NEW YORK, Feb. 10, 2011 /PRNewswire/ -- Venture capital (VC) funding in the Life Sciences sector, which includes the Biotechnology and Medical Device industries, fell steeply during the fourth quarter of 2010, according to a new PwC US report, "Taking a Tumble," that includes data from the PricewaterhouseCoopers LLP/National Venture Capital Association MoneyTree™ Report, based on data from Thomson Reuters.  Annual venture investment for the Life Sciences sector dropped by 2 percent in dollars from 2009 but increased 5 percent in deal volume, with $6 billion going into 784 deals in 2010.

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Compared with the fourth quarter of 2009, Life Sciences venture funding decreased 42 percent in Q4 of 2010 to $1.1 billion. This decline marked the largest year-over-year decrease since the first quarter of 2009 and the lowest level of funding for the sector since the first quarter of 2003.  Although deal volume was up 5 percent on an annual basis, for the fourth quarter, Life Sciences deal volume decreased by 21 percent to 165 deals when compared with the same quarter of 2009.

One possible reason for the drop-off in funding for the life sciences sector during the last half of 2010 was an increasingly challenging regulatory environment. "During the fourth quarter, we saw tremendous uncertainty relating to FDA approvals, including the 510(k) process for medical devices, which is thought to have affected venture capitalists' outlook," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC. "Until we get more clarity as to the regulatory pathway not only for medical devices, but also for drugs and other biotech products, venture capitalists are expected to be cautious with deals."

The life sciences sector's investment split has remained generally consistent over the past two years. During the fourth quarter of 2010, Biotechnology accounted for 63 percent of funding, while medical devices claimed 37 percent. In comparison, during the fourth quarter of 2009, Biotechnology captured 59 percent of investment in the sector; and Medical Devices, 41 percent.

For all sectors, venture capitalists invested $21.8 billion in 3,277 deals in 2010, an increase of 19 percent in terms of dollars and 12 percent in terms of deals, compared to $18.3 billion going into 2.927 deals in 2009.   The Life Sciences share of total venture capital dollars invested shrank to 28 percent during 2010 from 33 percent in 2009.

In 2010, Biotechnology investing grew by a modest 3 percent in dollars and 8 percent in deals, with $3.7 billion going into 460 deals. The Biotechnology industry, which led all industries in 2009 in share of total dollars invested, slipped into second place during 2010 behind Software, which captured $4 billion in 834 deals.  Medical device investments fell 9 percent in dollars from 2009 to 2010 and finished flat in terms of deals. With $2.3 billion going into 324 deals, the Medical Device industry ranked behind Software, Biotechnology, and Industrial/Energy in dollars invested.

First-Time Financing

During the fourth quarter of 2010, 39 Life Sciences companies received venture capital funding for the first time, capturing $194 million.  This represents a decrease of 12 percent in the number of companies and a 30 percent drop in dollars invested compared to the fourth quarter of 2009.  First-time deals in the Life Sciences sector averaged $5.1 million in the fourth quarter of 2010 compared with an average deal size of $6.5 million in the fourth quarter of 2009.

"We've seen good liquidity for the life sciences sector during 2010, with some IPOs in the fall and a fair amount of M&A activity during the last six months," added Lefteroff. "That uptick in exit activity could lead to an increase in earlier-stage investments going forward. As venture capitalists get liquid on some of their later-stage investments, they can recycle that money back into new investments. And an increase in exits also gives them additional time to take on new investments."

Funding by Subsegment

Three of the seven Biotechnology subsegments exhibited growth in the fourth quarter of 2010 compared to the fourth quarter of 2009.  Dollars invested in the Biotech Research, Biotech Industrial, and Biotech Animal subsegments rose 177 percent, 35 percent, and 136 percent, respectively.   The Human Biotechnology subsegment captured the largest share in the fourth quarter but also experienced the largest drop with $383 million going into 48 deals, a 49 percent decline in dollars and a 27 percent decrease in deals from Q4 of 2009.

Funding for all Medical Device subsegments in Q4 2010 showed double-digit decreases in both dollars and deals from Q4 of 2009.  The Medical Therapeutics category accounted for two-thirds of the dollars and deals during the fourth quarter with $270 million going into 47 deals. This represents a 10 percent decrease in deals and a 46 percent decrease in dollars compared to the fourth quarter of 2009.

Investments by Region

The top five metropolitan regions receiving Life Sciences venture capital funding during Q4 2010 were San Francisco Bay ($269 million), Boston ($227 million), San Diego Metro ($104 million), Chicago ($65 million), and Philadelphia ($55 million).  Investments in Biotechnology deals accounted for 70 percent of the dollars invested in the top five regions in Q4 2010.

Except for Chicago, funding for the top regions decreased on a year-over-year basis during the fourth quarter of 2010. San Francisco Bay received $151 million less in venture capital funding than the same period of the previous year; but the region continued to outpace all others in funding dollars.

A full copy of the report is available for download at www.pwc.com/us/lifesciencesmoneytree

About PwC's Pharmaceutical and Life Sciences Industry Group

PwC's Pharmaceutical and Life Sciences Industry Group (http://www.pwc.com/us/pharma and http://www.pwc.com/us/medtech) provides clients with audit, tax and advisory services. The firm has extensive experience in delivering industry-tailored solutions on a wide range of strategic, financial and operational issues. The Pharmaceutical and Life Sciences Industry Group is part of PwC's larger initiative for the health-related industries that brings together expertise and allows collaboration across all sectors in the health continuum.  Follow PwC Health Industries on Twitter at http://twitter.com/PwCHealth.

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© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

SOURCE PwC