Updated Numbers from the Venture Capital Industry – Focus on Healthcare

Venture capital investments and raises are down for the third quarter as compared to the second quarter of 2011, but numbers remain consistent with the last 3 years. Among the investments made, there was a trend towards larger deal sizes for later stage companies. Perhaps of more significance was the sharp drop in money raised in the third quarter, which marked the lowest amount raised in a quarter since the third quarter of 2003

Venture Capital Investments

For the first three quarters of 2011, venture capitalists invested $21.2 billion into 2,725 deals, representing 20% more dollars and 3% more deals than the first three quarters of 2010. The 2011 pace already exceeds the $19.7 billion invested in 2009.

Venture capitalists invested $6.95 billion in 876 deals in the third quarter of 2011, which represents a 12% decrease in terms of dollars and 14% decrease in the number of deals compared to the second quarter of 2011 when $7.9 billion was invested in 1,015 deals. Additional VC data are provided by the National Venture Capital Association, including Regional Data and data going back to 1995.

Healthcare Investment Breakdown

For the 3rd quarter, the Biotechnology industry was the second largest sector for dollars invested with $1.1 billion (versus $1.34 billion in Q2) going into 96 deals, falling 18% in dollars and 20% in deals from the prior quarter. The Medical Devices and Equipment industry also experienced a decline, dropping 18% in Q3 to $728 million, while the number of deals declined 21% to 74 deals. Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 18% in dollars and 21% in deals, dropping to the second lowest quarterly deal volume since the first quarter of 2005. To the contrary, Healthcare Services investments surged with $152 million going into 11 deals (a 200% increase in dollars and 38% increase in deal volume over the second quarter).

BIOTECH VC INVESTMENT

HEALTHCARE SERVICES VC INVESTMENT

MEDICAL DEVICE & EQUIPMENT VC INVESTMENT

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Venture Capital Deal Structures

The total number of VC deals thus far for 2011 (876) is up 3% from last year, but down 14% from the second quarter with a trend towards larger average deals going into expansion and later stage companies. See the Table 1 below. The later stage average deal size of $12.5 million represents the largest average deal size for this stage in a decade.

TABLE 1: Total VC Deals by Stage of Development

Within the healthcare sector, the number of deals is also down in Q3 and YTD for 2011. See Table 2 below.

TABLE 2: Number of Deals within the Different Healthcare Sectors

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Amount Raised

52 U.S. venture capital funds raised $1.72 billion in the third quarter of 2011, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 53% decrease by dollar commitments and a 4% decline by number of funds compared to the third quarter of 2010, which saw 53 funds raise $3.5 billion during the period. The third quarter marked the lowest amount raised in a quarter since the third quarter of 2003. See chart below.

FUNDRAISING BY VENTURE FUNDS

Despite the challenging environment for VC firms, particularly those with a focus on healthcare, Sofinnova Ventures created its eighth venture fund during the quarter, with a total of $440 million in new capital to invest, bringing its total money under management to $1.4 billion. Read more about the raise here.

Factors Affecting VC Investments and Raises

The Economy
Mark Heesen, president of the NVCA, explained, “Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August.”

Regulatory Environment
Part of the reason was the difficult and unpredictable nature of the approval process at the Food and Drug Administration, said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital practice.

“Challenges in the regulatory environment for Life Sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in Software investments,” Lefteroff said.

“Accordingly, over the past two quarters, we’ve seen a clear shift in Life Sciences investments from Seed/Early Stage companies over to more Later Stage companies.

Among companies, Reata Pharmaceuticals Inc. got the largest investment of the quarter, $300 million. Founded in 2002, the company develops oral anti-inflammatory drugs.

Similar Trends Seen in Healthcare M&A Transactions

Some of the same factors affecting the VC industry, namely an uncertain economic picture and a challenging regulatory environment, have also slowed M&A activity. Managements of many firms have reported a wait-and-see attitude in regard to potential transaction activity. As illustrated below, global deal volume and values across all sectors are down for the past few quarters. A similar pattern is also seen in the healthcare sector (see lower chart).

GLOBAL M&A VALUES AND VOLUME – ALL SECTORS

GLOBAL M&A VALUES AND VOLUME – HEALTHCARE

Source: Bourne Partners Internal Research

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About Bourne Partners

As a healthcare-focused merchant bank, Bourne Partners provides financial advisory, direct investment, alternative assets and management consulting services to our client-partners. We play an active role in helping businesses grow by creating long-term, profitable relationships that extend beyond single transactions. It is our focus on relationships and long-term results that has yielded us an impeccable track record of client satisfaction . Our direct and indirect investments in sector-leading companies – often through our relationships with top-tier Private Equity funds – allow us to learn about the best-of-the-best from the inside and apply that knowledge to the companies we serve. At Bourne Partners, we operate within a specific set of core boundaries: integrity, accountability, teamwork, loyalty and commitment are the driving forces behind everything we do.
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