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Venture Investors Flock to Silicon Valley Biotech

June 25, 2015

Biotech is in the midst of an investment boom, at least in Silicon Valley. In the first quarter of this year, biotech firms in the region raised $574 million, the third highest quarter on record, according to data from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) and reporting by the San Jose Mercury News. This peak represents a 103 percent increase over the same quarter the previous year. Nationwide, the sector is poised to attract a record-setting $7 billion this year, according to Bloomberg Business. However, Silicon Valley's biotech boom is less apparent in other parts of the country.

U.S. biotech investment has generally tracked upward since the collapse that accompanied the 2008 recession. The recovery, however, brought a restructuring of the industry. Over the last seven years, the number of biotech deals secured has declined, while those that have received funding have gotten larger infusions of cash.

In 2008, before the full effects of the crash were felt, 549 companies received a total of $5.2 billion, according to PwC/NVCA data. The following year, 2009, was the nadir of the recession for venture capital, dropping activity to 466 deals totaling $3.9 billion. Since then, the total dollars invested has risen, spiking in 2014 to almost $6 billion. The number of deals, on the other hand, has wavered, hitting a post-recession high of 505 in 2010 and then dropping to 473 in 2014.

A recent report from BIO, Venture Funding of Therapeutic Innovation, and reporting by Sy Mukherjee of BiopharmaDIVE explores how this trend toward fewer, larger investments has played out in the pharmaceutical sector. Many venture capital firms abandoned the life sciences in the aftermath of the crash. Since then, larger firms committed to investing in the industry have pursued larger deals. These firms have favored investments in treatments for novel drug treatments rather than drug improvement R&D.

Earlier this month, Clarus Ventures raised a $500 million fund that will focus on opthalmology, oncology and rare diseases. The fund joins several other supersized funds pursuing novel treatments, including a $527 million fund from Flagship Ventures and a $400 million fund from MPM Capital, according to the Bloomberg Business article. Federal policy changes have made the environment more favorable for new drug R&D, such as an accelerated USDA approval timeline and the Affordable Care Act's 12-year guarantee of data exclusivity for biologics.

While this new attention to biotech and novel drug treatments has brought a flood of new money to Silicon Valley startups, things have not yet developed at the same pace in other regions. The increase in dollars to Silicon Valley firms represents about 42 percent of the total increase in biotech funding between Q1 2014 and Q1 2015. In the past, Silicon Valley had been the strongest single region for biotech investing, but had not dominated the national venture market in the same way it had in software. During that period, however, Silicon Valley increased it share of national biotech venture dollars from 27 percent to 33 percent.

If the record setting forecast for 2015 becomes reality, Silicon Valley may be on track to account for most of the country's biotech investment, as its currently does with software.

Californiaventure capital, bio