Trying times in the life sciences

October 24, 2011|By D.C. Denison, Globe Staff

Despite difficult odds, Foundation Medicine completed a $33.5 million… (David L. Ryan/Globe Staff )

Chip Clark, chief executive of the Cambridge life-sciences start-up Genocea Biosciences Inc., raised $35 million from a group of venture capital firms last year.

It wasn’t easy.

“I would describe the mood as very selective,’’ he said.

It is getting harder for life-sciences start-ups and growth companies, once the darlings of investors, to raise funding from venture capital firms.

Clark’s read on the market was confirmed last week, when the third-quarter 2011 MoneyTree report on venture capital investing showed a steep decline across the country in venture investments in the life-sciences sector, which includes biotechnology and medical devices.

US venture capital investments in life-sciences companies fell to about $1.8 billion in the third quarter, down 18 percent from the previous three-month period, according to the report’s authors, PricewaterhouseCoopers LLP and the National Venture Capital Association.

There were 170 life-sciences deals in the most recent quarter, which was the second-lowest number since the first quarter of 2005.

The decline was much more dramatic in New England, a region where life-sciences start-ups are important drivers of the economy. Venture investments in life sciences plunged 34 percent, to $292 million. There was a ripple effect throughout the region; overall third-quarter investment by venture capital firms in New England companies plummeted, falling 45 percent from the previous quarter to $586 million.

When venture investors lose interest in young life-sciences firms, it creates new challenges for the many regional life-sciences firms that are looking to fund their next stage of growth.

Life-sciences executives and venture capitalists said the reasons for the venture capital drought include the significant investment generally required for life-sciences start-ups to get off the ground, and the long wait - at least seven or eight years - for those investments to pay off.

Also, success for new life-sciences firms depends on Food and Drug Administration approval of a blockbuster drug or a medical device, for example, a process that entrepreneurs and investors say has become more difficult in recent years.

Venture capitalists, who are struggling in a tough economy to make smaller investments pay off faster, are more interested in sectors like software, which does not generally require the time and capital that the life-sciences industry demands, and which does not face regulatory hurdles.

Software was one of the few areas that received more venture investment in the third quarter over the previous quarter.

It took Clark about a year to land the venture funding for Genocea, which is pursuing a new class of vaccines. “That was longer than I expected,’’ he said.