The story of the healthcare venture industry in 2013 can be summed up in three words: initial public offerings. In a year in which the number of venture-capital backed healthcare IPOs tripled, public market enthusiasm helped stabilize venture investment and fundraising overall. It also led to increased valuations of big exit mergers and acquisitions. Venture investment in healthcare saw the biggest returns since SVB started tracking the data in 2005, reaching double the next best year. As we note in this report, the climate for IPOs is cooling. However, we see the current balanced financing ecosystem continuing to prime the innovation pump and encourage smooth capital flow to keep the industry humming.
Text of Trends in Healthcare Investments and Exits 2014
HEALTHCARE INVESTMENTS STABILIZE AS IPOS SURGE The story of the healthcare venture industry in 2013 can be summed up in three words: initial public offerings. In a year in which the number of venture-capital backed healthcare IPOs tripled, public market enthusiasm helped stabilize venture investment and fundraising overall. It also led to increased valuations of big exit mergers and acquisitions. Venture investment in healthcare saw the biggest returns since SVB started tracking the data in 2005, reaching double the next best year. As we note in this report, the climate for IPOs is cooling. However, we see the current balanced financing ecosystem continuing to prime the innovation pump and encourage smooth capital flow to keep the industry humming. WRITTEN BY Jonathan Norris Managing Director Silicon Valley Bank t 650 926 0126 [email protected] Trends in Healthcare Investments and Exits 2014
HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 2 Table of Contents 3 KEY FINDINGS AND FORECASTS 4 VENTURE FUNDRAISING AND INVESTMENT DRIVE INNOVATION 4 Healthcare Drops as a Percentage of Total Venture Investment 5 Venture Fundraising and Investment Stay Strong 6 Trends in New Company Formation 7 Where Is the New Money Going? 10 HEALTHCARE BIG EXIT M&A DIPS AS IPOS SURGE 10 IPOs Triple and Potential Returns Soar 11 Biopharma: Big Exit M&A Activity Reaches Record Valuations 13 Device: Big Exit M&A Activity Declines but Values Increase 14 BIOPHARMA ANALYSIS: WHATS HOT, WHATS NOT 14 Oncology Is the Darling of Big Exits 14 Big Exit M&A Activity Shifts to Later-Stage 16 Companies Choose IPO Route Instead of M&A 17 Large Corporates Increase Acquisitions 18 DEVICE ANALYSIS: WHATS HOT, WHATS NOT 18 Imaging/Diagnostics Pushes Up Big Exit M&A Values 19 Bucking Convention, FDA Approval Not Necessary for Exit 21 Angel Investors and Smaller Funds Fill Device Funding Gap 22 More Capital Flow Is Needed But Tide May Be Turning 23 CONCLUSION SILICON VALLEY BANK PRODUCES THIS ANNUAL REPORT TO GUIDE OUR CLIENTS IN DECISION-MAKING AND TO CONTRIBUTE VALUABLE INSIGHT INTO THE TOP TRENDS IN THE HEALTHCARE VENTURE INDUSTRY. WE ANALYZED PROPRIETARY AND PUBLIC DATA AND FORECASTS TO DETERMINE TRENDS AT BOTH ENDS OF THE PIPELINE: ON THE CAPITAL SIDE THROUGH VENTURE INVESTMENT INTO COMPANIES AND VENTURE FUNDRAISING, AND ON THE LIQUIDITY SIDE THROUGH BIG EXITS AND IPO ACTIVITY.
HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 3 2013 KEY FINDINGS Venture fundraising stabilizes at the $3.5-$4 billion level. Venture investment remains at $6.7 billion, buoyed by the hot IPO market. Healthcare IPOs triple, leading to record potential IPO/big exit returns of $12.5 billion. Corporate venture activity in biopharma bolsters healthy financing ecosystem. Biopharma big exit M&A deals reach record valuations. Biopharma structured deals continue with higher upfront payments. Medical device big exits stay relatively stable, deal values increase. Device M&A analysis finds FDA approval not a necessity for big exits. KEY FORECASTS Healthcare fundraising will see continued stability. Venture investment into companies will slowly drop, then level off. Series A investments in biopharma will remain level. Investment will lag in Series A device, but corporate venture signals more active role. As the IPO market cools in second half of 2014, M&A activity will pick up. Acquirers will show continued strong interest in oncology and diagnostics.
HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 4 HEALTHCARE DROPS AS A PERCENTAGE OF TOTAL VENTURE INVESTMENT Healthcare venture investment in biopharma and device companies accounted for 22 percent of all venture dollars invested in 2013. This is down from the eight-year average of about 27 percent. Still, healthcare remains a major driver of investment in the venture industry (Exhibit 1). 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total VC Dollars ($B) $99 $38 $21 $19 $22 $23 $27 $31 $30 $20 $23 $28 $27 $30 % Biopharma 4% 9% 15% 19% 19% 16% 17% 17% 15% 19% 17% 17% 16% 15% % Device 2% 5% 9% 8% 8% 10% 11% 12% 11% 13% 10% 10% 9% 7% Source: PricewaterhouseCoopers and Silicon Valley Bank % Device% BiopharmaTotal VC $ $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% $Billions 2005 2004 2003 2002 2001 2000 2006 2007 2008 2009 2010 2011 2012 2013 $99 Exhibit 1: Healthcare as Percentage of Total Venture Investment VENTURE FUNDRAISING AND INVESTMENT DRIVE INNOVATION Healthcare as a percentage of total venture investment declined in 2013, but fundraising and investing are stabilizing to drive innovation.
HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 5 Many mezzanine and public funds provided equity financings for later-stage, venture-backed companies to bolster the balance sheet of companies preparing to go public. We think many of these companies would have secured partnerships or accepted M&A deals in the absence of readily available capital influenced by the open IPO window. Those financings led to the lofty company investment number in 2013. We forecast slightly declining investments into venture- backed healthcare companies in 2014 specifically in the second half of the year. The predicted drop is due to fundraising and declining mezzanine financing. The substantial venture funds raised between 2006 and 2008 are now fully invested and will not be available to support existing portfolio companies. The current funding environment is leading to less available venture capital in the market. As long as the IPO window is open, it will influence larger mezzanine financings in the private market. However, the IPO climate is cyclical, and already we have seen the market grow more discriminating, leading to our forecast of fewer mezzanine financings. We believe that some public investors and other momentum- based investors will begin to withdraw as the IPO cycle runs its course in late 2014 into 2015. We forecast that venture investment will drop from the current $6.7 billion and level off at $5-$5.5 billion in the next two to three years. VENTURE FUNDRAISING AND INVESTMENT STAY STRONG As higher returns from M&A and IPOs flow back to investors, and then to limited partners, healthcare venture fundraising has rebounded since dismal 2010. Buoyed by more confident limited partners and corporate venture, fundraising has reached or exceeded $3.5 billion in each of the past three years. A significant number of healthcare funds are raising money in 2014, leading us to predict that fundraising levels will stay the same or slightly increase over the next year. As a result, the fear of a lack of venture dollars to support healthcare innovation has abated for this cycle. Clearly, it is much lower than the top of the previous cycle ($5-$8 billion), but in our opinion, $3.5-$4 billion annually represents a healthy level to support innovation. In fact, higher amounts risk flooding the market with capital and creating too many companies, which happened in the last cycle. We think a key measure of ongoing sustainability is the ratio of capital invested to capital raised. The ratio peaked at three times in 2010, reflecting continued investment into companies from existing funds, but underscoring the venture fundraising drought of that year. In 2013, the ratio stood at 1.7 times, signaling a more balanced ecosystem that should lead to sustainable flows of investment in the future (Exhibit 2). We believe a healthy ratio is between 1.3 and 1.6 times, although ratios can be slightly higher during hot IPO markets such as we are experiencing. The fundraising part of the ratio includes healthcare venture fundraising, but does not track crossover and public investor capital, as well as most corporate venture funds. These sources of capital have increased over the past few years and help make up the difference between venture fundraising and capital invested into healthcare companies. Investment into healthcare companies totaled $6.7 billion in 2013, about equal to the previous year. We predicted a drop in investment, but had not accounted for such a strong IPO environment in 2013. HC $ InvestedHC $ Fundraised Year refers to Vintage Year of Fund. Source: PricewaterhouseCoopers, Thompson Reuters and SVB proprietary data % OverfundedGap in Funding $Billions $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 500% 400% 300% 200% 100% 0% Exhibit 2: Healthcare Funding Gap: Venture Dollars Invested and Raised HEALTHCARE VENTURE FUNDRAISING HAS EXCEEDED $3.5 BILLION IN EACH OF THE PAST 3 YEARS, A HEALTHY LEVEL FOR INNOVATION.
HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 6 TRENDS IN NEW COMPANY FORMATION BIOPHARMA: CORPORATE VENTURE BOLSTERS EARLY-STAGE INNOVATION Strong corporate venture interest in Series A deals is bolstering early-stage innovation a trend that began in 2012 and is leading to stabilized Series A investment. Corporate venture investors participated in 35 percent of Series A biopharma financings in 2013 (Exhibit 3). Large biopharma companies are essentially outsourcing early-stage R&D by investing heavily in young venture-backed companies. We predict that in 2014 corporate venture will continue to participate in at least 30 percent of Series A equity rounds. Corporate acquirers are feeding both ends of the innovation equity spectrum participating in Series A investment through their corporate arms and also aggressively entering the limited partner realm as key anchors for healthcare venture funds. This signals that partnership and big exit M&A with venture-backed companies will continue to fill the deal pipeline for the foreseeable future. Source: CB Insights, Pitchbook, VentureSource and SVB proprietary data 120 100 80 60 40 20 0 $1200 $1000 $800 $600 $400 $200 $0 #ofDeals Total$Invested(M) 2005 20
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