April 14, 2014

Mass. life sciences firms look beyond VCs for funding

PHOTO/RICK SAIA
PHOTO/RICK SAIA
Geert Cauwenbergh of RXi Pharmaceuticals had to look elsewhere for funding in 2012 and 2013.

When Geert Cauwenbergh needed money for a life sciences startup in 2002, he knew where to turn: venture capitalists.

A decade later, Cauwenbergh found himself at the helm of RXi Pharmaceuticals in Westborough, trying to generate at least $50 million for clinical trials. But following the Great Recession, venture capitalists were no longer eager to put money into early-stage biotechnology companies that could take up to a decade to recoup their investment.

"The horizon for venture capital firms has been dramatically reduced," he said. "These days, money has to cycle a lot faster."

So, Cauwenbergh turned to other sources for the $26.4 million RXi has brought in thus far. A spinoff from publicly-traded Galena Biopharma in 2012 stipulated that RXi would remain public and investors would buy $9.5 million of its stock. A year later, RXi sold assets and a stake in the firm to OPKO Health, a multi-national pharmaceutical and diagnostics company, for $16.4 million.

Life sciences venture capital has been taking a beating nationally, falling 54 percent between 2007 and 2012, according to data compiled by Silicon Valley Bank of Santa Clara, Calif.

But Massachusetts has largely bucked this trend, with venture investment in the biotech and medical devices industry peaking at $1.47 billion in 2011 before it fell to $1.32 billion in 2013, according to PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA).

Mass. deals at lowest since '05

However, the number of Bay State life sciences firms receiving venture funds fell in 2013 to 109, the lowest since 2005, PwC and the NVCA found. The problem is particularly pronounced in the medical device field, where just 26 deals were consummated in 2013, making last year the weakest since 1996.

"There's been a pullback in terms of fundraising and investment," said Peter Abair, director of economic development and global affairs for the Massachusetts Biotechnology Council (MassBio). "You can't ignore what's happening elsewhere."

Across the country, venture funds are turning away from emerging companies and directing nearly half of their biotech investments to firms that are expanding or in the later stages of development, PwC and the NVCA found. Though investment in Massachusetts' emerging companies remains strong — with 80 percent of biotech venture money going to startup or early-stage companies — Abair worries the state will eventually follow the national trends.

For starters, Abair said life sciences firms face competition from established industries like information technology, and nascent ones like social media and clean energy, all of which promise quicker returns. Investors have also become skittish about keeping their money in a company for more than six years after witnessing economic downturns in 1987, 1993, 2000 and 2007 that ended up derailing drug development plans, Cauwenbergh said.

Therefore, venture capitalists remaining in biotech are gravitating toward low-risk investments in later-stage companies, Abair said. Firms want to see tangible business plans, prototypes and lab achievements to know the ideas work, said Kevin O'Sullivan, president and CEO of Massachusetts Biomedical Initiatives in Worcester.

Local biotech companies have enjoyed recent success though, with Natick-based Karyopharm Therapeutics raising $50 million of venture money in 2013 and Spring Bank Pharmaceuticals of Milford raising $10 million, Abair said.

"People are still finding the value here," said Stephen DeMarco, a PwC partner based in Boston.

But venture capitalists are far from the only place life sciences companies can turn to. Venture funds made up just $4.2 billion of the $24.5 billion invested nationally in biotech in 2012, according to PwC and the NVCA. Some $15.5 billion of that came from alliances with established biopharma companies, such as the RXi-OPKO arrangement.

However, alliances can end pretty quickly, Abair said, while venture firms usually agree to provide money for a specific amount of time.

The stock market has proven to be a popular option, with life sciences firms recently going public after first- or second-phase clinical trials rather than waiting to complete all three phases, DeMarco said.

The effects of the industry's superior performance in the stock market — the NASDAQ Biotech Index was up 60 percent in 2013, outpacing the rest of the market by nearly 50 percent — have trickled down to companies angling to go public. Valuations are extraordinarily high, DeMarco said, and stock prices are often doubling or tripling after an initial public offering (IPO).

Elevated demand caused Karyopharm to up its November IPO from 5.7 million to 6.8 million shares. The stock was valued at $16 for its IPO; as of April 4, it was trading at $29.74.

An emerging option is crowdfunding, which is expected to grow from a $5 billion industry in 2013 to $300 billion in 2025, according to Judd Hollas, founder and chief inventor of the crowdfunding website EquityNet. "In just 10 years, crowdfunding will be five to six times the size of venture capital," Hollas said.

But issues in the life sciences industry — large capital needs and long development lifecycles — will also come into play in crowdfunding, Abair said.

"There are shinier objects on the tree for crowdfunding investors to reach for," he said. n

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