A strange thing has happened during an otherwise bleak time for biotech venture capital. Life science venture capitalists are apparently hitting more of their investments out of the park.
There were 17 so-called “Big Exits” for investors in privately held biotech companies, and 18 in the medical device business in 2011, the most of any year since 2005 in a new set of data analyzed by Silicon Valley Bank. For this analysis, a “Big Exit” was counted each time a venture-backed life sciences company was acquired, and the up-front payment was worth at least $75 million. Although many of these “Big Exit” acquisitions are structured to include milestone payments that can make the deals more lucrative over time, those future payments often don’t materialize, and they weren’t factored in to the SVB analysis of investment returns.
Taken together, those 35 big deals in life sciences generated $8.8 billion in up-front returns to investors. That figure ballooned to $12.7 billion when counting the future milestone payments— in a year when just $7.7 billion of new venture capital flowed into new life sciences investments. The number of Big Exits, and their total value, has steadily increased for four straight years during the period when structured acquisitions became more common, according to SVB. (See the full report here.)
Ironically, the increase in “Big Exit” returns comes at a tough period for the industry, as tech investing in companies like Facebook, Groupon, and Zynga has overshadowed all things biotech. Many investors are clearly worried about how much time and money it takes to invest in new drugs, devices, and diagnostics, when regulatory barriers are high at the FDA and insurers are looking hard for ways to get health spending under control.
That perception has put a crimp into the biotech IPO market for years, and made it much more difficult for many venture firms to raise new funds to keep investing. Those forces have all helped thin out the ranks of active biotech VCs, especially among those who invest in companies in the early stages.
“The perception of returns in healthcare is bad, but the reality is far different,” says Bijan Salehizadeh, a San Francisco-based managing director with Navimed Capital. “The prevailing sentiment is that healthcare investing is tough, it takes so much money, and it’s hard. It is. But the returns are there if you are in the right companies.”
The analysis of returns certainly isn’t a comprehensive look at whether it really pays to invest in biotech overall. It focuses entirely on private companies getting acquired, and doesn’t include any data on returns VCs may get when their portfolio companies went public, or when public companies in their portfolio were acquired.
It’s also not the only analysis to buck the prevailing wisdom about the woes of biotech investing. Salehizadeh and Bruce Booth of Atlas Venture published an analysis of VC returns last July in Nature which showed that biotech generated mean realized returns of 15 percent during the decade of the 2000s, compared with 3 percent for information technology and 4 percent for software.
Quite a few examples of “Big Exits” were listed in the report, although not all were described by name. Some of the biggies in 2011 were reported widely here and elsewhere in the media—companies like Berkeley, CA-based Plexxikon, Seattle-based Calistoga Pharmaceuticals, Woburn, MA-based BioVex, and San Diego-based Intellikine were among the greatest hits.
Not everything turned up rosy
