Indicators that the industry is rebounding continue to roll in. The latest: venture capitalists are spending more on biotechnology companies than in any other sector, and that spending is increasing nicely.

According to the July 16 MoneyTree Report, produced quarterly by PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters, biotech saw a huge, 59% spike in the amount of venture capital (VC) dollars coming in—$1.3 billion—in the second quarter of 2010 versus the first quarter. The number of deals—139—jumped an impressive 34% in the same time period.

Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers as well as head of its global life science practice, said that although funding in the biotech sector ran the gamut from seed all the way to expansion funding in advance of an initial public offering (IPO), funding for younger companies dominated.

“Early-stage deals, even in this environment, are getting more than their fair share
of capital here,” said Lefteroff.

He pointed out that, of the 139 deals in the biotech sector in the second quarter, 59 were early stage and another 42 were seed funding for start-ups, for a total of 101 deals. That’s up from 37 early-stage and 29 seed deals in the first quarter, or 63 of the 104 biotech deals during that time period.

Top biotech funding deals in the second quarter, said Lefteroff, included Tetraphase Pharmaceuticals of Watertown, Mass., which raised $45 million in an early-phase round in June; Redwood City, Calif.-based Incline Therapeutics, which raised $43 million in seed funding in June; and Seattle-based Calistoga Pharmaceuticals, which received $40 million in a series C round, also in June.

The good news for biotech firms is not only access to more cash, but also the expansion of their funding sources beyond just licensing deals with or acquisitions by pharmaceutical companies, explained John Kreger, a financial analyst with William Blair who has been scrutinizing the clinical research space for 15 years.

“The issue now is that pharma has all the money but they’re not very innovative, and small companies that are making innovations are starved for capital,” he said. “Lately, innovative companies have had to rely on big pharma to fund them. But if private equity ramps up, that’s great because it creates competition among funding sources.”

Being pursued by more than one entity that wants to fund your company allows for negotiation and usually a sweeter deal in the end, said Kreger, adding, “If I’m an innovator, that’s a perfect world.”

The uptick in venture capital spending in the space, explained Kreger, is a natural reaction to other positive signs in the industry.

“The IPO market has picked up and M&A has picked up, and VCs can see there’s a clear liquidity there, therefore they’re much more aggressive about making investments,” he said. “When the stock market works, everything else works.”

Kreger added that the VCs’ immobilization before this year was no surprise.

“Because things were so bad in the industry and beyond in late 2008 and early 2009, the VCs were frozen like the classic deer in the headlights,” said Kreger. “VCs think about: do I have an exit? If they don’t, they slow down, move into preservation mode and focus on their existing portfolio.”

The recent robust increase in venture capital dollars to biotech could be very good for medicine in the long run, he added. “Assuming this improved environment continues, this will push capital to the companies that are truly innovators,” Kreger said.

According to the report, total venture capital investment activity in the second quarter rose 34% in terms of dollars to $6.5 billion, and 22% in number of deals to 906, compared to the first quarter, when $4.9 billion was invested in 740 deals.

—Suz Redfearn