Biotech financing: Are early-stage companies hot again?

Venture investors’ interest in early-stage biotech companies may finally be starting to revive, nearly six years after the collapse of a biotech-stock bubble quashed appetites for the industry’s riskiest but often most innovative companies.

Biotech fundraising is certainly booming. The industry newsletter BioCentury (no link available) recently reported that biotechnology pulled in nearly $2 billion in venture capital during the first quarter, topping the previous record of more than $1.7 billion in the fourth quarter of 2000. A recent survey by law firm Fenwick & West* revealed that 79 percent of Bay Area biotechs saw their valuations rise during 2006, compared to 65 percent in 2005. Those rising valuations follow years in which the dreaded “down round” — a funding event that lowers the dollar value of a company — had become commonplace.

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The bigger question, however, has been whether VCs would also renew their interest in early-stage biotechs — companies so young it could them a decade or more to push a new drug or related product through development and the regulatory approval process. Once making up the bulk of biotechnology in the first place, early-stage companies fell out of of favor after the 2000 biotech-stock bubble collapsed. Battered VCs shifted their attention to more mature companies that offered quicker “exits” — that is, profits on the venture investments — via initial offerings or acquisitions. Some in the industry worried that innovative but risky drug development and technologies might languish as a result.

Although it’s still early, venture funding for early-stage companies may be starting to pick up. Last month, for instance, a genetics and molecular-imaging startup called Numira Bioscience raised $2.5 million in first-round funding, $2 million of that from vSpring Capital. A few days later, Affinium Pharmaceuticals, a proteomics company-turned-antibiotic developer, raised $18 million as part of its restructuring and drew in Forward Ventures as a new investor.

Since enthusiasm for biotech tends to wax and wane periodically, VCs such as Phillipe Chambon of New Leaf Venture Partners say the resurgence of interest in early-stage companies reflects “the pendulum swinging back in the opposite direction.” One main reason: Cash-rich Big Pharma companies are desperate to bolster their own drug-development efforts by acquiring biotechs. (Even established biotechs like MedImmune are feeling the pressure to put themselves up for sale.) Since the pharmas are increasingly willing to buy even less mature biotechs, venture capitalists see early exits growing more likely, which in turn makes them more comfortable about funding the industry’s youngest companies.

At least, so goes the theory.

(*Disclosure: Fenwick & West is a sponsor of VentureBeat)