By Brian Gormley
After two rough years, health-care venture capitalists are adapting to deal with what could be more tough times ahead.
While medical companies have produced some of the best exits recently-–most notably, Ardian Inc.’s $800 million sale to Medtronic Inc.–-the downturn has left many companies gasping.
“The biggest issue in health-care venture capital is that most of the funds are out of money,” said David Collier, managing director of venture firm CMEA Capital. As a result, “We’ll continue to see bankruptcies in both devices and drug-development companies.”
Investors do not expect the public markets to rescue them anytime soon. While some companies are going public, few can do so on their terms. This gives corporations the edge in alliance and merger talks. Since these companies are increasingly worried about regulatory risk, however, they are less willing to pay up for rights to therapies that are far from U.S. approval.
The trend is spurring some firms to search for opportunity to gain leverage by bankrolling biotech companies through Phase III trials. The final stages of human studies are often too costly for venture firms alone, but by teaming up with other types of investors, such as growth-equity, hedge and crossover funds, VCs may be able to fund a drug to regulatory approval in some cases, said Michael Ross, managing partner of venture firm SV Life Sciences.
Some drugs, for example, have potential in niche and large markets. By funding relatively small Phase III studies to gain approval in a niche indication, a company could secure revenue to pursue a larger one. With an approved product, it also would be better-positioned to bargain with partners or acquirers.
“In the absence of an IPO market, pharma companies realize they’re the endgame for most of our companies,” Ross said. “It will restore an economic equilibrium if we have alternatives.”
Venture firms are also urging their portfolio companies to cut their reliance on venture capital by courting pharmaceutical partners early on. “The intelligent thing in the coming year is to improve your relations with large strategic partners earlier,” said John H. Friedman, managing partner of Easton Capital. “It’s the most efficient way to go about it.”
Another alternative firms are considering is reverse-merging a biotech with a company that has cash to complete advanced clinical trials. That’s what Transave Inc. backers-–which include Bessemer Venture Partners, Prospect Venture Partners and Quaker BioVentures-–did in December when they united the business with publicly held Insmed Inc.
The new company-–46.7% owned by VCs, and led by Transave Chief Executive Timothy Whitten-–has capital to bring Transave’s drug, Arikace, through Phase III studies in cystic fibrosis patients with pseudomonas lung infections and lung infections due to non-TB Mycobacteria.
After two rough years, health-care venture capitalists are adapting to deal with what could be more tough times ahead.
While medical companies have produced some of the best exits recently-–most notably, Ardian Inc.’s $800 million sale to Medtronic Inc.–-the downturn has left many companies gasping.
“The biggest issue in health-care venture capital is that most of the funds are out of money,” said David Collier, managing director of venture firm CMEA Capital. As a result, “We’ll continue to see bankruptcies in both devices and drug-development companies.”
Investors do not expect the public markets to rescue them anytime soon. While some companies are going public, few can do so on their terms. This gives corporations the edge in alliance and merger talks. Since these companies are increasingly worried about regulatory risk, however, they are less willing to pay up for rights to therapies that are far from U.S. approval.
The trend is spurring some firms to search for opportunity to gain leverage by bankrolling biotech companies through Phase III trials. The final stages of human studies are often too costly for venture firms alone, but by teaming up with other types of investors, such as growth-equity, hedge and crossover funds, VCs may be able to fund a drug to regulatory approval in some cases, said Michael Ross, managing partner of venture firm SV Life Sciences.
Some drugs, for example, have potential in niche and large markets. By funding relatively small Phase III studies to gain approval in a niche indication, a company could secure revenue to pursue a larger one. With an approved product, it also would be better-positioned to bargain with partners or acquirers.
“In the absence of an IPO market, pharma companies realize they’re the endgame for most of our companies,” Ross said. “It will restore an economic equilibrium if we have alternatives.”
Venture firms are also urging their portfolio companies to cut their reliance on venture capital by courting pharmaceutical partners early on. “The intelligent thing in the coming year is to improve your relations with large strategic partners earlier,” said John H. Friedman, managing partner of Easton Capital. “It’s the most efficient way to go about it.”
Another alternative firms are considering is reverse-merging a biotech with a company that has cash to complete advanced clinical trials. That’s what Transave Inc. backers-–which include Bessemer Venture Partners, Prospect Venture Partners and Quaker BioVentures-–did in December when they united the business with publicly held Insmed Inc.
The new company-–46.7% owned by VCs, and led by Transave Chief Executive Timothy Whitten-–has capital to bring Transave’s drug, Arikace, through Phase III studies in cystic fibrosis patients with pseudomonas lung infections and lung infections due to non-TB Mycobacteria.