United States: Trends In Terms Of U.S. Life Science Venture Financings (Full Year 2012)

Survey Intro and Background

This survey reflects our analysis of the terms of venture financings for 363 life science companies headquartered in the United States that reported raising money during 2012. The results are summarized below.


Valuations for life science companies receiving venture capital financing during 2012 continued to trend modestly upward from 2011 levels. However, total investment into venture-backed life science companies declined during 2012, and our analysis of fundraising trends indicates that fundraising by life science venture capitalists has continued to decline as well.

Key observations and highlights from our survey include the following:

  • Up rounds outpaced down rounds 52% to 17% during 2012. This represents an improvement over results from 2011, which averaged 47% up rounds and 25% down rounds.
  • The average round-to-round price increase for 2012, as measured by the Fenwick & West Life Science Venture Capital Barometer", increased to 23%. For comparison, Barometer results for 2011 were 14%.
  • Within life science industry sub-sectors, Barometer results for biopharmaceutical companies remained in line with 2011, averaging 16% for both 2011 and 2012. In contrast, Barometer results for medical device companies moved up from an average of 12% during 2011 to an average of 30% during 2012.
  • Fundraising by life science venture capitalists, which fell off markedly following the 2008 recession, has continued to decline during 2012. We estimate that the percentage of VC fundraising allocable to life sciences has declined from 19% of funds raised in 2009 to 12.5% of funds raised in 2012. In absolute dollar terms, we estimate that fundraising has fallen from an average of $7.8 billion/year in 2007 and 2008 to $2.5 billion in 2012.
  • Senior and participating liquidation preferences remained a common feature of 2012 life science venture financings, appearing in 51% (for senior preferences) and 66% (for participating preferences) of the financings we reviewed, which is in line with results observed during 2011.


The financing environment for venture backed life science companies remained challenging during 2012. Capital to fund life science startups is in increasingly short supply, despite indications that long-run demand for life science innovation will remain strong.

As industry participants are keenly aware, funding for life science startups is becoming scarce. Fundraising by life science-focused venture capitalists has been declining since 2009, and appears to be well below the level needed to sustain the current levels of investment. For example, in 2012 investments into venture-backed life science companies were over $6.2 billion, but we estimate that life science-focused venture capitalists raised only $2.5 billion in new funds. While funding provided by corporate investors, wealthy individuals and disease foundations will continue to help to fill some of the gap, there is clearly a shortfall between funds raised and funds deployed.

On the other hand, the potential demand for the innovation produced by life science startups remains strong. In the near term, larger life science companies continue to look to startups for promising new technologies that can bolster product pipelines and offer the potential for higher revenue growth. Consistent with this, 2012 M&A activity, while down from the highs of 2011, remained on par with the robust levels seen during 2010, and Nasdaq healthcare and biotech stocks significantly outperformed the broader market indexes during 2012. Furthermore, long run macroeconomic factors such as an aging world population and rising standards of living in emerging markets will drive increased demand for healthcare products, particularly innovative products that have the potential to improve outcomes and reduce overall system costs.

The current shortage of venture capital financing for life science companies is driving several trends that we see in the market:

  • Life science venture capitalists are making fewer new investments, with PwC and NVCA reporting that 2012 saw the fewest "first time" investments in life companies of any year since 1995.
  • Life science companies continue to go public, but the majority of life science companies going public in 2012 priced below their target range, suggesting that many IPOs are being driven as much by necessity as by choice. See Fenwick & West's IPO Survey for further information on recent trends in IPO activity.
  • Large life science companies are playing an increasingly important role in providing funding to the sector, both through creative partnerships with life science startups and venture capital firms (as described in our 1H 2012 Survey) and through corporate venture investments.

In turn, companies and investors in the life science industry are adapting their strategies to account for current financing conditions. For example:

  • Investors are favoring investments that are seen as having less technology and development risk, such as inlicensing later stage compounds and pursuing treatments for orphan diseases, which can be done with smaller clinical trials and an accelerated regulatory pathway.
  • In a similar vein, investors are also favoring sectors and business models that require less capital to reach commercial potential. The growing interest in digital health and healthcare IT companies, including among investors in traditional FDA-regulated life science companies, represents one aspect of this trend. Likewise, investors continue to be interested in medical device companies, which typically require less capital than biotech companies to advance their products to commercialization, with our survey showing an uptick in medical device company valuations during 2012.
  • Furthermore, companies and investors are both accommodating, and in some cases actively planning for, earlier exits of investments. For example, life science acquisitions now frequently involve significant earn-out payments tied to achievement of post-closing milestones (e.g., analysis by Jon Norris of Silicon Valley Bank), which represents a way for investors and companies to exit at an earlier stage, prior to hitting key valuation inflection points, while still preserving the potential to realize upside returns. It is also becoming increasingly common for companies to take active steps – from the earliest stages of business – to enable an earlier exit. Examples of this trend include strategic partnerships involving a built-in option to purchase (e.g., Resolve Therapeutics recent partnership with Takeda Pharmaceuticals) or put-call structure (e.g., Warp Drive Bio's partnership with Sanofi-Aventis), and the use of tax-efficient structures involving limited liability companies to facilitate partial liquidation events and an earlier return of investor capital.

A more detailed summary and analysis of industry reports and data begins on the following page.

Venture Capital and Corporate Investment

  • Investments in venture-backed life science companies declined significantly during 2012, and remain at levels that are markedly below five-year historical averages.
  • The number of "first round" (initial) life science venture financings reported by the MoneyTree Report fell to the lowest level seen since 1995.
  • Corporate investors participated in 16.7% of life science deals and provided 9.6% of the funding received by life science companies during 2012, according to the MoneyTree Report. This represents an increase from participation in 15.3% of deals and providing 7.2% of funding during 2010 and 2011.

According to Dow Jones VentureSource ("VentureSource"), equity investments in U.S. venture-backed life science companies totaled $6.2 billion across 551 deals during 2012, a 19% decrease in dollars and 12% decrease in deals in comparison to 2011. Within the life science sector, biopharmaceutical investments were off 17% in dollars and 14% in number of deals during 2012 in comparison to 2011, and medical device investments were off 21% in dollars and 10% in number of deals.

The PwC/NVCA MoneyTree Report based on data from Thomson Reuters ("the MoneyTree Report") showed generally similar results, reporting that investments in venture-backed life science companies totaled $6.6 billion across 779 deals in 2012, a 15% decrease in dollars and a 7% decrease in deals in comparison to 2011. The MoneyTree Report showed somewhat more positive results for biotechnology investments, which were reported to be off 15% in dollars but approximately even in number of deals during 2012, as compared to medical device investments which were off 13% in dollars and 15% in number of deals.

For comparison, VentureSource reported that during 2012 overall equity investments into venture-backed companies (measured across all industry sectors) decreased 15% in dollars in 4% in number of deals in comparison to 2011. Similarly, the MoneyTree Report showed a 10% decrease in dollars and a 6% decrease in number of deals.

Healthcare IT and Digital Health Trends

Investments in digital health and other healthcare-related information technologies are continuing to trend upward, with digital health incubator Rock Health reporting that venture capitalists invested $1.4 billion in the digital health sector during 2012, representing a 46% increase in dollars (and a 56% increase in number of deals) in comparison to 2011.

While the Rock Health report indicates that the largest digital health sector by funding was health consumer engagement (representing $237 million of total 2012 funding), the digital health sector also includes big data analytics tools and digital health technologies to support better clinical trials that offer the potential to help shorten the cycle and reduce the cost of biopharmaceutical and medical device R&D.

Venture Capital Fundraising

  • The total amount raised by venture capitalists in all industries increased during 2011 and 2012, but fundraising by life science venture capitalists has continued to decline.
  • We estimate that only $2.5 billion (i.e., 12.5%) of venture capital funds raised during 2012 are likely to be deployed toward life science investments, a decrease from $3.0 billion (i.e., 15%) of funds raised in 2011. For comparison, we estimate that during 2008 — the last year prior to the significant decline in venture capital fundraising that accompanied the recession — $7.8 billion (i.e., 27%) of funds raised by venture capitalists were likely to go toward life science investments.

In overall fundraising, Dow Jones reported that U.S. venture capital funds raised $20.3 billion during 2012, in line with the $20.0 billion raised in 2011, and an increase from the $16.9 billion raised in 2010. Similarly, Thomson/NVCA reported that U.S. venture capital funds raised $20.6 billion during 2012, up from $18.8 billion raised in 2011 and $13.7 billion raised in 2010.

However, our analysis of the underlying data from Dow Jones — which is detailed in chart on this page — indicates that while venture capital fundraising has recovered somewhat in recent years, the portion of funds likely to be allocated to life science investment has declined from 19% of funds raised in 2009 to 12.5% of funds raised in 2012.

In order to estimate life science-related fundraising, we categorized funds based on their stated investment objectives, as either dedicated life science funds (i.e., focusing exclusively on traditional FDA-regulated life sciences), healthcare funds (i.e., making both traditional life sciences and healthcare IT/services investments), multi-industry funds (i.e., making both healthcare and IT/growth investments) or pure IT/growth funds. We then assumed that one half of the amount raised by healthcare funds and one quarter of the amount raised by multi-industry funds would be allocated to life science investment. We would note that neither our analysis nor the underlying fundraising statistics reported by Dow Jones and NVCA capture funding provided by non-venture capital sources (such as corporate investments from "captive" or evergreen funds, and investments by angel investors and disease foundations), which may account for some of the disparity we observe between funds raised and funds invested.

Merger and Acquisition Activity

  • Industry reports indicate that life science M&A activity tapered off from the very strong levels seen during 2011, but remained in line with results from 2010.
  • In the biopharmaceutical sector, various sources (e.g., HBM Partners and Ernst & Young) indicate that 2012 M&A activity was attributable to a broader range of buyers, with large biotech, small/mid-size pharma and specialty buyers participating alongside traditional big pharma players.

As a measure of industry-wide activity, Burrill & Co., which reports on public and private company M&A activity for U.S.- based companies across a diversified set of life science sectors, reported total deal volume of $73.7 billion for 2012, a 22% decrease from the $94.3 billion reported for 2011, but in line with 2010 volume of $71.8 billion.

In the biopharmaceutical sector, the HBM Partners Pharma/Biotech M&A Report ("HBM Report"), reported 22 sales of U.S. venture-backed companies during 2012 (for $2.1 billion upfront, $6.5 billion total possible value), in comparison to 18 sales during 2011 (for $3.7 billion upfront, $6.2 billion total). In the medical device sector, Dow Jones reported 21 medical device acquisitions of U.S. venture-backed companies during 2012, a decrease from the 29 acquisitions reported in 2011.

For comparison, Dow Jones reported that overall M&A activity for venture-backed companies (measured across all industries) decreased 23% in dollar terms and 21% in number of deals during 2012, as compared to 2011.

Initial Public Offerings

  • Life science IPO activity during 2012 remained on par with levels seen during 2011.
  • However, life science companies seeking to go public continue to face a difficult pricing environment, with a majority of 2012 life science IPOs pricing below their target range according to a report by Burrill & Co. and Fenwick & West's IPO survey.

Dow Jones reported that 12 U.S. venture-backed life science companies (10 in the biopharmaceutical sector and 2 in the medical device sector) went public during 2012, on par with the 10 life science IPOs (8 biopharmaceutical and 2 medical device) reported for 2011. Similarly, Burrill & Co. reported 16 life science company IPOs during 2012, even with 16 life science IPOs in 2011.

For comparison, 2012 IPO activity for venture-backed companies, measured across all industry sectors, began strongly in Q1 2012 but then tapered off, ending the year approximately even with 2011 levels. Dow Jones reported= a total of 50 venture-backed IPOs during 2012 (20 of which occurred during Q1), in line with the 46 venture-backed IPOs during 2011.

Public Markets

In the Nasdaq public markets, life science stocks significantly out-performed the broader market index during 2012. The Nasdaq Composite (IXIC) increased 16% during 2012. In comparison, the Nasdaq Biotech Index (NBI) increased 32% during 2012, and the broader Nasdaq Healthcare Index (IXHC) increased 27%.

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