the sector—PwC even titled the report, "Biotech holds strong amid record high investments."
Here are some of the major trends—and the potential weaknesses—that PwC identified in its report.
A big year-over-year jump in life sciences funding
Overall venture capital funding in both Q3 and 2015 are headed for near-record levels, according to PwC. There's been a total of $47.2 billion funneled by venture capital firms in the first three quarters of 2015, including $16.3 billion over 1,070 deals in Q3.
That's a bit of a decline in total number of aggregated venture capital deals compared to Q3 2014. But that's only because 2014's numbers were so high, too. In fact, PwC Venture Capital Market Leader Tom Ciccolella notes that overall 2015 VC funding is headed for the second highest levels on record.
Although software companies dominated VC dollars in Q3 with $5.8 billion in funding, the life sciences came in second with $2.9 billion across 194 deals—and that's despite a fair amount of shakiness in the market.
"If there’s anything we learned this quarter, it’s that despite the recent turbulence in the financial markets, venture capitalists remain undeterred and are confident investing in truly innovative companies across all sectors of our economy," Bobby Franklin, President and CEO of NVCA, told PwC.
But it's important to note that the overall life sciences figure includes medical device VC. Biotech funding specifically actually fell about 0.5% compared to Q2 2015 but was offset by the 3% spike for medical devices. Still, it represented a massive 77% jump in biotech venture capital year-over-year.
An all-time high in average deal sizes
Although overall deal volume shrank a bit both year-over-year and compared to last quarter, the average size of life sciences deals actually reached an all-time high.
The average deal size rose to a staggering $14.9 million in the life sciences, ballooning 68% compared to Q3 2014. And biotech was a large driver for this trend.
For instance, the MoneyTree authors point out that the $250 million deal snagged by cancer San Francisco-based drugmaker Stem CentRx was one of the top 10 deals of Q3, placing 5th on the overall list of deals.
Significantly higher investments in earlier stages
In BioPharma Dive's foray into the changes driving biotech VC over the last several years, one of the main concerns flagged by CFA David Thomas was the need for more seed capital and Series A funding.
"We still see Series A financing down from the peak," he told BioPharma Dive in an interview. "And that's an interesting discussion. I think there's a debate as to whether or not we're funding enough small companies. And there are a lot of entrepreneurs that have a difficult time getting seed money, and a really hard time getting Series A money, which goes back to there being a very small pool of core life science venture groups."
But there are signs in the MoneyTree report that this dynamic may be shifting. In fact, VC funding for early stage life science doubled year-over-year, while early-stage biotech investments spiked by a staggering 126% year-over-year to $1.6 billion spread over 87 deals.
"The $1.8 billion early stage investment is the highest early stage investment in the [life sciences] sector, since the start of the data series in 1995," said Greg Vlahos, Life Sciences Partner at PwC. "This record high investment in early stage deals signals strong interest of venture capitalists in the life sciences sector and bodes well for continued investments in the sector in the near future."
Late-stage biotech funding also rose by 5% compared to Q3 2014, and the average deal sizes for early- and late-stage biotechs were $18 million and $14.5 million in the past quarter, respectively.
Wavering volume—and value—in IPOs
Despite the veritable buffet of good news for life sciences and biotech in the MoneyTree report, PwC's analysis wasn't all sunshine and rainbows. As industry observers may know, recent market volatility and increased scrutiny of biopharma companies has taken a toll on biotech IPO valuations after a period of record (and, some might argue, unjustified) highs.
The trend has hit the IPO market at large, even beyond biotech. The 13 venture-backed IPOs in Q3 were valued at $1.7 billion, or a 54% decline compared to Q2 2015. 10 of these IPOs were in the life sciences sector.
Still, the report authors noted some reason for future optimism. "Of the thirteen companies that did make an IPO, more than two-thirds are currently trading above their offering price in the middle of a choppy market, a strong indicator of the quality of venture-backed IPOs," noted NVCA's Franklin.
"[T]he venture-backed IPO pipeline is deep and we are hopeful that exit activity picks up steam in future quarters."
