Whether it’s the foods we eat or the drugs we take, not a day goes by in the U.S. and abroad when people don’t talk about, or actively seek a healthier, longer life. Our aging population, and the quest to live long, zestful lives, plays into the hands of the life sciences.
According to The Science Journal, the average life span worldwide is 65 for men, and 70 for women, double what it was 200 years ago. In the U.S., the average life expectancy is much greater and improving all the time.
That’s due in large part to our dependence on new drugs, and better healthcare services. What’s more, Americans are willing to pay top dollar for new drugs, which means that any drug or device that solves a significant problem can command premium prices.
Yes, life sciences is hot again. Life sciences companies are grabbing a larger share of a shrinking pool of venture capital. The greater interest in the sector could be long term, as venture firms seek opportunities created by the integration of technology in the drug-development process, and continuing advances in genomics and proteomics.
Additionally, the life sciences industry is maturer today than it was three or four years ago and the critical mass of management talent and institutional investors are much savvier about the sector than ever before.
What makes life sciences products so enticing to many is that they have huge market windows and long product life cycles. They are not like IT businesses where competition springs up overnight and the window opens and shuts too quickly.
The flip side is that, for the venture firms who back life sciences companies, it takes several years to grow and develop a firm to exit. And during that span, the commitment – both financial and human – makes life sciences a challenging category even under the best of circumstances.
It’s the reason why not every firm stays the course. OVP Venture Partners, for example, is bowing out of life sciences investing after nearly 20 years in the category. OVP Venture is the exception rather than the rule. But it is nonetheless a cautionary tale about the risks involved in this ever-evolving sector.
JPMorgan Partners invests around 14% in life sciences, and intends to increase that percentage in the coming years. Mitchell Blutt, a partner at JPMorgan Partners, who focuses on life sciences, says, “These types of companies are a very significant part of our portfolio, and we are gradually building up our life sciences portfolio.”
Unlike OVP, a rather small shop when compared with JP Morgan, the mega firm can wait 10 to 15 years for returns if need be. JPMorgan Partners has close to $1.5 billion invested in healthcare companies, and has executed more than 100 transactions in the sector. However, the idiosyncrasies of investing in life science companies can at times even frustrate a Goliath like JPMorgan.
“It takes a long time to take a drug to market. Our investment in Cor Therapeutics probably took about 10 years to get into a drug stage, and six years to get to an IPO,” says Bill Younger, a managing director at Sutter Hill Ventures, a Palo Alto, Calif.-based early-stage investor. “Often times there is a liquidity event, or return before there is some major introduction of a product.”
JPMorgan Partners’ Blutt said he understands the frustration that goes along with life science investing. “It’s fraught with unique risk. Companies require FDA approval, and investors require special knowledge, and even then who knows how long it will be for a payout,” he says.
Blutt’s London-based counterpart, Philip Rattle, agrees. “You need a combination of skill. You need to know a lot about science, and how to commercialize it. Life science investing gives rewards, but you have to have patience. And you can’t just do a couple of deals a year; you have to really be in it. The due diligence is tough, and you need to have experience,” says Rattle.
Prospect Venture Partners, a Palo Alto-based VC firm that is dedicated to biotech, and life sciences investing, has raised a $450 million life sciences fund, and also agrees that the sector is highly sensitive. “You take people who have expertise, and are the best of the best, and can do the highest quality of due diligence. But firms will always have challenges,” says Russell Hirsch, a managing partner at Prospect.
The Longer You Do It, The Better Off You Are
The sector is countercyclical. The industry fell out of favor in the early- and mid-1990s, when the Clinton Administration threatened mass regulation of healthcare. And now it is up again, in the wake of the dotcom fallout. Whether it is here to stay remains uncertain.
“There was a definite high level of cautious investing, and the public market almost universally disliked the healthcare industry,” remembers JPMorgan’s Blutt. “Then the tech boom was catching fire. You made an investment in that sector, and you could expect a quick turnaround.”
While there might be a longer wait for returns, and more expertise may be required, there are benefits to investing in life sciences. Sutter Hill invested about 35% of its portfolio in the area, and as Younger recalls, “We’ve lost money fewer times in life sciences than in the Wild West of the semiconductor, or IT world. That kind of trouble just reinforces our strong commitment to life sciences.”
“A firm can make a difference here. And if you took a snapshot of how any one sector did, I think you will find sectors outperforming, and under performing life sciences,” says Prospect’s Hirsch. “All in all, it’s a phenomenal business to be in. A drug that comes to market gets a 17- to 20-year government forced monopoly; the returns on that can be huge. Within this very large sector there are fabulous opportunities, and we are definitely sticking to our knitting.”
Not so with OVP Venture Partners. The Kirkland, Wash.-based fund is readying to close its sixth fund of $200 million this month, but will no longer invest in life sciences. The firm has managed six funds, and its third fund, which raised $36 million, was completely devoted to early-stage, life sciences companies. That fund produced the smallest return the firm had ever had.
“We found we weren’t making as much when we invested in life sciences,” says Chad Waite, chief executive of OVP. “If we were the first money in the Series A rounds, we expect to make 20 or 30 times our money back, we were doing that in the [information technology] area, but not with life science. We were only making about five or six times our money.”
Waite points to an investment that OVP made in Rosetta Inpharmatics Inc. as proof that life sciences just doesn’t pay. Rosetta, which develops a technology that analyzes pharmacological data to predict the effects of potential cancer-fighting drugs, went public in August of 2000. OVP put in a little more than $3 million into Rosetta, investing in the company’s first, and second round, and later sold its shares for $650 million.
“That sounds successful, but because of dilution we didn’t return as much as we would have liked to,” Waite says. “The period of time until success was long, and the amount they needed from investors became fairly significant. This kind of situation was happening over and over to us. These companies seem very successful, and reputable, but in the end we didn’t make the money to justify the risk.”
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