Is biotech back in favor? Not entirely, but funding drought may be ending

For much of the Great Recession and beyond, biotechnology was out of favor among angel and venture capitalists. Software and Internet deals became the shiny objects for investors who wanted faster returns with fewer dollars risked.

To fatigued life sciences investors, biotech seemed a bit like last year’s prom date — expensive, time-consuming, and generally “high maintenance” because of the seemingly endless regulatory challenges faced by emerging companies.

Software and Internet deals are still the rage, although the memory of the dot.com bubble lingers among some investors who were splattered when it burst. But biotechnology may be back on the dance card, based on national investment figures as well as recent Wisconsin deals.

Biotech companies in the United States raised $4.53 billion in 2013, according to the National Venture Capital Association, paced by a strong fourth-quarter performance that has generally continued into 2014. Through the first two quarters of the year, 234 biotech deals raised $2.9 billion, according to data collected by NVCA, PricewaterhouseCoopers, and Thomson Reuters.

Angel investors remain somewhat less enamored with biotech than venture capitalists, in part because they invest earlier in a company’s life span and don’t commit nearly as much cash in any single deal. Nationally for angel investors in 2013, software represented 23% of all angel deals while media and communications stood at 16%. Health care (14%) and biotech (11%) were next on the angel deal list.

In Wisconsin in 2013, there were 86 early-stage deals (venture and angel) worth $128 million reported through The Wisconsin Portfolio, a publication of the Wisconsin Angel Network. Of that total, life sciences and biotech — primarily drugs, assays, reagents, and research tools — comprised 15% of the total deals. That was good for third place in number of deals and represented about $11 million in total investments out of the $128 million total.

Information technology and consumer services were first and second, respectively, in Wisconsin. Health care services, a category that includes some health IT and software, was fourth and medical instruments was fifth on the deal list. Some of the Wisconsin deals in water, energy, business services, and manufacturing (about 13% in total) may have biotech technology in the background.

So far in 2014, Wisconsin biotech companies such as Madison Vaccines, Promentis, FluGen, Zurex Pharma, Cellectar Biosciences, Intuitive Biosciences, Microscopy Innovations, and Stealth Therapeutics have reported raising one or more rounds of financing.

Other Wisconsin biotech companies have shown progress on other fronts, with Exact Sciences winning vital federal clearances for its colorectal cancer test and Cellular Dynamics International reaching important milestones for patent protection and manufacturing scale. The “granddaddy” of all Wisconsin biotech firms, Promega, has continued its growth domestically and worldwide, as evidenced by its building boom in Fitchburg, the opening of an office in India, and new product innovation.

A report released this summer by Battelle, a national research and development group, noted that Wisconsin’s bioscience industry is “sizable and growing.” Wisconsin was one of only 12 states to gain at least 1,000 jobs in the biotech and life sciences field in the five years ending in 2012, the report noted.

Battelle counted 31,800 jobs and nearly 1,400 businesses in Wisconsin’s bioscience sectors, which span agricultural feedstock and chemicals; bioscience distribution; drug development; medical devices and equipment; and research, testing, and medical labs. Madison is one of only nine metro regions nationwide to have a job concentration in four or more bioscience specialties, according to Battelle.

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Cost and regulatory issues remain, however, and the health care industry remains preoccupied with the advent of the Affordable Care Act as well as Medicaid and Medicare challenges. That sometimes slows adoption of new products — although new technologies usually improve care and manage costs.

“After many years in which biotech investments were outpacing exits, we’ve seen a reversal in the past few years,” said John Neis, managing director for Madison-based Venture Investors LLC. More “exits,” such as initial public offerings, mean investors are seeing returns from past deals and beginning to put that money into new deals. Company valuations in biotech also appear realistic overall, he added.

“I’ve been in the business long enough that I’ve seen the ‘death of biotech’ predicted several times,” Neis said. “But, in the end, the unmet health care needs and the diseases don’t go away … which means biotech doesn’t, either.”

For those Wisconsin companies that weathered the storm, that’s why the future appears brighter.

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