The Coming Contraction

As I mentioned in a previous post, I believe the VC industry will contract mainly because some funds will have a difficult time raising new money from LPs in this new financial environment. Fred Wilson has a very good post on the "Math Problem" that the VC industry has and why the asset class will likely shrink because of it. One could argue that the Math Problem doesn't apply as much to the life sciences sector since M&A activity remains relatively robust, but we'll leave that discussion for another day. While less capital is good for LPs, it does make things harder for entrepreneurs trying to raise. As the industry emerges from the current financial crisis, I believe that capital efficiency will be the focus of most VCs, both in technology and life sciences. It's not like capital efficiency wasn't important before, but it will definitely be more now. For the entrepreneur, that means doing more with less. It likely means that fewer primary care drugs and more specialty drugs get funded. Unfortunately, it also means that fewer startups in total will likely get funded.

Deathwatch

Just to see how tough it is for biopharmaceuticals companies trying to obtain financing, I put together a list of firms that have released some negative press in the past few months. The list is by no means comprehensive, considering that private companies are not obligated to report their financing situation.

Genaera Corporation, Isolagen Inc., Torrey Pines Therapeutics, Evotec AG, La Jolla Pharmaceuticals, Trubion Pharmaceuticals, Northstar Neuroscience, Targeted Genetics, Cardiace Science, Telik, Oscient Pharmaceuticals, Advanced Life Sciences, DeCode Genetics, Anesiva, and DiObix.

Update: Sorry for any confusion. I didn't mean to imply that any of the companies listed above would go bankrupt. I was just pointing out that many companies need to conserve cash given the current financing environment.

VentureSource Q1 Numbers Not Very Pretty

Dow Jones VentureSource just released Q1 results for VC activity in the US. Not surprisingly, the numbers weren't very pretty. Total dollars invested decreased by 50% from the same quarter last year. The one bright spot - if you can really call it that - was health care, which only declined 34%. M&A activity in health care has kept VCs interested in the space. VC investments in all the other sectors declined 50% or more. So have we hit the bottom? Are VCs going to jump back in and start deploying cash? Will companies finally be able to raise capital? Unfortunately, I think it's too early to tell. Even if we have bottomed out, I don't expect too many VCs will rush back in right away. It's probably going to be a drawn out process as investors slowly test the waters.

Discovering Bacteria's Communication System

Bonnie Bassler, microbiologist from Princeton, recently gave a very interesting presentation at the TED2009 Conference on signaling between bacteria. The part of the her talk that really interested me was the fact that humans and many bacteria have a symbiotic relationship. Certain bacteria help us digest food for example. It's no wonder that most antibiotics have side effects since they indiscriminately target the beneficial bacteria as well as the harmful bacteria. Professor Bassler's research suggests that developing molecules that target the way bacteria communicate with each other will eventually lead to novel antibiotics. I believe that targeting intra-species bacterial signaling, as she proposes, is extremely promising. Unfortunately, antibiotics that inhibit inter-species communications might result in side effects, due to non-selectivity and negatively impact the bacteria that help humans function. Nonetheless, her presentation provides a fascinating look at how bacteria interact, and it's worth watching.

DiObex Shuts Down and Sells Assets

About a month ago, I wrote a post about potential opportunities to pick up assets from distressed companies. Last week, DiObex announced that it failed to raise additional capital and was effectively shutting down. The company was financed previously by venture firms including Domain Associates, Inventages Venture Capital, Pequot Ventures, and Sofinnova Ventures. The board has now decided to sell the company's assets, mainly diabetes drug (DIO-901) entering Phase II, to recoup invested capital. Although the diabetes market is huge, getting regulatory approval for a diabetes drug can be difficult, time-consuming, and expensive. Recent safety concerns with diabetes drugs, e.g. Avandia, has made the FDA very cautious, and long-term safety is always an issue since most diabetes drugs are taken chronically. This might be an opportunity for a large pharmaceutical company, e.g. Lilly or Novo Nordisk, to pick up an asset on the cheap. Unfortunately, I don't believe this will be the last we hear about companies having to sell their assets this year.

Laying Down Some PIPE

A PIPE (private investment in public entity) occurs when a private investor (e.g. a VC/PE fund) purchases shares of a publicly traded company. Recently, VCs have been showing a lot of interest in PIPEs. Sunesis just announced that the company secured $43.5M in a private placement led by Bay City Capital. Other recent PIPEs include Xenoport, ATS Medical, and Stereotaxis. The main reason VC funds are doing PIPEs is because valuations of public companies have been indiscriminately slaughtered; a number of companies are trading for less than cash. Another advantage of PIPEs is that of liquidity (theoretically), especially with the IPO window closed. VCs normally don't do many PIPE transactions. Public companies are generally left to mutual funds and hedge funds to invest in. PIPEs don't always result in a board seat for the VC; thus no active management or much control over the investment. Another reason PIPEs aren't too common is that a portion of the financing is spent on adhering to SEC regulations for public companies rather than improving the business; Sarbanes-Oxley is a common complaint. Liquidity is not always guaranteed; even though the companies are public, there might not be enough float to sell the shares. In the current financial crisis, some PIPEs make sense though. Unfortunately, PIPEs only make it more difficult for private startups looking to raise money.