First Quarter Venture Capital Investments Suggest Uncertainties Ahead

Illumina is best known for its sequencing platforms, genomic testing and rapid growth. But the San Diego-based company is taking a leap into new territory: It recently committed $100 million to the creation of a new venture capital fund to help move forward new applications in nucleic acid sequencing, which is the crux of many genomic laboratory tests. The new fund, Illumina Ventures, is headed by Nicholas Naclerio, Illumina’s former vice president of corporate and venture development.

“Under Nick’s leadership, internal venture investing has worked well for Illumina, providing strategic insight and connections to key technologies and channels in our industry,” said Illumina Chief Executive Officer Jay Flatley in a statement. “Participating in an independent fund led by Nick that can leverage capital and know-how from other investors who share our strategic interests is an even more effective way for us to utilize Illumina’s capital to create incremental shareholder value.”

Company officials were reluctant to discuss outside forces that may have dictated the decision, other than the fact that such an arrangement might yield better results for the company in the long term.

“Illumina has for many years been making such investment via an internally managed fund, but as the market grows and scales, we believe we can obtain greater reach via an independent venture that has access to additional capital,” said Eric Endicott, the company’s director of global public relations.

The commitment is relatively small: the $100 million is callable in increments over the next decade. But the fund could raise another $100 million from additional investors if they are not in the business of sequencing, Endicott said.

It is becoming clearer that the laboratory sector may need that kind of investment in the coming months and years, as venture capital funding is trending unevenly at best.

Although MoneyTree, the venture capital tracking organization, does not keep specific tabs on the laboratory sector, it does track biotechnology, medical devices and health care services, the three areas that include laboratory operations.

Biotech showed some promising growth, up 11 percent for the first quarter of 2016 compared to the fourth quarter of 2015, reaching investments of $1.8 billion compared to $1.63 billion, with 118 deals consummated during the quarter versus 99 in the fourth quarter.

But investment in medical devices and health care services tell different stories. Investment in medical devices dropped 22 percent in the first quarter compared to the fourth quarter of 2015, from $648.5 million to $508.3 million. Deals also dropped steeply, to 59 from 83.

Deals in the health care services sector dropped even more precipitously, from $341.1 million to $131.2 million. There were 20 deals consummated during this quarter, compared to 23 in the fourth quarter, strongly suggesting that the companies being funded are receiving investments that are significantly smaller in scale.

Combining the three areas of investment where laboratory-related deals take place, the drop in funding is about $360 million for the first quarter compared to the fourth quarter of 2015.

Overall, there was an extremely steep drop in venture capital investments in the fourth quarter of last year. The number totaled just under $12 billion, down from $16.7 billion in the third quarter of 2015 and $17.3 billion in the second quarter. For the first quarter of 2016, the numbers rose slightly to $12.1 billion.

There was also a drop in investments in new or newer companies. Seed stage investments in the biotech sector dropped 4 percent in biotech; early stage investments dropped 72 percent in the health care services sector and 23 percent in the medical device sector, respectively.

“The first quarter appears to tell us that investors still have faith in the venture ecosystem. However, the increase in expansion and later stage financing, combined with the drop in first-time financing, suggests a shift towards relatively mature startups,” said Tom Ciccolella, a venture capital and private equity assurance partner at PricewaterhouseCoopers, which helps assemble the report, in a statement.

So far this year, the money appears to be going to more mature laboratories.

The biggest funding this quarter is $60 million for Exosome Diagnostics, which will use the proceeds to expand its testing portfolio.

Another big funding this quarter is for the privately-held Quanterix, which manufactures and distributes molecular testing platforms. It received $46 million in series D funding from a variety of venture capital funds. The company said it has reported triple-digit revenue growth for six consecutive quarters.

“With the proceeds from this raise, we will launch desktop instruments in 2017, develop 60 new assays by the end of 2016 and further expand our global reach,” said Quanterix Chief Executive Officer Kevin Hrusovsky in a statement.

Another big laboratory-related funding this quarter includes Veracyte, whose $49.5 million in 2015 revenue and estimates of $59 to $63 million in 2016 from its thyroid and lung cancer-related assays place it in the mature company category. It snagged $45 million in funding—primarily financing—from New York-based Visium Healthcare Partners. It will receive $25 million upfront, of which it will use $5 million to retire existing debt. It has the option of drawing down another $15 million over the next year.

“This agreement provides Veracyte the funding and flexibility we need to advance our business towards having three revenue generating products by the end of 2018. We have a clear path to profitability and will build the business with financial discipline and measured investments,” said company Chief Executive Officer Bonnie Anderson in a statement. But beyond those two investments, there are few in the eight-figure range. GenomeDX Biosciences recently obtained $25.4 million in funding to develop genomic assays to better detect the presence of prostate cancer.

Colorado-based Biodesix brought in $22 million in a series F round of funding to develop new immunotherapy tests and to market its cancer assays.

“With the introduction of immunotherapies, it is more important than ever to invest in developing appropriate diagnostic tests for emerging therapies. Securing this investment allows us to continue to work for the patients we serve,” said company CEO David Brunel in a statement.

Most of the other funding deals announced this quarter have been below $10 million. A couple of deals involve laboratories based overseas, demonstrating the sector’s global growth and outreach.

Takeaway: Venture capital in the laboratory sector may be spotty and unpredictable for the foreseeable future, with more mature operations the most likely to obtain further funding.