Long ignored in favor of enterprise software, social networking and other sexy Internet technologies, biotech has roared back in the past year.
With drug companies desperate to replace expiring drug patents, and President Barack Obama's new health care law demanding cuts in medical costs, Wall Street has shown a seemingly insatiable appetite for initial public offerings of stock. Last year's 35 IPOs, including seven in the Bay Area, represented the most in the sector in nearly a decade. In the first two months of this year, 17 others have launched -- shattering records.
"It is absolutely amazing," said Greg Vlahos, who heads the U.S. life sciences practice for PricewaterhouseCoopers.
Others call it good news for Silicon Valley's tech ecosystem, making it less reliant on the booms and busts of any one sector. Even as venture capital firms have piled money into enterprise software companies over the past year, biotech held a solid grip on second place in PwC's latest MoneyTree report, prepared with Thomson Reuters and the National Venture Capital Association to track venture investment around the country.
It was a marked shift from the previous few years, when venture capital firms fled life sciences amid dismal returns. Some venture firms spun out their health investing arms or shut them down altogether.
"In 2008, before the Lehman Brothers decline, there were about 150 funds that were investing in life sciences companies. Today, there's less than 40," said Mir Imran, who's been launching and investing in Bay Area health startups for two decades.
That tough funding environment, in fact, planted the seeds for the current renaissance, Vlahos and Imran agreed. Companies that survived the dry spell and successfully got new drugs through the long process of federal approval "were ready for IPOs when the markets became welcoming," Imran said.
Now that the markets are taking notice, he added, the endowment and pension funds that invest in venture capital firms are once more giving the green light to biotech deals. "A number of venture funds have been able to raise a sizable amount of dry powder to invest in new companies," said Imran, chairman of San Jose-based InCube Labs, which develops implantable medical devices and drug delivery systems.
Another reason he cites for the booming biotech IPO market is that many blockbuster drugs developed in recent decades by large public pharmaceutical companies are approaching a "patent cliff" -- meaning other drugmakers will be free to start producing lower-cost, generic versions of those therapies. For companies desperate to find new drugs on which to bet, buying startups armed with recent patents is often less expensive and easier than developing products from scratch.
Imran notes than an IPO often speeds the way to an acquisition by setting a clearly defined value on the acquiree's shares. Indeed, another new PwC report notes that mergers and acquisitions in the life sciences industry spiked 24 percent in the last quarter of 2013, with 31 companies snapped up for a total of $37 billion.
"Big pharma" appears well-armed for a continued buying spree: Of the 16 public drugmakers that boast market capitalizations greater than $50 billion, 13 saw double-digit increases in share price last year, according to a recent analysis by Forbes.
Vlahos said that while investor demand for cancer-fighting drugs remains strong, smaller biotech companies have begun making real progress in other areas, such as Alzheimer's and Parkinson's diseases. Those ailments had previously seen little investment because effective drug development had stalled.
"The money is going into companies that are looking at novel therapies and big markets," said Vlahos, speaking not just of venture capital but also about the startups that have recently been going public.
Still another factor driving the uptick in life sciences investing is Obama's new health care law. With renewed mandates to cut costs, "Health care economics is now playing a role in virtually every diagnostic and therapeutic that's being developed," Imran said.
Vlahos said it's too soon to declare the biotech drought officially over, at least until Wall Street weighs in on the next batch of IPO hopefuls.
Imran, who's been in the game long enough to recognize that it runs in cycles, doesn't expect the current boom to last more than another year. In large part, he said, that's because venture firms have been focused on mature biotech companies with drug candidates deep in the approval pipeline, neglecting early-stage companies that might develop novel therapies two or three years from now.
To help bridge the gap, Imran recently launched a "crowdfunding" service called VentureHealth to match accredited investors with life science startups.
One thing that doesn't worry him is that only one of 2014's biotech IPOs so far has been launched by a Bay Area company.
"Silicon Valley," Imran said, "is still considered the center of biotech."
Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.
These Bay Area biotech companies have gone public during the past year's banner run:
Five Prime Therapeutics, South San Francisco
KaloBios Pharmaceuticals, South San Francisco
OncoMed Pharmaceuticals, Redwood City
Portola Pharmaceuticals, South San Francisco
Relypsa, Redwood City
Revance Therapeutics, Newark
Ultragenyx Pharmaceutical, Novato
Veracyte, South San Francisco
Source: Thomson Reuters; PricewaterhouseCoopers