800-pound Gorilla Doesn’t Deter Investors in Ophthalmology Sector

The coronavirus pandemic became the 800-pound gorilla dragging down the economy this year, but 2020 turned out to be a stellar one for investors in healthcare and ophthalmology, as specialists in the private and public financial markets reported last week at the OIS Year in Review.

Private and public placements in the healthcare sector reached record levels in 2020, reported Jonathan Norris, managing director of healthcare and life science practice for Silicon Valley Bank, and Udit Patel, an executive director of healthcare investment banking at Piper Sandler.

A video of Norris’ presentation is available here. A video of Patel’s talk is available here.

Private market trends
Through Q3 this year, venture fundraising in healthcare reached almost $14 billion, Norris said, exceeding the 2019 full-year level of $10.7 billion, “which is just a huge number when you think about that [being] the capital that’s going to be deployed over the next two to three years into new portfolio companies from these VC firms,” Norris said. “Healthcare obviously has become a very important part of the venture industry.”

Through Q3, biopharma led all healthcare areas in VC investment with $5.7 billion, followed by health technology ($3.3 billion), diagnostics and tools ($3 billion), and devices ($1.5 billion).In ophthalmology specifically, private investments in biopharma totaled 16 deals valued at $291 million through Q3 2020 versus 19 deals and $372 million for all of last year, with three companies going public: Oyster Point, Graybug Vision, and Tarsus Pharmaceuticals. Investments in the device sector in ophthalmology reflect “a little bit of a pullback,” Norris noted, with seven deals valued at $111 million through Q3 this year, compared with 21 deals valued at $308 million for all of last year.

VC players that went for multiple Series A deals in ophthalmology are Hatteras Venture Partners and InFocus Capital Partners, Norris said. Also notable was the emergence of Asia-focused investors, specifically Wu Capital and WuXi Healthcare Ventures, making Series A deals in ophthalmology. Another notable was late-stage investor Perceptive Advisors, which made a Series A investment in AsclepiX Therapeutics.

In later-stage deals, ophthalmology-focused funders such as InFocus and ExSight Ventures have been joined by the likes of KKR and its Falcon Vision unit, and Flying L Partners, along with big late-stage investors, including D1 Capital Partners and Casdin Capital, Norris said. ViVo Capital has also moved into ophthalmology with three early and late-stage placements in the sector.

‘Interesting’ to say the least
“It’s been an interesting year in 2020 to say the least,” is how Patel summed up public market activity in ophthalmology. But it’s also been a “banner year” in the sector with market gains of 48.8% compared with 13.5% for the Standard & Poors 500.

“Much like the broader healthcare sector, even in ophthalmology, biotech contributed meaningfully to the outperformance, with several ophthalmology drug companies demonstrating positive clinical results that drove valuation,” he said. Life science companies raised $13 billion with initial public offerings (IPOs) and $37 billion in follow-on offerings in the public markets this year, Patel said. IPOs almost doubled the $7 billion mark in each of the previous two years, while follow-on offerings rose 50% over 2019 levels.

“The increase relative to last year is driven not only by a greater number of deals, but also by an increase in the average deal size,” Patel noted. Eighty-three life science companies have issued IPOs so far in 2020 compared with 60 for all of 2019, with an average value of $182 million in 2020 versus $128 million in 2019.

In biotech specifically, the 66 IPOs in the class of 2020 have had a strong year, gaining 110% on average after issue through the first 11 months of the year – “a staggering number,” in Patel’s words. “The same number for last year’s class was 45%, and the year before it was 17%.”

The new public listings in the class of 2020 “represent a healthy mix of both front and back of the eye, biotech, and medtech, as well as a diversity in terms of deals,” Patel said. That includes the Lensar spin-off, Gemini’s SPAC (special-purpose acquisition company) reverse merger – at an eye-popping $216 million – and Ocuphire Pharma’s reverse merger.

Why investors like ophthalmology
Patel provided some context about what investors like about the ophthalmology space, and it’s a lot.

“The companies tend to be much later stage with clinical data, the markets are large, the regulation pathways are well-defined, and there’s unmet need,” he said.

With respect to IPO candidates, investors desire a strong proof of concept with supporting clinical data, and are attracted to gene and cell therapies, and, to a lesser extent, rare disease, Patel added.

They also seek competitive differentiation clinically. “And more importantly,” he explained, “how that competitive differentiation translates into commercial opportunity not only from a market-size perspective, but reportedly from a pricing and reimbursement perspective, given the ophthalmology indications tend to be competitive with known incumbents.”
That uptick in new public listings comes at the expense of M&A in medtech and biotech, he noted, “particularly given that there has been a significant degree of consolidation among the large acquirers within ophthalmology.”

M&As in medtech and biotech peaked at 62 and 29, respectively, in 2018, declining to 23 and 16 so far this year. “It shouldn’t be a surprise to anyone that M&A volumes were down due to COVID,” Patel commented. “That said, we are starting to see green shoots of activity among acquirers across healthcare, but also within ophthalmology. The acquirers have started to digest the impact of COVID.”

The pandemic and election were the “two big unknowns” this year, he said. But the economy is turning the corner from both, particularly with progress on a COVID-19 vaccine, a “constructive” Federal Reserve policy, and “plenty of capital out there sitting with investors.”

Not that 2021 won’t be without its issues, Patel said. “Volatility is definitely going to be a concern, so it’s not going to be a straight path,” he said. “We think it’s going to be up and down, or potentially even a U.”

He added, “It’s really hard to ignore the escalating number of COVID cases that we’ve seen today.”

That 800-pound gorilla is going to hang around for a while.