SVB Healthcare Industry Outlook 2015: Investment and Exit Trends Following a Record-Breaking 2014
Silicon Valley Bank recently released a report on global healthcare industry investment and exit trends. The report, divided into three sectors—biopharmaceuticals, medical devices, and diagnostic tools—provides a review and forecast of the healthcare industry from the perspectives of investment, exits, and geographic regions. VCBeat has selected and translated key excerpts from the report, as presented below.
Soaring Healthcare Venture Capital Investment and Returns
The surge in the healthcare sector drove fundraising, investment, and exits in 2014 to their highest levels in recent years, actually surpassing our optimistic projections a year earlier. The number of IPOs in 2014 more than doubled that of 2013, reaching a ten-year high. Strong returns are accelerating capital circulation; within just one year, investors’ fundraising increased by 56%, indicating extremely high confidence in healthcare innovation.
Although we predict that robust fundraising volumes in the coming years will fuel the investment cycle, IPO activity in 2015 may decline slightly.
Key Conclusions and Forecasts
Key Findings from 2014——
In 2014, fundraising for medical risk surged by 56% compared to 2013, reaching a record high since 2008;
Healthcare venture capital investment also saw significant growth, reaching $8.6 billion in 2014, a 30% increase from 2013;
Non-VC investors are flocking to companies preparing for IPOs, providing substantial capital and supporting their successful public listings;
Early-stage biopharma VC investments, along with potential distributions from IPOs and M&A activity, rose 60%, generating $20 billion and reaching a 10-year high;
Biopharmaceutical IPO and M&A Exit Activity Accelerates;
M&A activity in the medical device sector has increased after two years of dormancy, and IPOs have also rebounded;
Large biopharmaceutical companies are highly interested in late-stage diagnostic tools, investing funds to support better drug development tools and companion diagnostics (CD);
VBInsight analysis reveals that capital efficiency is the key factor for a benign exit;
2015 Outlook——
IPO and M&A activities will continue to rise, generating substantial returns and stimulating the capital cycle of fundraising, investment, and exit;
New capital investment and innovative companies will increase compared to 2014;
The trend of rapid exits in 2015 will continue, driven by successful late-stage financing strategies employed by non-VC investors.
Corporate IPO activities will decline, particularly among biopharmaceutical companies, while M&A activity will increase;
IPO activity in the medical device sector is expected to increase in 2015, driven by large equipment companies acquiring early-stage device companies at discounted valuations;
Diagnostic tool companies are poised for high returns, yet challenges remain. Tech and big data giants are beginning to focus on the diagnostic tools sector, with many likely to pursue major acquisition strategies;
Soaring Risk Capital and Investment Drive Medical Innovation
1) The proportion of total healthcare venture capital investment has slightly decreased
The biopharmaceutical, equipment, and diagnostic tools sectors accounted for 18% of total venture capital investment in 2014, down from 22% the previous year. This decline was driven by exponential growth in overall venture capital funding rather than a waning interest in the sector. In fact, healthcare venture capital investment rose by 30% compared to 2013, reaching $8.6 billion and marking a new seven-year high.
2) Healthcare Risk Fundraising and Investment Exceed Expectations
Fundraising for healthcare risk surged by 56% compared to 2013, marking another new high since 2008. Total fundraising exceeded $6 billion, significantly higher than the figures projected in our report last year.
Medical investment also saw significant growth, reaching $8.6 billion in 2014. Among these, biopharmaceutical companies received the most investment, totaling $6 billion.
3) Biopharmaceutical companies attract the most attention from corporate investors in Series A financing rounds
In 2014, corporate investments in biopharmaceutical companies were concentrated in Series A rounds, with the number of Series A transactions increasing by 35% compared to 2013, while transactions in the equipment and diagnostics sectors remained relatively unchanged.
Analysis: What Drives Investors to Inject Capital into the Healthcare Market
Successful large-scale M&A and IPO exits in the biopharmaceutical sector have created a more favorable financing environment, thereby accelerating the capital cycle of fundraising, investment, and exit, which has made more effective capital available for reinvestment.
1) Active biopharmaceutical investors focus on early-stage opportunities and rapid exits
Top 5 Active Investors in Biopharma: Their Investments in Biopharmaceutical Companies from 2013 to 2014 Surged by Over 50% Compared to the Previous Two Years. The Top 5 Investors Were OrbiMed, Atlas Venture, Novo A/S, NEA, and Sofinnova Partners.
Among these active corporate investors, China-based WuXi focused almost exclusively on the early stages of U.S. biopharmaceutical companies during the two-year period from 2013 to 2014.
The number of drug development projects at most biopharmaceutical companies is also increasing; however, the oncology sector significantly outpaces other therapeutic areas in drug development, with the majority of investment transactions in oncology occurring outside the United States and backed by corporate venture capital.
From a geographic perspective on investment activities, investments in the biopharmaceutical sector are primarily concentrated in the Boston/Cambridge area, Northern California, and Southern California, with a significant volume of transactions also taking place outside the United States.
2) Small investors and angel investors mainly focus on the equipment sector
The number of active device investors has declined significantly over the past five years, and the composition of investors has shifted in the last two years. While some investors have ventured into new areas such as biopharmaceuticals and internet healthcare, many investment firms continue to focus on the sector. For instance, New Enterprise Associates (NEA) remains a leader in device investment, while smaller investment firms, including BioStar and Emergent, as well as angel investment groups like Life Science Angels, are also generating increased investor interest.
Investment in cardiovascular and neurological devices tripled, while investment activity in otolaryngology also saw a significant increase.
In terms of the geographic distribution of investments in the medical device sector, California projects secured the most financing, followed by investments outside the United States.
3) Diagnostic tool companies have identified significant demand from biopharmaceutical companies for drug development tools
An increasing number of enterprises are showing interest in the diagnostic tools sector, with corporate entities accounting for half of all active investors. In particular, large biopharmaceutical companies are most interested in developing companion diagnostics and drug R&D technologies for monitoring clinical trials.
However, this sector has long been commercialized; in 2014, more than half of the diagnostic tool companies that secured Series A financing were already profitable.
In terms of geographic distribution, Northern California and regions outside the United States recorded a higher number of investment transactions. Among countries outside the U.S., Germany and Israel were the most active, with 5 and 3 deals, respectively.
4) Non-VC Investors Flock to Companies Preparing for IPOs
Over the past two years, a large number of non-VC investors have emerged in the market, particularly hedge funds, providing substantial financing to companies preparing for initial public offerings (IPOs).
The Frenzied IPO Market and Large-Scale M&A Deliver Substantial Returns
1) "First Movers" Reap the Greatest Rewards
The number of IPOs in 2014 hit a new high since 2005, with trading volume at least doubling and M&A exit activity surging by 59%. There were 83 IPO transactions and 43 large-scale M&A deals.
2) Large-scale M&A activities span all sectors
The number of IPOs doubled in 2014, large-scale M&A activity was robust, and transaction volume increased by 59%. Moreover, every healthcare sector witnessed major M&A deals in 2014.
Analysis: What Drives IPOs and Large-Scale M&A Activities
1) The biopharmaceutical industry has made tremendous progress
The biopharmaceutical IPO boom has presented some intriguing phenomena. Many have questioned whether it is still viable for companies that are already “well-established” to pursue an IPO. In fact, data from the exit phase of biopharmaceutical IPOs since 2014 indicate that a minimum of six years is typically required for such offerings. As shown in the chart, 44% of these IPOs were still in the preclinical stage or Phase I clinical trials. This also suggests that investors appear more willing to bear the additional risks associated with investing in preclinical assets and prolonged commercialization timelines.
As shown in the chart, the oncology sector will continue to grow. Following a curious lull in 2013, the central nervous system (CNS) field is also expected to see significant activity (M&A and IPOs). Exit activity for anti-infective drugs may also surpass that of previous years, particularly in the IPO market.
2) High Returns on Exit for Medical Device Companies
Despite the lack of spotlight on this sector, medical device companies have demonstrated strong performance, evidenced by an increase in exit activities, capital injections, and multiple rounds of financing. In 2014, there were 18 major M&A transactions, reaching a ten-year high.
3) Late-stage diagnostic tool companies are attracting significant investor interest
In 2014, major M&A and IPO activities in the diagnostics sector increased significantly, with 10 M&A deals and 7 IPOs. These activities reached a ten-year high and were primarily concentrated in the late-stage companies. The acquisition landscape in 2014 was highly diverse, involving large pharmaceutical companies, major medical device manufacturers, as well as diagnostics/testing or MDx companies.
Conclusion
As we can see, the healthcare venture capital sector achieved unprecedentedly robust returns in 2014. For 2015, we predict that a healthy pace of investment and fundraising will continue. The influx of substantial new capital and the launch of numerous startups are expected to match or exceed the overall levels seen in 2014. Corporate venture activities will continue to support the biopharmaceutical and diagnostic tools sectors, while the medical device sector may lag slightly behind. Although large-scale M&A exits are expected to increase, IPO activity may decline modestly (with the exception of the device sector). Stimulated by this environment, non-VC investors will likely pay greater attention to companies preparing for IPOs.
Overall, 2015 is set to be another remarkable year for the healthcare industry, with exit activities expected to continue increasing in the coming years.
Original Authors: Jonathan Norris, Kristina Peralta Compiled by: Mo Renying Edited by: Luo Xiaosou