Capital Crunch: Life Sciences Startups Look to New Sources of Funding

by Edward MathersFeb 21, 2013

It’s no secret that the flow of capital into the life sciences industry has slowed to a trickle over the last several years. The number of funds being raised continues to decline, with only a handful of firms raising fresh funds in the past two years (including NEA), leaving venture capitalists with a shortage of dry powder and an ever-dwindling appetite for risk. In 2012, the sector saw a 10 percent drop in total dollars invested and a six percent decrease in the number of deals. First-time financings were hardest hit, with the lowest number of deals since 1995.

Coupled with an unstable economic environment and a widespread aversion to capital-intensive projects, the hurdles to bringing new treatments and therapies to patients seem higher than ever, and the threat of an innovation bottleneck (with grave consequences for human health) looms large. Clearly the industry must redirect the flow or find new sources of capital to survive.

This transformation underway in life sciences is a core focus of the upcoming CED Life Science Conference, where participants will discuss the broader funding landscape, dynamics within the venture capital industry, and emerging opportunities to pursue less traditional sources of capital. The flow of capital will certainly be a key topic for discussion at CED and throughout 2013, and we can expect several key shifts to emerge or become more firmly rooted during the course of the year.

A New Role for Big Pharma

What has begun to unfold in the life sciences industry is a massive paradigm shift of the role “big pharma” plays in the startup ecosystem. As more and more VCs pull away from the early-stage biotechnology and medical device sectors, many big pharmaceutical and biotech companies have stepped in and supplied an influx of much-needed corporate cash. Why now?

Historically, big pharma has honed in on products as they enter late-stage development, seeking low-risk opportunities to close the gap on existing pipelines. Previously, the corporate venture groups participated in financings—fast forward to now, and we see more pharma-led financings. Ironically, at the same time, pharma is also cutting back on R&D budgets, and exiting certain therapeutic areas.

This crisis has delivered a wake-up call for big pharma in recognizing the importance of platform-oriented companies, which are focused on creating new, disruptive, and broadly-applicable technologies rather than a specific therapeutic product. Structured to foster innovation, these types of companies are uniquely positioned to make technical and scientific advancements that will fuel the next generation of therapeutics. Large pharmaceutical and biotech companies depend upon a thriving life sciences ecosystem, and platform-focused companies are an increasingly important factor in that equation.

Corporate R&D “Going to Where the Science Is”

Corporate R&D, equally important to the ecosystem, has increasingly made “going to where the science is” central to its strategy. Large corporations are increasingly collaborative, partnership-focused, and are cultivating hubs for innovation.

For example, Johnson & Johnson recently announced the launch of four research centers in prominent life sciences communities, including Boston, California, China and London. Merck established the California Institute for Biomedical Research in San Diego to conduct early-stage drug research. Bayer partnered with the University of California, San Francisco, to establish an innovation center focused on helping basic research discoveries progress to the drug development stage. Pfizer has also announced several academic relationships, all with a goal of early access to cutting edge technology and relationships with academic leaders in their fields. We can expect to see more of this in 2013.

Casting a Wider Net

Clearly, reviving the flow of capital to life sciences cannot (and should not) be fueled by big pharma alone, and there is still considerable room for growth in developing new strategies for funding. A successful future for the life sciences industry will require medical startups to think outside of the box to bring in fresh capital, and they have already begun to do so.

During the last few years, the concept of alternate funding sources appears to be gaining traction in life sciences. Liquidia Technologies received a $10 million equity investment from the Bill & Melinda Gates Foundation in support of their development and commercialization of safe and more effective vaccines. Hedge funds in Boston and San Francisco are the latest backers of Intarcia Therapeutics, which is developing a potential treatment for type-2 diabetes.

Pharma-backed VC funds companies are also beginning to flow significantly more money into deals, proving their willingness to elevate their role from simply strategic investor to financing leader in this space. As life sciences startups lay the bricks for alternate roads to funding, we’re likely to see increased momentum when it comes to finding new sources of capital and, longer-term, a much more diverse life sciences ecosystem.

The Seeds Are Planted

Although the life sciences sector is struggling right now, it appears that the seed has been planted for new survival strategies. As the VC capital channels to life sciences continue to shrink, the industry must become much more flexible and innovative in their fundraising process through big pharma’s increased support of platform and product-oriented companies as well as medical startups’ exploration of new avenues to fresh capital. The evolution of the psyche of the life sciences investment ecosystem only stands to continue in 2013 and, for the sake of all of our health, let’s hope it does.

This post was also published on the CED blog Start Something. Ed Mathers is one of three CED Life Science Conference 2013 Co-Chairs, and has authored this post on life science financing ahead of the conference on February 27-28, 2013, where these topics and predictions will be discussed in keynote addresses, on the conference floor, and in expert panel discussions with investors and life science leaders. For more information and to register, visit the CED Life Science Conference website.