Where Private Financing in Health Care Is Headed

In the large world of private funding in health care, ophthalmology pales in comparison with huge sectors like oncology and cardiovascular, but ophthalmology has had a good run in device and biopharma exits over the past three years, Jonathan Norris, managing director of the health care practice at Silicon Valley Bank, told those gathered at OIS@ASRS 2016.

Norris provided context on where ophthalmology fits into the overall health care funding picture, focusing on the three broad categories within each health care sector: biopharma, devices, and tools and diagnostics. He expects overall private investment in health care to top out at $9.5 billion this year, down from about $10.5 billion in 2015.

In biopharma, ophthalmology ranks 10th among health care sectors in attracting venture capital with five deals so far in 2016. However, the median investment in health care is up about 42% to $42.8 million this year. “We’re seeing a lot more tranche deals in the sector,” Norris said. “It’s not like they’re raising 12 or 18 months of capital; they’re actually raising three to four years of capital based on the tranching system of achieving development milestones.”

In terms of big-exit M&A and IPOs, ophthalmology ranks fourth among health care sectors in both device and biopharma categories since 2013. “You continue to see, even though there are not a lot of acquirers in the sector, strong M&A activity in ophthalmology,” Norris stated. In the device category, IPO activity has all but disappeared this year, whereas the M&A environment has been stable, he said.

Over the past two years, venture capital funding in health care has surged about 50% from 2013 levels, reaching about $7.6 billion last year, tracking overall health care investment of $10.5 billion last year. “We can’t see that as a trend that’s going to continue,” Norris said.

Series A activity continues to be strong, particularly on the device and diagnostic side. A record number of Series A deals have been issued through the first half of 2016, with 24 issues in both device and diagnostics versus 18 and 17 in those sectors, respectively, for all of last year.

In biopharma Series A, funding will probably hold steady, building off of a robust 2015. There were 58 deals for the first half of 2016 versus 87 in all of 2015, Norris said. “Since 2013, about 17 Series A deals have been in ophthalmology device and biopharma,” he noted.

However, the IPO market is slowing in biopharma – to 15 for the first half of this year versus 42 for all of 2015. Norris provided some explanation: “IPOs are coming off a really amazing last couple of years, but what’s interesting is on the IPO side, you’re still seeing a lot of early-stage activity.” Of the biopharma IPOs in the first half of the year, 60% were for companies in preclinical or Phase I investigations, “which is really incredible.”

One reason for this early-stage activity is the role of crossover investors, who invest in all phases of development – before, during, and after the IPO. “The crossovers are really the ones that are forcing these companies to go to IPO, building to two-times book size just from the inside investors in order to get them out,” Norris said.

Like IPO activity, many of the M&A plays in biopharma overall are also for early-stage companies, although ophthalmology doesn’t necessarily mirror the overall health care sector, Norris commented. “Even with IPOs coming back to reality, the dollar size and the number of transactions for early-stage M&A and biotech continues to be really strong,” he said, pointing to a $600 million median deal size so far this year for preclinical and Phase I deals with over 50% of that coming in the up-front payment.

“This is really good news,” Norris said. “IPO optionality is not driving the deal size in biopharma M&A; it’s really the fact that there are a lot of acquirers out there.”

Participant:

Transcript:

Jonathan Norris: So in the next 7 minutes or so what I wanted to do is give you an idea of what we’re seeing in the venture healthcare environment, specifically around biopharma, device, tools and diagnostics. So a lot of the data you’ll see is going to go around those three areas. You know, we’re going to talk about some highlights that I’ve seen so far, mid-year 2016. We’ll talk a little bit about healthcare investment into companies as well as who the active investors are. And then we’ll also talk about exits, on M&A and the IPO side. So if I look at the first half of the year, we’re seeing a little bit of a venture funding decline, but series A investment is up in all three of those sectors. And actually, we think that despite coming off the high in dollars invested in the companies last year, we’re going to be similar to where we were last year. Crossover investors sort of retracted from investing, and instead are really sort of pushing their companies into the public market. Biopharma round sizes are skyrocketing. We’ll talk about that in just a little bit. And device remains healthy, especially on the M&A side. So if we look at dollars invested in the companies, which is the top line, and then the light blue line is dollars fundraised by healthcare venture funds, you can see in the last 2 years there’s a 50% increase in fundraising. And we can’t see that as a trend that’s going to continue. It has to come down. We know fundraising is going to come down this year. Dollars invested in the companies are going to stay pretty similar to what we saw last year, really based on the fact that most of these venture funds have raised over the last two years, and that means they have 3 to 4 years of active investment into new companies, and then another 3 or 4 years of continuing to support those companies. On the series A side, halfway through the year you’re seeing both on the device and the dx tool side record number of series A company fundings, which is really great to see. And biopharma, which had an unbelievable number of companies and dollars invested in the first – or in 2015, 2016 looks like it’s going to be right on that track. And if you think about series A specifically around indications, since 2013 we’ve probably seen 17 or so series A companies focused in ophthalmology between device and biopharma, which puts it above like the rare orphan area, puts it above orthopedics, puts it above respiratory and aesthetics, but sort of pales in comparison to some of the other indications like neurology at 70 companies, oncology 83, cardiovascular a little bit more at 33. Just gives you a little context. So they’re still seeing some investment in ophthalmology, maybe not as much as the top indications, but you’re still seeing a good amount of activity. And when you think about who the top investors are, corporate and venture folks on the biopharma side continue to aggressively invest into biopharma. And actually we’re on a pace to exceed the investment pace for the top ten of last year this year. Where is the money going? Really oncology is getting the vast majority of dollars. Ophthalmology continues to see investment by the top 60 investors out there, but on a smaller range versus the other indications. Biopharma deal size has increased about threefold from 2013. Really that’s a function of two things that we’re seeing out in the market: one, bigger funds. You’re seeing funds go out and fundraise again and increase the size of their fund, which means they have more money to put into more companies. And two, the fact that we’re seeing a lot more tranched deals in the sector. So it’s not like the 12 to 18 months of capital they’re raising. They’re actually raising 3 to 4 years of capital based on a tranching system of them hit development milestones. On the device side, there’s a lot of diversity around investors. This just gives you a little bit of perspective as to where those investors are that are actively looking to invest in deals. Cardiovascular has received the most investment that we’ve seen out there. On the biopharma side, IPOs are down, M&A is staying pretty solid, but it’s coming off – you know, IPOs are coming off a really amazing last couple years. But what’s interesting is on the IPO side, you’re still seeing a lot of early stage activity. Sixty percent of the IPOs in the first half of the year were preclinical or phase 1 in terms of where their most advanced asset was, which is really incredible. Really that’s been – a reason behind that is really the crossovers. The crossovers are really the ones that are forcing these companies to go IPO, building a 2X book size just from the inside investors in order to get them out. But that’s really where we’re seeing where most of the IPO activity is seen. On the M&A side, we continue to see early stage M&A as well. Not as much on the ophthalmology side, but when we look at M&A, it’s preclinical and phase 1 for biopharma. And even on this early stage side, even with IPOs coming back to reality, the dollar size and the number of transactions for early stage M&A and biotech continues to be really strong. So we’re seeing $600 million median deal size so far this year for preclinical and phase 1 deals with over 50% of that coming in the upfront payment, which is really good news. So IPO optionality is not driving the deal size in biopharma M&A. It’s really the fact that there’s a lot of acquirers out there. And finally, on the device side, we’re seeing what’s really is a stable M&A environment. Since Q2 of 2015, you’ve seen at least four M&As every single quarter. IPOs have sort of disappeared; maybe you’re seeing some reverse merger activity there. But really it’s an M&A story. And that M&A story had in 2015 a little bit of activity on the early stage side. That was really on the cardiovascular side, although there was one development stage ophthalmology play. 2015 or 2016 so far, still seeing good M&A activity. One ophthalmology deal is a part of that. But that tends to be later stage. You’re seeing either CE Mark or FDA approved companies that are already in revenue are really where you’re seeing the vast majority of those exits. And when you think about the dollar size in device, it’s a lot lower than what you see in biopharma. And I think the number, the 9.2 number in terms of years from the close of series A, that’s a little bit of an anomaly. I think the first half of the year you saw some older companies finally get to exit, but frankly, some of those exits were really nice. So even though it took a long time, the multiple on capital invested was actually fairly strong. And sort of final slide here, when you sort of think about where ophthalmology lies within indication based exit analysis on the IPO side, in the top 5. The big exit side, also number 6. But if you add it all together, really ophthalmology the number 4 indication in terms of exit. So you continue to see, even though there’s not a ton of acquirers in the sector, you continue to see strong M&A activity in the sector. So with that, it was a pleasure to give you an overview of what we’re seeing out in the private venture environment. Thank you very much.