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VC headwinds continue for life sciences firms

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Indiana life sciences companies trying to raise venture capital continue to do so with a national wind in their faces, according to third-quarter venture capital data.

Venture capital raised by biotech, health care services and medical technology firms through the first nine months of the year totaled nearly $4.9 billion, essentially flat compared with the same period in 2012, according to the MoneyTree Report released last week by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

But that amount of fundraising is off 20 percent from 2011, and 30 percent from 2008 levels, according to the MoneyTree report.

The number of life sciences deals fell 7 percent to 566 nationally, off nearly 25 percent from 2008 levels.

Health care and life sciences firms have been stymied by rising demands from the U.S. Food and Drug Administration, as well as poorer financial prospects as the federal Medicare program and private health insurers get toughter on reimbursement policies. Also, health care technologies take longer to develop than information technology, which has been the hottest area for venture capital.

“The health care sector is what we would call comparatively capital inefficient. It takes more time to get to an exit, whether that be a sale or an IPO, than it does a technology company,” said Brian Williams, a former Indiana venture capitalist who is now a health care consultant for PricewaterhouseCoopers. “That just creates an additional burden on entrepreneurs who want to be effective in [health care]. The ideas have to be that much better to win.”

No Indiana life sciences companies raised venture capital during the third quarter, according to the MoneyTree report.

That won’t help Indiana’s standing against its peers in the Midwest. Through the first half of the year, Indiana ranked 6th out of 11 Midwest states in life sciences venture capital raised and 7th in number of deals, according to data compiled by Ohio-based BioEnterprise, a life sciences business development group.

Five Hoosier life sciences companies attracted $11.7 million in capital from January through June, according to the semi-annual BioEnterprise report.

Those trends have contributed to a dry spell of venture capital in Indiana. Firms here have raised a total of $20.9 million through the first nine months of the year, down two-thirds from this point last year.

In fact, Indiana’s entrepreneurial firms haven’t been close to this low level of fundraising since 2003, when they had raised $24 million through the first nine months.

The only firm to raise venture capital in the third quarter, according to the MoneyTree report, was West Lafayette-based Spensa Technologies Inc., which is making software for the agriculture industry.

Williams acknowledged that Indiana’s software industry is in a transition between the initial public offering or sale of such previous stars as Angie’s List, ExactTarget and Compendium Blogware, and the reinvestment of those earnings into new ventures.

When it comes to life sciences companies, however, Williams, a former aide to former Democratic Gov. Evan Bayh, pinned the blame on Indiana’s public sector. He said cuts in funding by the state government has harmed the competitiveness of Indiana’s universities. Williams’ wife is a lobbyist for Purdue University.

Williams also said Indiana’s failure to fully embrace health care reform is not an encouraging signal to entrepreneurs.

“You’re continuing to tell me as an entrepreneur that I need to bear the economic risk of the health of my employees,” Williams said.

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  • Free Market realities
    Proving once again that life sciences is unlike other industries. Admittedly this sector is subject to regulatory rigour unlike many other businesses; however, the bluster of the free mouseketeers is apparently tempered if guaranteed investment or profits aren't forthcoming from government. This doesn't have to be adversarial. Just a recognition that much of the advancement is complicated, needs and deserves public as well as private support, so we can all benefit.

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