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Monday, Jan 30, 2023

Biotechs Surviving VCs’ Cutbacks Better Than Other Sectors

San Diego’s biotech sector raised more venture capital dollars than any other local industry in the first quarter of the year, according to two recent venture capital spending reports, but it suffered big year-over-year declines.

Locally, 15 biotech companies received $230.5 million in venture funding, according to data compiled by Thomson Financial for PricewaterhouseCoopers and the National Venture Capital Association. That amounted to a 22 percent drop from the first quarter of 2007, when 16 companies received about $293.9 million.

According to the PricewaterhouseCoopers report, 51 percent of investments in San Diego went to biotech. The second largest industry was medical devices, capturing 24 percent of investments. It falls dramatically from there, with information technology services coming in third with 9 percent of total investments in San Diego.

A separate quarterly report by Dow Jones VentureSource reported a more significant decline in San Diego biotech venture capital investments, totaling $172.7 million invested in 11 San Diego deals. That compared with $447 million invested in 14 deals the same quarter last year.

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Whether the data hints at lackluster future spending driven by an economic slowdown or simply a return to spending as usual, compared with the record highs set a year ago, remains to be answered.

A Challenge

“I think the lack of public exits is certainly challenging for us and for us as investors in life sciences companies,” said David Kabakoff, manager of the San Diego office of Sofinnova Ventures Inc., a venture capital firm investing in early-stage life sciences and information technology companies. “In the absence of a robust public market, it’s going to be very difficult for these companies to raise money to fund late-stage clinical trials.”

During the first three months of the year, only five companies backed by venture capital investors went public on Wall Street, and only 56 venture-backed startups were sold, making it the lowest number in a decade, according to Thomson Financial and the National Venture Capital Association.

Kabakoff says that despite the quarterly statistics, a fair amount of substantial capital remains available to San Diego companies.

Sofinnova, which manages about $1 billion, helped account for two of the biggest venture capital investment deals made during the first quarter. Along with a syndicate of other investors, it helped raise $30 million for anti-bacterial drug maker Trius Therapeutics Inc. in a Series B financing round and $35.5 million for Ocera Therapeutics Inc., a biotechnology firm developing treatments for gastrointestinal and liver diseases, in a Series C round.

“We still have a lot of capital to invest,” he said. “For us, it’s actually a very good time.”

A Cautious Approach

Unlike investments of the past, however, Kabakoff says investors are perhaps more careful in choosing their investments and in reserving money for future rounds.

With exit options dwindling, investors must spend money on existing companies rather than building new ones.

BrainCells Inc., a San Diego developer of small molecule therapeutics for diseases of the central nervous system, succeeded in raising additional cash from existing investors in the first quarter to further fund its lead drug for the treatment of anxiety and depression.

Chief Executive Officer Jim Schoeneck says it’s likely the company attracted investment dollars because of the drug’s potential to enter the market faster than the 10 to 12 years it takes many drugs to reach the market. The company in-licensed its lead drug from Mitsubishi Pharmaceutical Corp. in 2006 and has already tested it in 700 patients with favorable results.

“Because the science is really cutting edge, and the practical application is cutting edge, I think the combination is really what allowed us to do that,” he said.


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