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TITLE:  Biotech Investors Worried By Possible Bubble
SOURCE: Private Equity Week, USA, by Jerry Borrell
        http://www.ventureeconomics.com/pew/protected/articles/fundnews/
        1031551158694.html
DATE:   Feb 3, 2003

------------------ archive: http://www.gene.ch/genet.html ------------------


Biotech Investors Worried By Possible Bubble

The Internet bubble. The optics bubble. The biotech bubble?

With the dramatic upturn in life sciences investments in the past year,
longtime biotech investors fear that a glut of capital will create
another bubble of investment into too many me-too startups.

The numbers are impressive-or depressing, depending on your point of
view. The life sciences sector accounted for 22% of all venture
investments last year, up from 13% a year earlier, and ahead of
investments in software, telecommunications, and networking, according to
the annual PricewaterhouseCoopers/Venture Economics/NVCA MoneyTree
Survey. The last time that life sciences accounted for such a large
portion of overall venture funding was seven years ago. Venture
capitalists pumped a total of $4.7 billion into the sector last year,
with $2.8 billion going to biotechnology and $1.9 billion going to
medical devices.

Shahan Soghikian, a general partner at JPMorgan Partners (JPMP), confirms
that long-term investors in life sciences are concerned about a potential
bubble. "We've witnessed many funds shifting from information technology
into biotechnology, as the IT market has soured," says Soghikian, whose
firm invested in about 12 life sciences companies in 2001. Fortunately,
JPMP and its Global Fund I, one of the largest funds in the world at $8
billion (of which about 20% is allocated to risk or venture capital), can
take a longer-term view, as the fund will make disbursements until 2012.

At Frazier Health Sciences in Seattle, one of the country's largest life
sciences investors, founder Alan Frazier says that MoneyTree numbers bear
deeper scrutiny. "Those statistics you cite reflect some key transactions
last year by big pharma companies - not the flow of early-stage capital
into startups," he says. Still, "there is a concern that venture
capitalists are killing a good theme by investing in too many too-similar
firms," Frazier notes. "Are there a few good ideas out there? Yes. Are
there 30? No."

Dan Janney, managing partner at Alta Partners, one of the oldest and most
successful life sciences investors, is raising two new funds dedicated to
the sector. He's sanguine about his firm's biotech investments, assured
by the long experience of Alta's partners and their ability to steer the
firm's investments though what may be the next area of over-enthusiasm as
newer VCs rediscover biotech as a perceived haven for their money.

Alta is raising $250 million Alta Bio Partners III (ABP III), which will
focus on late-stage life sciences deals and PIPES (private investment in
public equity securities). At the same time, it is raising Alta
California Partners IV (ACPIV), a $250 million fund that will target
early-stage life sciences and IT deals. Both funds are set to close by
March 30 with the ongoing support of longtime Alta limited partners, such
as the California Public Employees' Retirement System (CalPERS), TIAA-
CREF, Pacific Corporate Group, and the Hughes Medical Institute.

Alta Partners was founded in 1996 by four of the senior partners of Burr,
Egan, Deleage & Co. It divides its practices into life sciences (bio-
pharmaceuticals) and IT, with 15 professionals (11 in life sciences and
four in IT), who manage the firm's five venture funds (totaling about $1
billion) and the two new funds. Janney says Alta is expanding in life
sciences, having added three new professionals to its biopharmaceutical
practices last year.

Despite the expansion, he's still cautious about the sector. "The biggest
problem in the biopharmaceutical sector at present," Janney says, "is the
same problem affecting the IT sector. All of the major acquirers have
dialed back in their R&D. They have to acquire technology. Whether it's
Intel or Pfizer, acquisitions are a part of their business. And that
bodes well for venture-funded startups."

And that may be the saving grace, at least in part of this investment
space. "I would guess that 70% to 75% medical device startups are
acquired by the likes of St. Jude, Boston Scientific, Guidant, and
Johnson & Johnson" Frazier says. He expects the process of low-risk
technology investment will continue. "About $30 million to $40 million is
invested and then [the resulting company is] sold for around $150
million," he says. "That process is still viable [and it] provides a two
to three times multiple of your investment. But it's different for those
early-stage investors in [pharma] startups."

For example, Immunex (a Washington based, VC-backed company that went
public and was acquired last year, needed about $250 million to $300
million before it broke even, Frazier points out. In the absence of an
active market for new issues, Frazier wonders whether venture capitalists
that are new to life sciences have the patience to build companies of
quality like Immunex.

Alta's Janney concurs that there is no sign that the IPO window will open
in the near term. Asked about the last two years, Janney is unable to
mention a single life sciences IPO that Alta was involved with, despite
the fact that the firm took 12 companies life sciences companies public
in 2000 - a record for all VCs.

However the firm has "a lot of deals teed up and waiting for a market
window," Janney says. When that window will reopen for the firm's
portfolio companies is anyone's guess. Meanwhile, lots of "drive by"
investors are targeting the life sciences as a place to shoot their money.