By Jonathan Norris, Managing Director, Healthcare Practice, Silicon Valley Bank
U.S. healthcare venture fundraising reached a record $9.6 billion in 2018, continuing a four-year upward trend. This was driven by excellent returns in the sector, especially in biopharma and medical devices. Capital-raising was dominated by large life science funds such as Foresite and Versant, and by new fund spin-offs led by veteran life science investors like Westlake Village and Samsara. In addition, generalists Venrock and Norwest continued to invest in this sector and were joined by new entrants such as Lightspeed and 8VC.
Venture investments in the U.S. and Europe increased 50 percent over 2017, setting a record. The growth in biopharma dollar volume doubled that of 2017 and was about four times that of device and diagnostics/tools volume in 2018. Large pre-IPO mezzanine funding in biopharma drove this increase, with over 50 private venture deals of $80 million or more. Device investment swelled 40 percent in 2018, while diagnostics and tools investment remained stable.
Biopharma Series A dollars increased 35 percent over 2017 to more than $4 billion, led by oncology and platform companies, which accounted for more than half of all deals and dollars. However, there was an overall decrease in the number of deals, meaning that very large Series A deals drove the 2018 jump.
We also noted a decline in corporate venture investment as part of early-stage syndicates. This was partly driven by crossover investors such as RA Capital, Perceptive, Cormorant and EcoR1, which have become prolific early-stage, pre-IPO investors. The crossover value proposition is typically a nice step-up in valuation, but just as important is the addition of a significant follow-on investor in the IPO. We noted that 69 percent of 2018 IPOs in biopharma had participation by the top 15 most active crossover investors in their last private round. Reflecting an optimistic view of the IPO window, these crossover investors restocked biopharma IPO pipelines by funding 60 new private companies in 2018.
Biopharma exits were dominated by IPOs, which accounted for 70 percent of the record $49.3 billion in exit values in 2018. There were 18 $1 billion-plus exits in 2018. Four exits were private venture acquisitions, four were pre-2018 IPOs that were acquired in 2018 in the public market, and 10 companies that exited via IPO in 2018 achieved $1 billion-plus market caps by the end of the year. The total number of IPOs fell short of the 2014 record (66 to 54), but new IPO highs were set in median pre-money valuation ($325 million) and median dollars raised ($100 million).
The number and deal size of M&A transactions decreased in 2018, as most companies raised large rounds and pursued the public market. However, the alternative was to raise fewer dollars and look for an M&A deal. The 10 early-stage private companies that did achieve a merger or acquisition had small dollars invested (median of $17 million), very early data (pre-clinical or phase I), and quick exits (median of 2.9 years from close of Series A). These early exits received lower upfront payments ($100-200 million), but the multiple on invested capital was significant, with a median upfront multiple of 5.4x and a total deal multiple of 22x.
Device investment grew 40 percent in the U.S. and Europe, and Series A dollars rose more than 30 percent to almost $1 billion. Cardiovascular, neuro, and ophthalmology indications led investment in Series A rounds. However, we also saw significant investment in surgical (specifically robotic surgery companies), non-invasive monitoring, and oncology.
While Series A investment surged, most device investment (78 percent of the total) went into later-stage deals. Fresh off four IPOs in 2018, neuro received significant later-stage venture investment, with three $50 million-plus deals for Neuropharma, Reliveant Medsystems, and Stimwave. Meanwhile, urology/gynecology saw significant deals for Procept BioRobotics, Renovia, and AEGEA Medical. Cardiovascular investment was also active, with HeartFlow, Neochord, and Whiteswell all raising big rounds led by crossover investors.
Device exits rallied from a flat performance over the previous two years. Nineteen M&A transactions tied a six-year high, and the $3.5 billion in upfront payments eclipsed both biopharma and diagnostics and tools. In addition, eight IPOs recorded cycle highs in median pre-money valuations and dollars raised.
Boston stepped into the void left by Medtronic and Abbott by acquiring seven venture-backed, private device companies. Oncology, with four M&A exits, tied cardiovascular and orthopedics for the most M&A activity. 510(k) pathway deals continue to require FDA clearance and commercialization rounds before acquisition (32 of 34 exits since 2015), while PMA pathway companies typically get to an exit prior to FDA approval (23 of 26 since 2015). The De Novo 510(k) classification, with four exits since 2017, needed FDA approval and commercialization prior to exit, but had the best overall deal values and multiples.
Diagnostics and Tools
Tech investors continued to dominate new diagnostics and tools investments, making up seven of the 10 most active investors. Incubators and accelerators were also active in spinning out companies. Series A investments dipped in deals and dollars, particularly in diagnostic tests and R&D tools, as investors wait for things to play out, but diagnostic tools and analytics did see increased activity. 2018 R&D tools companies continued to raise money in the later stages, doubling investment dollars over the previous year with large private rounds for 10x Genomics, Twist, Zymergen, Berkeley Lights, and Ginkgo Bioworks—all at post-money valuations of over $400 million.
Diagnostics and tools exits jumped to 10 M&A deals and two IPOs from very limited activity in 2017. Two successful IPOs late in the year by Twist Biosciences and Guardant Health set up the sector for more IPOs in 2019. M&A values continue to lag far behind the private valuations we see in venture financings, with a median M&A upfront deal value of just $105 million. Traditional acquirers continue to dominate the landscape and often look for commercialstage companies to add to their product mix, although we believe the larger technology companies will make significant healthcare plays in this sector over the next few years.
Predictions for 2019
We anticipate total U.S. venture fundraising for life sciences companies to continue at a healthy pace in 2019, reaching about $8 billion, with established funds likely to be joined by new spinout funds anchored by established investors. In addition, tech firms may raise life sciences-only sister funds. hurdles?
Top 15 crossover investment in venturebacked companies could soften by 25 percent or more, leading biopharma investments to decrease and therefore more closely match 2017 numbers.
The biotech IPO pipeline is strong, but market uncertainty could drag the number of IPOs down to 30 to 35 deals and moderately reduce pre-money valuations and dollars raised. As a result, we expect an increase in private biopharma M&A transactions.
Device investments are expected to be stable, with additional growth in Series A. A strong performing group of later-stage, venture-backed companies shows promise for up to eight device IPO opportunities in 2019. We don’t expect much change in device M&A activity relative to 2018.
The number of Series A deals in diagnostics and tools will likely climb in 2019, although overall investment dollars could lag following multiple larger 2017 and 2018 financings. Tech acquirers will likely scoop up a few diagnostics test and diagnostics tool and analytics companies, which could spur an uptick in M&A deal value. Further, we anticipate there could be two to four IPOs of revenue-generating R&D tools companies.
About the Author
As a Managing Director, Jonathan Norris spearheads strategic relationships with many healthcare venture capital firms. In addition, he helps SVB Capital through sourcing and advising on limited partnership allocations and direct investments. Jonathan speaks at major investor and industry conferences and authors widely cited analyses of healthcare VC trends. He has more than 18 years of banking experience working with healthcare companies and VC firms. Jonathan earned a B.S. in business administration from the University of California, Riverside, and a J.D. from Santa Clara University.
By Scott Murano, Partner (Palo Alto)
The data demonstrates that venture financing activity increased from the first half of 2018 to the second half of 2018 with respect to the total amount raised, and decreased with respect to the total number of closings. Specifically, the total amount raised across all industry segments increased 43.3 percent, from $1,353.44 million to $1,939.51 million, while the total number of closings across all industry segments decreased 8.4 percent, from 119 to 109.
Notably, the industry segment with the largest number of closings—biopharmaceuticals—experienced a marginal decrease in number of closings but a significant increase in total amount raised from the first half of 2018 to the second half of 2018. Specifically, the number of closings in the biopharmaceuticals segment decreased a mere 4.3 percent, from 46 to 44, while the total amount raised increased 40.3 percent, from $528.57 million to $741.77 million. Similarly, the industry segment with the second-largest number of closings—medical devices and equipment—experienced a decrease in number of closings but an increase in total amount raised from the first half of 2018 to the second half of 2018. Specifically, the number of closings in medical devices and equipment decreased 41.9 percent, from 43 to 25, while the total amount raised increased 15 percent, from $321.48 million to $369.6 million.
Meanwhile, the industry segment with the third-largest number of closings during the first half of 2018—healthcare services—experienced no change in number of closings but a significant increase in the total amount raised: the number of closings remained at 12, while the total amount raised increased 162.7 percent, from $183.47 million to $481.89 million. The industry segment with the fourth-largest number of closings during the first half of 2018—health IT—was unique among others in that it experienced increases in both number of closings and total amount raised. Specifically, the number of closings in the health IT segment increased 142.9 percent, from 7 to 17, while the total amount raised increased 674.1 percent, from $36.87 million to $285.4 million. The two remaining industry segments—genomics and diagnostics—both experienced decreases in total amounts raised from the first half of 2018 to the second half of 2018. The total amount raised in genomics decreased 88.2 percent, from $229.93 million to $27.23 million, while the total amount raised in diagnostics decreased 36.7 percent, from $53.12 million to $33.62 million.
In addition, our data suggests that Series A (including Series Seed) financing activity and Series B financing activity, in each case as a percentage of all other financing activity, increased from the first half of 2018 to the second half of 2018, while Series C and laterstage financing activity and bridge financing activity as a percentage of all other financing activity decreased across the same periods. Specifically, the number of Series A (including Series Seed) closings as a percentage of all closings increased from 34.5 percent to 37.6 percent; the number of Series B closings as a percentage of all closings increased marginally from 15.1 percent to 15.6 percent; and the number of Series C and later-stage closings as a percentage of all closings decreased from 16.8 percent to 11.9 percent. Bridge financing activity as a percentage of all other financing activity decreased from the first half of 2018 to the second half of 2018, moving from 26.1 percent to 20.2 percent.
Average pre-money valuations for life sciences companies increased for Series A (including Series Seed), Series B, Series C, and later-stage financings, from the first half of 2018 to the second half of 2018. The average pre-money valuation for Series A (including Series Seed) financings increased 80.7 percent, from $13.67 million to $24.7 million; the average pre-money valuation for Series B financings increased 96.6 percent, from $60.13 million to $118.2 million; and the average pre-money valuation for Series C and later-stage financings increased 37.1 percent, from $212.2 million to $290.96 million.
Other data taken from transactions in which all firm clients participated in the second half of 2018 suggests that life sciences is now the the most active industry for investment among our clients. For the second half of 2018, life sciences represented 32 percent of total funds raised by our clients, while the software industry—historically the most popular industry for investment—represented 27 percent of total funds raised.
Overall, the data indicates that access to venture capital for the life sciences industry increased in the second half of 2018 compared to the first half of the year, with the most active segments (in descending order of total closing activity)—biopharmaceuticals, medical devices, healthcare services, and health IT—experiencing significant increases in total dollars raised. Moreover, those dollars were raised at higher valuations across the board—for Series A (including Series Seed), Series B, Series C, and laterstage financings. This increase in access to financing at improved valuations should be a relief to entrepreneurs struggling to find money at the right valuations between the second half of 2017 and the first half of 2018. And, because early 2019 exit activity for our life sciences companies is strong across all industry segments, we would expect this recent increase in financing activity to continue during the first half of 2019.
By Ross McNaughton, Corporate Partner, Penningtons Manches LLP
For many companies in the medtech and diagnostic sectors, identifying the next source of capital is high on the board’s agenda. While many companies opt to secure their next round of financing from venture capital firms, there is an alternative source of capital that is becoming increasingly popular.
The London Stock Exchange’s Alternative Investment Market (AIM) offers access to a supportive, high-quality investor base within a flexible regulatory regime that allows companies to go public at a much earlier stage than would normally be expected for a listing in the U.S. In the life sciences sector, medtech and diagnostic companies that have secured FDA approval, are generating revenue, and ideally have international aspirations, are all potential candidates to raise money via AIM.
This article explains the opportunity and why several North American companies have looked to AIM to raise money.
What Is AIM?
AIM was launched in 1995 by the London Stock Exchange as an international growth market for small- and medium-sized companies to help them access capital from the public markets. Since AIM’s launch, more than 3,800 companies from around the world have traded on AIM, raising nearly £112 billion (approximately $144 billion) in funds.
Companies on AIM operate in over 100 countries and represent 40 different sectors ranging from financial services to healthcare and technology. As of the end of December 2018, 89 of 922 companies trading on AIM were in the healthcare industry and they collectively raised over £480 million (approximately $617 million) on AIM during the period between January and December 2018.
Why List on AIM?
The London exchanges are inherently international in their outlook and there are more international companies listed in London—including approximately 120 North American companies—than on any other exchange. There is a particular opportunity for North American companies to take advantage of this route at the moment; for example, there were 21 North American (U.S. and Canada) listings in 2017,1 five times the 2016 number. Several U.S.-based healthcare companies, including Maxcyte (Maryland), Polarean Imaging (North Carolina), and Renalytix AI (New York), have raised money on AIM in the last 24 months.
The principal benefits for companies listing on AIM include the following:
Life on AIM
AIM companies are required to appoint and have a Nomad at all times. The Nomad is responsible for ensuring that the listed company complies with the AIM rules. In turn, the Nomads are regulated by the AIM exchange.
An AIM company must prepare and publish annual audited accounts. The accounts must be prepared under international financial reporting standards (IFRS) for companies incorporated in the European Economic Area (EEA), but issuers incorporated in the U.S. may choose to adopt and report under U.S. GAAP. An AIM company must also prepare and publish half-yearly reports. There is no requirement for AIM companies to publish quarterly financial reports.
Management and corporate governance
In order to carry out a UK listing, the company will need to consider its existing board structure and may need to appoint additional directors to make it suitable for a listing. In general, and depending on the size of the company, it is likely that the company will need to have at least two independent, non-executive directors appointed. At least one member of the board will also likely need to have prior UK listing experience and be resident in the UK for investor access.
Where there is one or more shareholder who has a significant interest in an AIM company, the company will usually enter into a relationship agreement with such shareholder(s) that will set forth how the company will be run and govern the relationship between the parties while the company is admitted to trading on AIM. This can demonstrate that the company has good corporate governance, will be run for the benefit of shareholders as a whole, and consequently is appropriate to be trading on AIM. Although there is no hard and fast rule on when a shareholder is deemed to be “significant,” anyone who holds (or is interested in) 30 percent or more of the share capital of the company will likely be considered to have a significant interest.
Duty of Disclosure
AIM companies have a general duty to disclose without delay any inside or pricesensitive information. In addition, AIM companies must announce the following (among others): (1) details of substantial transactions and related party transactions; (2) reverse takeovers; (3) fundamental changes of business; (4) changes in directors, holdings of significant shareholders, Nomad, and broker; and (5) changes in accounting reference dates, legal name, and registered office address.
For further information on AIM or any related matter, please contact Ross McNaughton (firstname.lastname@example.org).
About the Author
Ross McNaughton is a partner in the corporate team at Penningtons Manches LLP, based in the San Francisco office. He has extensive experience of a variety of public and private capital raisings, mergers and acquisitions and general corporate advice, having acted on a full range of transactions - from multi-billion acquisitions to strategic bolt-ons or disposals and main market listings to smaller capital raises. His expertise spans the technology, life sciences, financial and professional services sectors. He has strong links with the UK tech and life sciences communities, particularly in the ‘Golden Triangle’ of London-Oxford-Cambridge.
Many investments into U.S. companies, including life sciences companies, now require filings with the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS is an interagency committee, headed by the U.S. Treasury Department, which reviews investments for national security implications. Failure to make a mandatory filing can give rise to a civil penalty up to the value of the investment, in addition to other adverse consequences. As we have explained previously, this represents a momentous change.
What are the origins of these new obligations? The Foreign Investment Risk Review Modernization Act (“FIRRMA”) and the Export Control Reform Act (“ECRA”) both were enacted in August 2018. A FIRRMA “Pilot Program,” effective on November 10, 2018, implements specific provisions of FIRRMA, particularly to require mandatory CFIUS filings for investments into companies involved with “critical technologies.” Relatedly, ECRA establishes a process to define “emerging technologies,” which is a category of “critical technologies.” Understanding the rules for mandatory CFIUS filings and the definition of “critical technologies” is important for any life science company or investor.
Mandatory Filings Under the FIRRMA Pilot Program
To determine if an investment requires a mandatory CFIUS filing, the U.S. company and the investor should consider the four questions below. If the answer to any of these questions is “no,” then a mandatory filing is not necessary; however, a voluntary filing may still be prudent, as explained further below.
1. Is the investor a foreign person?
If the investor is a foreign natural person, a foreign entity, a foreign investment fund, a foreign government, or a U.S. entity under the control of any foreign person or entity, it is a foreign person. In addition, if the investor is a U.S. fund with one or more foreign general partners (or foreign limited partners that have information rights or serve in more than a purely passive capacity), then there may be a foreign person and a mandatory CFIUS filing.
2. Is the investment into the U.S. business covered by the Pilot Program?
Any type of equity or equity-like investment in a U.S. business is covered. The investment must grant the foreign investor one of the following rights:
3. Does the U.S. business work with “critical technologies”?
The regulations define “critical technologies” broadly, by reference to several categories of export-controlled technologies. Companies that deal in toxins, viruses, radiological equipment, hazardous clean-up equipment, and many other technologies may be covered by the definition of critical technologies; further, the use of encryption often yields a determination of “critical technologies.” Importantly, “critical technologies” includes the category “emerging technologies,” which are technologies that will be designated soon, as explained further below.
4. Does the U.S. business have customers or partners in a “Pilot Program industry”?
If the U.S. business’s customers or partners that use the critical technology operate in a specified list of 27 industries—which includes research and development in biotechnology, among other areas—the U.S. business’s activities likely fall within the Pilot Program industry.
If the answer to all four questions is yes, then a CFIUS filing generally is required at least 45 days before the investment closes. A “no” answer to any of the questions obviates a mandatory filing; however, it may still be prudent to consider a voluntary filing. CFIUS has jurisdiction to review any transaction—regardless of the technology—in which a foreign person gains control over a U.S. business. Control generally means ownership of greater than 10 percent voting interest with some additional power (e.g., a board seat, a veto over business decisions, or other right not typically possessed by minority shareholders). CFIUS can intervene in such transactions and impose restrictions on the U.S. business or even force an investor to divest. There is no statute of limitations.
To eliminate the risk of CFIUS intervention, parties can make a voluntary CFIUS filing to clear the transaction before it closes. The process for a voluntary filing typically takes at least several months. Clearance is not guaranteed and may be subject to certain conditions on the transactions.
ECRA and “Emerging Technologies”
As explained in a prior advisory, in November 2018, pursuant to ECRA, the U.S. Department of Commerce (“Commerce”) released an advance notice of proposed rulemaking (“ANPRM”)—the first of several steps toward implementing rules—to control the export of “emerging technologies.” Commerce identified 14 categories in which it seeks to determine whether there are emerging technologies of national security interest, including biotechnology and artificial intelligence.
The possibility that broad swaths of life sciences technologies (and other technologies) could be subject to new export controls has at least two major implications: i) access to these “emerging technologies” by non-U.S. persons may be difficult or impossible, and ii) foreign investments into U.S. companies involved with these technologies may trigger mandatory CFIUS filings.
To explain: the “emerging technologies” designations could result in “deemed exports” in those cases in which non-U.S. persons access the designated technologies. While obtaining licenses for such exports might be possible, licenses may not always be obtained in a timely manner. Further, as noted above, in many circumstances CFIUS filings must be made at least 45 days prior to foreign investments in “critical technologies.” Since the designation of “emerging technologies” will expand the set of “critical technologies” (the former being a subset of the latter) the scope of CFIUS review similarly will expand.
The process of making these “emerging technologies” designations likely will take months, and perhaps more than a year, but the process warrants close monitoring because of its significant implications.
Regardless of the outcome of that process, now and in the future life sciences companies and investors will need to consider the status of their technologies and potential obligations to make CFIUS filings.
Alector Announces Pricing of Initial Public Offering
27th Annual Medical Device Conference
Wilson Sonsini Goodrich and Rosati’s 27th Annual Medical Device Conference will feature industry experts discussing key issues facing today's early-stage medical device companies. Through a series of topical panels, attendees will hear from industry CEOs, venture capitalists, industry strategists, investment bankers, and market analysts. The conference will kick off with a dinner on June 20.
Phoenix 2019: The Medical Device and Diagnostic Conference for CEOs
The 26th Annual Phoenix Conference will bring together top-level executives from large healthcare companies and CEOs of small, venture-backed firms for an opportunity to discuss critical issues of interest to the medical device industry today, as well as to network and gain valuable insights from both industry leaders and peers. This exclusive, two-day event will provide an unrivaled experience that will help inform and shape company strategy for the years ahead.
The rEVOLUTION Symposium has become the place to discuss the most important strategic problems facing pharma and biotech CSOs. We will examine the organization and management of R&D to uncover new disruptive discovery and development models and assess the continued impact of pricing, reimbursement, regulation, and globalization on our industry.
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