Venture capital flight away from life sciences as the costs, time, and uncertainty involved in developing medical ideas have risen to “crisis” levels

April 25, 2013 9:58 pm

Venture capital flight away from life sciences

By April Dembosky in San Francisco

Venture capitalists are fleeing investments in life sciences, as the costs, time, and uncertainty involved in developing medical ideas have risen to “crisis” levels, according to a new report released on Thursday.

First-time financings are suffering in particular, with only 20 life sciences companies receiving start-up funding in the first quarter of 2013, the lowest number seen since the second quarter of 1995.Representatives from the National Venture Capital Association and the Medical Innovation and Competitiveness Coalition, which authored the report together, will take their findings to policymakers in Washington on Friday to lobby for improving investment conditions in the life sciences.

“Our most critical message is that it’s not too late to reverse course,” said David Douglass, a partner at Delphi Ventures and board member of the venture capital association.

Investment in life sciences has declined since the mid-2000s for several reasons. Investors have grown wary of the time and money required to develop new drugs or devices, particularly the government regulations and trials needed for approval. Today, the relatively cheap investment in a couple graduates holed up in a coffee shop building a social media app on their laptops has become more appealing.

“Setting out to build a business that can go public involves a different kind of risk and a lot more capital than throwing something on the internet and seeing if anybody cares,” said Bill Janeway, a partner at Warburg Pincus, a private equity firm and author of Doing Capitalism in the Innovation Economy.

On top of that, the market for initial public offerings in biotech has closed up, he added. Investment banking has consolidated so much, the large banks that now handle IPOs are only willing to take on companies that have already reached $100m in revenues. Uncertainty around whether a company will have enough money to make it through the late stages of development has made early-stage investors reluctant to invest.

Peter McNerney, an advisor at Thomas McNerny & Partners, said the life sciences industry needs the help of Congress and regulators to simplify the approval process for new drugs and devices.

More than 60 per cent of venture capitalists said the highest impact on investment is the cost and time of the US Federal Drug Administration review process, according to the report. Almost 40 per cent said payment policies set by the Centers for Medicare and Medicaid Services were another concern.

“We must now focus on continuing steps needed to streamline new product development and encourage investment,” Mr McNerney said.