Biotechnology is attracting unprecedented venture capital attention but is not at risk from a lapse in investment discipline, according to research by AltAssets. The report, titled Delivering on Discovery Private Equity Investing in Biotechnology, says institutional investors are showing increasing interest in the sector, which is perceived to be on the cusp of delivering on its commercial promise.
Research shows the long-term drivers for the industry, such as an ageing population, increased spending on medication and pharmaceutical restructuring, are fundamentally sound. However the state of the public markets is one short-term barrier the industry will have to overcome. Other concerns raised by LPs include escalating fund sizes reminiscent of the high tech funds of the late 1990s. According to Chris Davison, head of research at AltAssets, the markets are currently a stark warning of how important it is for investors to have genuine scientific expertise and proven venture experience.
Investment opportunities in biotechnology will continue as a result of advances in science, most influentially the mapping of the human genome. “Biotech has traditionally been an important niche sector for private equity investment, but the industry’s increasingly bright commercial prospects are pushing it firmly into the venture capital mainstream,” says Davison. The research also reveals sophisticated biotech firms, which have learnt exactly what VCs are looking for, are finding it easier to raise money. Key characteristics include definite commercial application, security of patent-protected concepts and effective management.
The report’s findings show the sector is historically under-funded and can now productively absorb increased investment. In Europe particularly, where the supply of capital from public markets to biotech companies lags behind the US, there is an increased opportunity for private equity. The market in Europe is still less competitive; there are currently about 19 biotech firms per European biotech VC, compared with eight in the US.
AltAssets predicts the number of private equity firms focusing on biotechnology will rise from between 250 and 300 worldwide at present to around 350, with new entrants including funds raised by former pharmaceutical and biotech executives. However, institutional investor caution will place a limit on the number of new players since institutional investors avoid first time funds as a general rule.
The most successful funds are likely to be those with US expertise. The prevalence of dual listing among European quoted biotech companies reflects the need for access to US capital and consumer markets. Scientific knowledge and exit capabilities, aided by relationships with the pharmaceutical and biotech industry, will also help differentiate firms.