Trends in Healthcare Investments and Exits 2017Trends in Healthcare Investments and Exits 2017...

Trends in Healthcare Investments and Exits 2017Strong Fundraising and Innovation Fuels Healthcare Momentum

Paul SchuberSenior AssociateSVB Analytics

Written by:

Jonathan NorrisManaging DirectorSilicon Valley Bank

Caitlin TolmanSenior AssociateSilicon Valley Bank

Visit svb.comFollow @SVB_FinancialEngage #SVBHealthcare

Table of Contents

Trends in Healthcare Investments and Exits 2017 2

2016 Key Highlights 3

Healthcare Investments and Fundraising 4

Top 15 Crossover Investors 18

Healthcare Big Exit M&A and IPOs 21

2017 Outlook 43

Glossary 44

About the Authors 45

2016 Key Highlights

• Series A investments set records in all sectors. Recently closed funds have eagerly invested in early-stage technologies.

• Biopharma has kept up with the accelerated pace of overall venture investing between 2013 and 2016. However, crossover investors reduced private investments to focus on taking their portfolio companies public.

• The most active device and Dx/Tools investors grew more diverse - corporate venture, angel groups, incubators and accelerators and private equity - all seeking to fill the void left by traditional healthcare venture. Tech-focused VCs became very active in Dx/Tools.

• Potential distributions declined in 2016 but exceeded 2013 totals. AbbVie’s $9.4 billion acquisition of Stemcentryx dominated the 2016 total.

• Biopharma IPOs, as predicted, declined more than 30 percent from 2015. M&A activity dipped slightly and focused on early-stage deals.

• IPOs for device companies reappeared in late 2016. Big exit M&A activity remained consistent, and surprisingly orthopedics and ophthalmology were the top indications.

• Dx/Tools companies continued to struggle to get to exit and had no IPO activity. Technology advancements in bioinformatics have led to large investment bets, setting the stage for M&A in the coming years.

After an exceptionally strong 2015, we saw a decline in investment in 2016, but fundraising remains at historically robust levels.



Healthcare Investments and Fundraising: Series A Activity Booms

Total VC Dollars ($B) 26.4 31.0 44.2 40.5 44.5 68.7 78.9 74.0

Biopharma 17.0% 12.4% 9.3% 11.6% 10.7% 9.9% 12.5% 11.3%

Device 11.0% 11.3% 8.8% 9.3% 9.7% 6.6% 6.8% 5.3%

0%

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18%

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2009 2010 2011 2012 2013 2014 2015 2016*

Tota

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Total VC Capital Invested ($B) Biopharma as % of Total US VC $Device as % of Total US VC $

Venture investments in companies from 2014-2016 nearly doubled compared with 2011-2013.

Biopharma investments have scaled similarly. During 2014-2016, strong IPO and M&A big exit activity has spurred healthy returns, additional fundraising and an invigorated investment pace.

Device companies maintained consistent overall exit activity, but it took longer to reach M&A exits, and there were fewer IPOs. As a result, many investors shifted dollars to biopharma.

Biopharma Keeps Pace with Overall Venture Investing

5

Biopharma and Device Investment as a Percentage of All U.S. Venture Investing

*Full data for 2016 was not available therefore total VC capital invested in 2016 was extrapolated based on 9/30/16 data and SVB proprietary data.Source: PitchBook, NVCA and SVB proprietary data. The PitchBook data does not contain a separate Dx/Tools category. Most Dx/Tools deals appear to be contained within the biopharma and device categories.

Percentage of U.S. Venture Investing

Trends in Healthcare Investments and Exits 2017

$4.5$3.9 $4.1

$4.7 $4.8

$6.8$9.8

$8.3402 475 459 496

548 562 612

524

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2009 2010 2011 2012 2013 2014 2015 2016*

Pharma & Biotech ($B) Pharma & Biotech (# of Deals)

$2.9$3.5

$3.9 $3.8$4.3 $4.5

$5.3449

486 548

600 598 614 583

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HC Devices & Supplies ($B) HC Devices & Supplies (# of Deals)

BIO

PHAR

MA

DEVI

CE

$3.9

Biopharma Investing Off Record High and Device Declines


Biopharma investments declined 15 percent from 2015 but marked a 20 percent increase compared with 2014. While Series A investments were up, later-stage dollars were down.

The number of biopharma deals slid to the lowest level in four years. We anticipate similar deal and dollar activity in 2017.

Device investments grew annually since 2012, but in 2016 the amount invested was projected to decline 25 percent, down $1.4 billion. That marks a four-year low, and the number of deals was at a six-year low.

For 2017, we forecast device investment dropping to $3.5 billion. However, the recently enacted 21st Century Cures Act could provide additional capital and faster approvals, spurring increased investment.

U.S. Biopharma and Device Investment Dollars and Deals

*Full data for 2016 was not available therefore total VC capital invested in 2016 was extrapolated based on 9/30/16 data and SVB proprietary data. Data updated from initial release.Source: PitchBook, NVCA and SVB proprietary data. The PitchBook data does not contain a separate Dx/Tools category. Most Dx/Tools deals appear to be contained within the biopharma and device categories.

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2009 2010 2011 2012 2013 2014 2015 2016

($ B

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HC $ Invested in Companies HC VC $ Fundraised Gap in Funding

$7.2B

$12.2B

Steady Fundraising Continues as Investments Come Off Record 2015


Spurred by biopharma investments, overall healthcare venture investing continued strong, though below the record year of 2015.

Fundraising was robust as investors who saw large returns in recent years raised new funds.

More than $20 billion in venture funds have been raised since 2013, which will continue to propel investment.

Looking ahead the next two years, we expect investments into companies to level off at $10.5–$11 billion annually through a combination of venture, corporate and other investors.

U.S. Healthcare Capital Invested and VC Dollars Raised

Source: PitchBook, NVCA and SVB proprietary data.

38 4231

60

# of

Dea

ls

39 34 2851

# of

Dea

ls

Total Series A ($M) $1,107 $862 $1,693 $2,199

CVC Deals % / # 28% / 17 27% / 20 25% / 20 24% / 31

Top 3 IndicationsOncologyPlatform

Drug Delivery

OncologyNeuro

Anti-Infective

OncologyAnti-Infective

Neuro

OncologyOrphan/Rare Disease

Neuro

BIOPHARMA

DEVICE

Total Series A ($M) $227 $337 $155 $257

CVC Deals % / # 18% / 7 14% / 6 19% / 6 5% / 3

Top 3 IndicationsImaging

CardiovascularNeuro

CardiovascularNeuro

Vascular Access

NeuroCardiovascularOphthalmology

NeuroRespiratory

Cardiovascular, Orthopedic

DX/TOOLS

Total Series A ($M) $234 $252 $236 $478

CVC Deals % / # 10% / 4 12% / 4 18% / 5 24% / 12

Series A Takes Off in 2016


Biopharma Series A investments were up dramatically, spurred by newly raised venture funds and early-stage exits.

Oncology led indications, and orphan/rare disease placed second.

Series A also grew significantly for device, but corporate investments in early-stage companies dropped off. We expect corporate investment to return in 2017 and see increased engagement by Chinese corporate investors.

Dx/Tools saw meaningful early-stage momentum in 2016.

Dx outpaced tools with 59 percent of Series A dollars invested. At $125 million, Grail was the largest venture-backed Dx/Tools Series A deal we have seen.

U.S. Company Formation: Deals and Investments in Series A

60 75 81129

2013 2014 2015 2016#

of D

eals

Source: CB Insights, PitchBook and SVB proprietary data. Data updated from initial release.

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19

20

26

Venture and Corporate Investment in Biopharma Continues Strong


Most Active New Investors in Biopharma 2015–2016*

Seven of the top 20 investors are corporate. This underscores the continued support and influence of corporate venture in the biopharma ecosystem. Each of the top venture investors has raised a new fund in the last two years. It is likely that this list will not change substantially in 2017 as these top investors are quickly deploying new capital.

After dominating biopharma investing in 2015, crossover activity scaled down significantly in 2016. We discuss crossover investment in biopharma later in this report.

*Most Active New Investors in biopharma defined as Top 44 venture and corporate investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

# of Deals

5

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15

16

17

21

63

1

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7

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Cardiovascular

Gastrointestinal

Ophthalmology

Metabolic

Auto-Immune

Anti-Infective

Orphan/Rare Disease

Neuro

Platform

Oncology

Early Stage Late Stage Undesignated

Oncology, Orphan/Rare CardiovascularTrends:

Oncology Leads Biopharma Investments; Orphan/Rare Disease Sees New Interest


Most Active New Investments in Biopharma by Indication 2015–2016*


Early-stage investment (series A and B) across all indications in biopharma represented more than 80 percent of deals in the last two years. This has been driven by a recent increase in early stage exits.

Orphan/rare disease investments continue to rise in 2016, up from #5 in last year’s paper. This interest was driven in part due to time and cost reduction for gaining FDA approval. In addition, there is typically extended market exclusivity and better commercial economics. Aesthetics/dermatology was not in the top 10 for investments, but tied with oncology for the top M&A indication in 2016.

Massachusetts and Northern CaliforniaSee Majority of Activity


Top 5 U.S. Biopharma Top 5 OUS Biopharma

Most Active New Investments in Biopharma by Geography 2015–2016*


China5 deals $285M

United Kingdom11 deals $379M

Switzerland5 deals $117M

Canada8 deals $417M

Sweden3 deals $96M

NorthernCA43 deals $1,648M

Southern CA20 deals $631M

MA54 deals $2,127M

NY9 deals $316M

WA8 deals $192M

3

4

5

6

7

9

Diverse Investors Focus on Device


Most Active New Investors in Device 2015–2016*

*Most Active New Investors in medical device defined as Top 36 investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

# of Deals

The very diverse list of investors includes venture, corporate, PE, crossovers, angel groups and accelerators. Traditional venture investors have scaled back their investing in this sector.

Corporate investors include Boston Scientific, Medtronic, GSK (through Action Potential), OSF and Johnson & Johnson.

Investors outside the U.S. include LSP, GIMV, and Triventures.

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Drug Delivery

Metabolic

Ophthalmology

Orthopedic

Uro/Gyn

Non-Invasive…

Neuro

Vascular Access

Surgical

Cardiovascular

Early Stage Late Stage Undesignated

New Category of Non-Invasive Monitoring Receives Substantial Investment


Most Active New Investments in Device by Indication 2015–2016*


Non-Invasive Monitoring,Cardiovascular, Neuro Aesthetics/Derm

Trends:

Non-InvasiveMonitoring

For the first time, we are reporting investments in non-invasive monitoring. This category is defined as medical data collectionthrough sensors and other technology. We saw significant investment in this category.

In ranking by deals, orthopedic fell from #2 in 2015 to #7 in 2016, despite continued exit activity in this indication.

Neuro investment activity grew year-over-year, and drug delivery continued to draw investor dollars.

Device Deals Get Boost on West Coast


Top 5 U.S. Device Top 5 OUS Device


Most Active New Investments in Device by Geography 2015–2016*

NorthernCA28 deals $663M

SouthernCA9 deals $318M

WA7 deals $138M

TX7 deals $40M

MA11 deals $255M

Israel5 deals $55M

France3 deals $21M

Switzerland6 deals $180M

Ireland3 deals $47M

Italy3 deals $8M

2

3

4

5

8

Tech-focused VCs Dive into Dx/Tools


Most Active New Investors in Dx/Tools 2015–2016*

*Most Active New Investors in Dx/Tools defined as Top 31 investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

# of Deals

We observed that a number of tech-focused venture investors are pursuing technology advancements that can be leveraged to improve healthcare. Dx/Tools, for example, uses big data and is in a prime position to take advantage of improved tools for bioinformatics.

Tech-focused firms like Data Collective, Felicis and AME Cloud Ventures have emerged as very active new Dx/Tools investors. Other active investors included angel groups (Keiretsu Forum and Golden Seeds), corporate venture (Google Ventures, LabCorp, GE andIllumina) and OUS firms (DeCheng, Invitalia).

Northern CA Continues to be Most Active Region for Dx/Tools


Top 5 U.S. Dx/Tools Top 5 OUS Dx/Tools

NorthernCA19 deals $1,193M

SouthernCA7 deals $345M

UT2 deals $61M

Most Active New Investments in Dx/Tools by Geography 2015–16*

*Most Active New Investors in Dx/Tools defined as Top 31 investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

United Kingdom1 deal $2M

MA7 deals $106M

WA2 deals $24M

Canada4 deals $42M

France3 deals $35M

Israel1 deal $13M

Italy2 deals $6M

Biopharma deal sizes have more than doubled since 2013. Our analysis indicates three major reasons:

• Increased fund size – investors are putting more dollars to work per company

• Series A lasting longer – many of the Series A deals we see are large tranched rounds that provide 3-4 years worth of financing. This allows company management to focus on growing the business instead of constantly fundraising

• Bigger syndicates – larger syndicates mean larger round sizes and also provide financial security. A company can sustain itself for long periods of time with inside rounds if there is a down financial market

Deal Sizes for Biopharma Soar


Dx/Tools

Device

Biopharma

$15.3

$23.0$30.0

$36.0

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*Most Active New Investors in biopharma (60), medical device (36) and Dx/Tools (31) defined as top investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

Median Deal Size for Most Active New Investors 2013–2016*


Top 15 Crossover Investors: Investments Decline as Crossovers Focus on IPOs

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Top Biopharma Crossover Investors 2016

2013 2014 Q12015

Q22015

Q3 2015

Q4 2015

Q12016

Q22016

Q3 2016

Q4 2016 Total

PRIVATEINVESTMENTS 14 74 30 42 68 23 13 13 11 10 298

*Top 15 Crossover Investors: Adage Capital Management, Cormorant Asset Management, Deerfield Management, EcoR1 Capital, Fidelity Investments, Foresite Capital Management, Jennison Associates, Partner Fund Management, Perceptive Advisors, RA Capital Management, Redmile Group, Rock Springs Capital, Sabby Capital, Wellington Management and Woodford Investment Management

Crossover Investments in Biopharma Decline Rapidly


Crossover deals in private venture-backed companies dropped more than 70 percent in 2016 as the IPO market slowed. Crossover investors shifted focus from new investments to managing IPO expectations for still-private companies in their portfolios. A number of those companies went public in 2016, but there remains a backlog of more than 80 companies.

A big question for private portfolio companies seeking additional private rounds: Will crossover investors provide equity support? We expect to start learning the answers in Q2-Q3 2017.

Top 15 Crossover Investors in Biopharma 2013–2016*

*Top 15 Crossover Investors based on new investments in 2015–2016.Source: PitchBook and SVB proprietary data.

*Top 15 Crossover Investors: Adage Capital Management, Cormorant Asset Management, Deerfield Management, EcoR1 Capital, Fidelity Investments, Foresite Capital Management, Jennison Associates, Partner Fund Management, Perceptive Advisors, RA Capital Management, Redmile Group, Rock Springs Capital, Sabby Capital, Wellington Management and Woodford Investment Management

**Other Investors defined as venture-backed IPOs that do not include a Top 15 crossover in private investor syndicate.

Top 15 Crossovers Drive Biopharma IPO Activity


For two years in a row, the top 15 crossover investors drove more IPOs than all other venture investors.

These crossover investors seek a foothold in private venture-backed companies interested in an IPO and typically are major participants in the resulting IPO.

As the overall biopharma IPO market has slowed in recent years, the crossover share of IPOs has grown.

Nearly 60 percent of biopharma IPOs had a top 15 crossover investor (16 of 28) in 2016.

However, crossover-backed IPOs declined significantly (from 11 to 5) in the second half of 2016. We believe crossovers will resume their IPO push in early 2017.

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s

Top 15Crossovers*

Other Investors**

Source: PitchBook, press releases and SVB proprietary data.

IPOs with Top 15 Crossover Investors vs. Other Venture-Backed Investors


Healthcare Big Exit M&A and IPOs:Robust M&A Activity Continues as IPOs Slow

$4.3 $5.4$8.0

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April 2016:Stemcentrxacquired by AbbVie for$5.8 billion

Potential Distributions* Dip from Record High, But Up Cycle Continues


Potential distributions nearly tripled between 2012 and 2015. However, as we predicted, such growth is not sustainable. The slower IPO market led to lower distributions in 2016, though they still outpaced 2013.

In 2016, the value of big exit M&A upfront payments (see brown columns) outpaced pre-money IPO values for the first time since 2012. The Stemcentrx acquisition accounted for about half of the upfront M&A proceeds.

In 2017, we expect potential distributions to closely match 2016.

Biopharma 64.4% 79.9% 69.0% 69.2% 79.2%

Device 26.6% 12.2% 21.2% 22.2% 17.1%

Dx/Tools 9.0% 7.9% 9.8% 8.5% 3.7%

Potential Distributions from VC-backed IPOs and Big Exit M&A 2012–2016

*Potential distributions calculated as 75% of upfront payments, 25% of milestones, and 75% of pre-money IPO value.Source: PitchBook, press releases and SVB proprietary data.

Pre-Money IPO ValueBig Exit Milestones to be EarnedBig Exit Upfront Payments

Biopharma Big Exits and IPOs Slow Down


We predicted IPOs would decline to about 7-8 per quarter, and 2016 ended with 28. We saw a steep decline in Q4.

We were surprised to see M&A activity decline, with a 2016 total of 17 deals. Still, that's coming off an exceptionally strong 2015 (22 deals), and 2016 activity marked the second highest level since 2012.

Orphan/rare disease exits increased to match oncology, with 7 exits each (M&A and IPOs). Exit activity also increased for aesthetics/ dermatology, rare (non-genetic) and metabolic indications.

Neuro, cardiovascular and anti-infective saw the largest declines in exits in 2016.

VC-backed Biopharma Exits 2012–2016


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IPO M&A

Acquirers Flock to Early-StageBiopharma Companies


Early-stage big exits continued to dominate in 2016, with more than half occurring in pre-clinical and phase I. These indications included orphan/rare disease, neuro, oncology, aesthetics/dermatology and auto-immune.

Aesthetics/dermatology tied with oncology for the most M&A activity in 2016 (3 deals). Neuro and orphan/rare disease had two deals each.

Early-stage M&A activity is expected to continue in 2017. If corporate tax repatriation should occur, we think that would free up cash and lead to increased activity above 2015 levels.

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Pre-Clinical Phase I Phase II Phase III Commercial

VC-backed Biopharma Big Exit M&A by Stage 2012–2016

*Stage defined as last completed clinical trial in most advanced asset.Source: PitchBook, press releases and SVB proprietary data.

Biopharma Big Exit Deal Values Are Stable, Despite IPO Decline


In 2016, the median upfront deal value for biopharma big exits was stable and substantial.

The acquirers were a mix of big pharma and large biotech companies. Allergan, at the top of the list, acquired four companies.

A possible new trend in 2017: Avalanche, which went public in 2014, became an acquirer in 2016.

In 2016, we saw four disclosed big exits valued at more than $1 billion (including milestones). In order of total deal size: Stemcentrx, Afferent, Nimbus and Ganymed.

Because of the IPO slowdown, acquirers felt less pressure to act, so time to exit increased.

MedianUpfront ($M) 125 213 225 200 200

MedianTotal Deal ($M) 375 452 413 570 535

MedianYears to Exit 5.1 5.6 4.0 4.2 6.0

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# of

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# of Structured Deals # of All-In Deals

VC-backed Biopharma Big Exit M&A Deal Structure 2008–2016


Number ofExits

Median Years to Exit Pre-Clinical Phase I Phase II Phase III Commercial

Oncology 18 4.3 8 4 4 0 2

Neuro 13 4.2 4 1 5 1 2

Respiratory 7 4.9 0 1 4 1 1

Aesthetics/Derm 6 6.1 0 2 2 0 2

Cardiovascular 6 5.7 1 2 1 0 2

Auto-Immune 5 3.7 2 2 1 0 0

Anti-Infective 5 5.6 1 3 1 0 0

Orphan/Rare Disease 4 1.4 1 1 2 0 0

Ophthalmology 3 4.1 0 0 2 1 0

Oncology, Neuro Lead Biopharma Big Exits; Orphan/Rare Disease Gains Early-Exit Traction


VC-backed Biopharma Big Exit M&A by Indication 2012–2016

*Stage defined as last completed clinical trial in most advanced asset. Source: PitchBook, press releases and SVB proprietary data.

Oncology saw the highest number of big exits since 2012, and 12 of 18 were early stage (pre-clinical or phase I).

Orphan/rare disease has attracted significant venture investment in recent years, and now we are seeing remarkably quick exits: 1.5 years from Series A equity raise. Six of 9 indications (highlighted above) have a median time to exit of 5 years or less.

Anti-Infective and Cardiovascular See Largest Upfront Multiples


VC-backed Biopharma Big Exit M&A by Indication 2012–2016


Number of Exits

Median Invested ($M)

Medium Upfront ($M)

Median Upfront Multiple

On VC $

MedianTotal Deal ($M)

Median TotalDeal Multiple

On VC $

Oncology 18 $33 $238 6.7x $668 15.2x

Neuro 13 $50 $185 3.1x $550 6.8x

Respiratory 7 $36 $135 3.2x $430 5.4x

Aesthetics/Derm 6 $32 $237 4.1x $310 10.6x

Cardiovascular 6 $38 $250 8.3x $1,125 25.5x

Auto-Immune 5 $27 $225 3.5x $325 10.2x

Anti-Infective 5 $40 $325 9.4x $464 9.4x

Orphan/Rare Disease 4 $43 $128 2.9x $252 6.6

Ophthalmology 3 $42 $160 1.9x $300 6.8x

The median equity round size in 2016 was substantially larger than the median total invested for exits during the 2012–2016 period. This leads to a concern that the recent large round sizes may negatively affect future exit multiples.

Cardiovascular and oncology saw the largest milestone upside.

Early-Stage Biopharma Companies Continue March to IPO


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VC-Backed Biopharma IPOs by *Stage 2012–2016

*Stage defined as current clinical trial in most advanced asset.Source: PitchBook, press releases and SVB proprietary data.

For a third year, early-stage (pre-clinical and phase I) biopharma IPOs continued strong, accounting for 46 percent of all 2016 biopharma IPOs. However, there was a significant decline from the first half of 2016 (10 of 18) compared with the second half (3 of 10).

The early-stage trend has been fueled by crossover investors putting up large pre-IPO venture rounds. In fact, venture-backed biopharma companies with a top 15 crossover investor accounted for more than 70 percent of early-stage biopharma IPOs in 2015-2016.

Dollars and Values Decline as IPOs Wane


# of IPOs Raised Over $100M 1 8 12 13 1

% of IPOs Raised Over $100M 10 24 18 32 4

$202

$182

$141

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$156

$61$71

$62 $70

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Med

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The number of large IPOs declined significantly in 2016: Intellia, which focuses on orphan/rare diseases, was the only $100 million-plus IPO. In 2015, nearly one of three IPOs raised $100 million-plus.

Median pre-money valuations dropped to $156 million, compared with nearly $200 million in 2015. Still, 2016 was higher than 2014. We think a key reason crossover investors retreated from the IPO market in the second half is that pre-money valuations plummeted in Q2 and Q3 2016.

On a positive note, Q4 2016 saw two solid venture-backed IPOs: CRISPR Therapeutics and Ra Pharmaceuticals. Each company raised $90 million-plus with healthy pre-money values and appear to be holding their values post-IPO.

VC-backed Biopharma IPOs by Pre-Money Valuation and Dollars Raised 2012–2016


Company IPOIPO Pre-money

Value ($M)Acquisition

Acq. Price ($M)

Upfront

Acq. Price ($M) in

Milestones

Total Deal Size ($M) Acquirer Sector Indication Stage*

May. ‘15 RM** Sep-16 $695 $1,000 $1,695 Biopharma NASH Phase III

Sep. ‘14 $69 Sep-16 $639 $0 $639 Biopharma Auto-Immune Phase II

Jun. ‘14 $230 Nov-15 $2,700 $0 $2,700 Biopharma Cardiovascular Phase III

Feb. ‘14 $186 Mar-15 $3,500 $0 $3,500 Biopharma CNS Phase III

Sep. ‘13 $315 Jan-15 $1,000 $0 $1,000 Dx/Tools Dx Commercial

Jun. ‘13 $596 Nov-14 $680 $160 $840 Biopharma Orphan/Rare Phase III

May. ‘13 $55 Sep-14 $315 $95 $410 Biopharma Oncology Phase III

May. ‘13 $182 Jul-15 $7,200 $0 $7,200 Biopharma Auto-Immune Phase III

Jul. ‘12 $94 Oct-14 $675 $147 $822 Biopharma Anti-Infective Commercial

Total $18,806

Acquisitions of Newly Public Companies Soar, Generating Significant Returns


VC-backed IPOs Acquired within 2.5 Years from IPO/Reverse Merger 2013–2016

*Stage defined as current clinical trial in most advanced asset. **RM defined as reverse merger.Source: PitchBook, press releases and SVB proprietary data.

The hot IPO market of the previous few years enabled many promising healthcare startups to go public. Over time, with ensuing data releases, larger companies snapped them up at significant valuations. Between 2013 and 2016, acquirers spent nearly $19 billion on these companies.

Biopharma Landscape – Oncology Exits


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VC-backed Biopharma Big Exit M&A and IPO in Oncology 2013–2016

*Stage for M&A defined as last completed trial in most advanced asset. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.

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VC-backed Biopharma Big Exit M&A and IPO in Neurology 2013–2016

*Stage for M&A defined as last completed trial in most advanced asset. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.

2016: Undisclosed partnership payout

M&A* Pre-ClinicalM&A* Phase IM&A* Phase IIM&A* CommercialIPO**

Device Big Exit M&A Charges On as IPOs Disappear


VC-backed Device Exits 2012–2016


In 2016, device big exit M&A activity declined from the highs of 2014 and 2015, but beat 2013. Surprisingly, 2016 M&A exits declined each quarter, ending with a single deal in Q4.

Orthopedic (4 deals) and ophthalmology (3 deals) led indications in 2016. This marks a change: since 2012, orthopedic ranked #4 and ophthalmology #5 in big exits.

Surprisingly, Medtronic, the leading acquirer in earlier years, made no VC-backed acquisitions in 2016.

Device IPOs reappeared in late 2016. Two 510k product companies (Tactile and iRhythm) were FDA-approved, and had a revenue ramp at $50 million-plus at IPO. PMA pathway company Obalon held an IPO immediately after FDA approval, without any significant commercialization.

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Non-Approved CE Mark Only U.S. Commercial

Represents # of IPOs Represents Big Exits

Acquirers continue to focus on buying companies with products that are FDA-approved and commercialized. This puts critical regulatory and commercialization risk squarely on the venture community, increasing investment time and capital required.

All 7 U.S. commercial M&A deals were 510k products. This reflects the investor mindset of the early 2000s, which focused on products with easier FDA-approval paths, instead of PMAs, which had unpredictable FDA outcomes.

That said, PMA companies are being acquired, typically before FDA approval is secured. In 2016, the 3 CE Mark Only and 2 Non-Approved exits were likely PMA pathway companies.

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VC-backed Device Big Exit M&A by Stage 2012–2016*

*Stage defined as current stage in most advance product.Source: PitchBook, press releases and SVB proprietary data.

Device M&A Time to Exit Increases in 2016


Median upfront deal values stabilized in 2016 at $120 million, but we saw a significant number of milestones to be earned.

The time to exit rose in 2016, with 4 exits taking 10 years or more from close of Series A. Just 2 deals had time to exit under 6 years.

We see 510k companies reaching approval and commercialization more quickly compared with 5 years ago. That should lead to quicker time to exit in the next few years.

MedianUpfront ($M) 95 127 180 125 120



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VC-backed Device Big Exit M&A Deal Structure 2012–2016


Cardiovascular, Ophthalmology and Neuro Achieve Exits at Earlier Stage*


VC-backed Device Big Exit M&A by Indication 2012–2016

*Stage defined as current stage in most advance product.Source: PitchBook, press releases and SVB proprietary data.

Earlier stage (non-approved and CE Mark only) are focused in cardiovascular, ophthalmology and neuro.

Commercial-stage products have dominated device exits. Acquirers appear to have limited bandwidth or P&L ability to take on non-approved stories, other than in huge growth markets where they have been forced to buy early based on acquirer competition. Cardiovascular is a good example of this.

Number of Exits

Median Yearsto Exit Non-approved CE Mark Only U.S. Commercial

Cardiovascular 19 6.8 5 4 10

Surgical 13 7.0 1 2 10

Vascular 12 5.8 1 3 8

Orthopedic 8 8.9 0 0 8

Ophthalmology 7 8.2 2 3 2

Neuro 4 5.6 1 3 0

Imaging 3 12.8 0 0 3

Aesthetics/Derm 2 5.6 0 0 2

Cardiovascular and Vascular Lead in Milestone Upside for Investors


VC-backed Device Big Exit M&A by Indication 2012–2016


Cardiovascular and vascular companies typically are acquired before U.S. commercialization, resulting in more milestone earnoutsand a larger gap between upfront and total deal values.

Orthopedic exits typically are ready-made tuck-in acquisitions. The acquirers seek to scale with existing sales staff so the new revenue accrues directly to the bottom line. For this reason, we have seen acquirers target venture-backed orthopedic companies with proven sales ramps which requires more equity investment and reduced multiples for investors.

Number of Exits

Median Invested ($M)

Median Upfront ($M)

Median Upfront Multiple

On VC $

MedianTotal Deal ($M)

Median TotalDeal Multiple

On VC $

Cardiovascular 19 $40 $124 2.6x $250 5.8x

Surgical 13 $34 $110 3.4x $170 3.8x

Vascular 12 $31 $138 4.4x $238 7.4x

Orthopedic 8 $49 $125 2.1x $133 2.3x

Ophthalmology 7 $62 $240 2.7x $400 4.8x

Neuro 4 $56 $188 3.0x $210 3.3x

Imaging 3 $83 $102 1.2x $102 1.2x

Aesthetics/Derm 2 $21 $325 13.7x $325 13.7x

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2016: Undisclosed dealOne cardio development stage

M&A* Non-ApprovedM&A* CE Mark OnlyM&A* U.S. CommercialIPO**

VC-backed Device Big Exit M&A and IPO in Cardiovascular 2013–2016

*Stage for M&A defined as current stage in most advance product. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.

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VC-backed Device Big Exit M&A and IPO in Vascular 2013–2016

M&A* Non-ApprovedM&A* CE Mark OnlyM&A* U.S. CommercialIPO**

*Stage for M&A defined as current stage in most advance product. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.

Dx/Tools Faces Exit Slowdown


2015*

Among the trends we are seeing: new tools to enable drug development and high-end sequencing, and substantial progress in move from invasive diagnostics to simple blood screens and liquid biopsies.

Tech-focused investment in bioinformatics is on the rise. Investors expect these companies to develop technologies faster and become more capital efficient. Still, M&A continued to lag in 2016.

There were no Dx/Tools IPOs in 2016, in the wake of poor after-market performance. All five 2015 Dx/Tools IPOs are trading below their IPO price. Two have seen their share prices fall by half.

VC-backed Dx/Tools Exits 2012–2016


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Tools Sector Grabs Majority of Big Exits


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VC-backed Dx/Tools Big Exit M&A by Stage 2012–2016


For the first time since 2012, Tools exits outpaced Dx in 2016.

Over the last two years, tools exits earned stellar multiples on capital. The average upfront multiples exceeded 14x (median 7x), and had shorter exit times.

With burgeoning interest from tech-focused VCs, Tools are advancing quickly and we expect exits (particularly for NGS and drug discovery) to increase in 2017.

While Dx exits declined in 2016, we see a significant number of companies ramping revenue towards $30-$50 million. We think that level should attract acquirer interest.

Some early-stage Dx companies, using advancements in assay development and bioinformatics, may morph into drug development companies.

Dx/Tools Sees Stable Deal Values But Time to Exit Rises


Upfront M&A values remained stable, while total deal value went up. Time to exit more than doubled from 2015.

We have seen several advancements in Dx/Tools that will allow for faster, cheaper technology development, which could help continued engagement and collaboration with biopharma. We hope that these advancements will spur exit activity and reduce time to exit.

Valuable assets have commanded a premium (Assurex and ACD), however we think acquirers are being selective, waiting to get specific assets at the right price. Part of the slowdown could be a timing issue as the acquirers were busy completing and digesting big mergers in 2016.

MedianUpfront ($M) 127 350 133 164 175



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VC-backed Dx/Tools Big Exit M&A Deal Structure 2012–2016


In last year’s report, we predicted 2015 would be a hard act to follow. And we were right. Here are our projections for 2017:

• Healthcare investments will closely match 2016 levels, and biopharma will continue as the strongest sector.

• Fundraising will come close to 2016 amounts, though may decline slightly. The current quick pace of investing may lead firms that raised in 2014 or early 2015 to return to the market in 2017, bolstering fundraising.

• After a remarkably strong 2016, Series A investments in biopharma may drop as funds turn their attention to supporting Series B and later stage companies that are unable to go public. Device and Dx/Tools likely will be stable.

• The biopharma IPO window will remain open in 2017, anticipating between 28 and 32 IPOs (compared with 28 in 2016). Crossovers will continue to actively push their companies public. At least half of the biopharma M&A big exits will be for early-stage companies, with the total number expected to reach between 18 and 22.

• After a very slow 2016 (three IPOs), device IPOs will at least double. M&A activity likely will remain stable (13 in 2016), driven by a flurry of early-stage acquisitions.

• Dx/Tools big exit M&A activity will rise in 2017 and may reach double digits (four in 2016). We anticipate at least one major acquisition of $1 billion-plus in total deal value.

2017 Outlook: Healthcare Trends Continue Positive Cycle


Glossary


Big Exit

Big Exits are defined as private, venture-backed merger and acquisition transactions in which the upfront payment is $75 million or more for biopharma deals and $50 million or more for device and Dx/Tools deals.

Initial Public Offering

IPO is defined as a venture-backed company raising IPO proceeds more than $25 million.

Deal Descriptions

Structured DealThis is a pay-for-performance system that pays some of the consideration up front, but sets milestones in development that must be achieved before the full value of the transaction will be realized.

All-in DealAll consideration for the deal is paid when the deal closes.

Big Exit Upfront PaymentsThe upfront payment refers to payments in a structured deal that are made at the close of the deal; it does not include milestones.

Big Exit Milestones to be EarnedThe milestones to be earned refer to payments in a structured deal that are made after the predetermined goals are met.

Total Deal ValueThe total deal value of a structured deal includes both the upfront payment and the milestones to be earned.

Time to ExitCompany time to exit, measured from the close of its first institutional round of financing.

Regulatory

Non-approvedNon-approved refers to a device company that has no regulatory approval for its product.

CE Mark OnlyThis refers to a device company that has a CE Mark approval but has not received FDA approval. CE Mark is a European Union designation that is less difficult to obtain than FDA approval, and the approval process typically has a faster timeline.

U.S. CommercialCommercial refers to a device company that has an FDA-approved product, and typically is in commercial stage.

Series ASeries A companies are defined as U.S. companies raising their first round greater than $2 million in equity or backed by institutional or corporate venture capital.

Corporate InvestorCorporate investor is defined as both venture and parent company investment into venture-backed companies

Indication Definitions

NeurologyCNS, pain, and psychology comprise neurology.

Non-Invasive MonitoringDefined as medical data collection through sensors and other technology.

About the Authors


As a Managing Director, Norris oversees business development efforts for banking and lending opportunities as well as spearheading strategic relationships with many healthcare venture capital firms. He also helps SVB Capital through sourcing and advising on limited partnership allocations.

In addition, he speaks at major investor and industry conferences and authors widely-cited analyses of healthcare venture capital trends. Norris has more than 16 years of banking experience working with healthcare companies and venture capital firms. Norris earned a bachelor’s degree in business administration from the University of California, Riverside, and a juris doctorate from Santa Clara University.

Jonathan NorrisManaging DirectorSilicon Valley [email protected]

As a Senior Associate with SVB Analytics, Schuber leads strategic advisory and valuation engagements, specializing in the life sciences. Prior to SVB Analytics, Schuber facilitated clinical trials on behalf of pharmaceutical sponsors and pre-clinical trials to advance medical school research, which included writing and implementing IRB and IACUC protocols. Schuber’s healthcare experience also includes working as an emergency medical technician and an electrocardiogram technician. He has a background in technology as well, working in many roles, including chief technology officer of an e-commerce company.

Schuber earned a master’s degree in the business of bioscience from Keck Graduate Institute of Applied Life Sciences while also studying at Claremont McKenna College at the Robert Day School of Economics and Finance. Schuber earned a bachelor’s degree in biology, emphasis in physiology and minor in chemistry, from California State University, Long Beach.

Paul SchuberSenior Associate SVB [email protected]

Caitlin is a Senior Associate with SVB’s Life Science and Healthcare team. A five-year veteran of the team, she provides market research and targeted analysis of historic and current investment trends within the life science and healthcare venture capital industry. Caitlin works to strengthen and deepen relationships to build the SVB network and offer meaningful connections for both VC firms and SVB clients. Her passion for innovation is evident in the work she does every day to identify emerging industry and market trends.

After graduating with honors from the University of Massachusetts, Amherst, Caitlin joined Silicon Valley Bank as a client service advisor in 2007. She then held a role in SVB’s Global Sales and Solutions group and helped to drive various product and service solutions, particularly in cash management and payments.

Caitlin TolmanSenior AssociateSilicon Valley [email protected]

mailto:[email protected]

mailto:[email protected]

About Silicon Valley BankFor more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance.©2017 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). CompID-Jan2017-172

About SVB AnalyticsSVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.

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