Heathcare venture funding surges in first quarter

Biotechnology and medical-device venture investment soared in the first quarter as funding for information technology and other sectors declined, according to data compiled by Ernst & Young and Dow Jones VentureOne.

Overall venture funding for U.S. companies rose 8% in the quarter, compared to the same period last year. Biotech firms pulled in a record $1.8 billion, more than double what the industry raised a year earlier. Funding for medical-device companies rose 55% to $953 million. The healthcare sector raised $2.9 billion, accounting for 41% of the $7 billion in first-quarter venture investment.

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Venture funding of the IT industry, by contrast, fell 16% in the quarter to $3.1 billion. Software, semiconductors, communications and computers all saw double-digit declines, although investment in information services — presumably reflecting the boom in Web-based services — rose 10% to $722 million.

The surge in biotechnology funding appears to reflect two relatively recent trends in the industry. With Big Pharma now on the prowl to acquire promising biotechs, venture capitalists are thinking harder about how to best dress up their companies for sale. As several VCs recently told the industry newsletter BioCentury (no link available), that frequently means committing biotechs to larger, more rigorous and more expensive mid-stage human tests of experimental drugs. The idea is to generate more reliable data that might catch the eye of a pharma acquisitions hawk, and so far VCs seem willing to pony up for a chance to do so. For instance, Ascenta Therapeutics recently raised $30 million, plus the possibility of another $20 million in milestone payments, to advance an experimental cancer drug through mid-stage trials.

At the same time, VCs do seem to be showing renewed interest in small, early-stage biotech companies — often newly formed companies that take the biggest risks in developing new drugs or even entirely new ways of treating disease. As I wrote earlier, these companies have been out of favor for years, after investors got burned in the biotech-stock mania that accompanied the looming completion of the human genome project in 1999-2000. Now they seem to be edging their way back. According to the VentureOne data, funding for these companies — technically, seed and first-round investments — amounted to $513 million in the quarter, or 29% of all biotech venture funding, up from 26% in all of 2006.

On the other hand, while some VCs have recently asserted that they’ve broadening their healthcare interests beyond biotech and medical devices, the latest data shows no evidence of such a trend. According to VentureOne, funding for healthcare services dropped 57% to $84 million, while that for health-related information services and software fell 27% to $58 million.