Life science investing is through the stratosphere. Why now?
We have the privilege of living through a renaissance in the life science sector — a time where the word “cure” will increasingly replace the word “treatment” in a number of indications. There is no single factor driving the current momentum, and what is often forgotten is that some of the most transformative therapies (whether CRISPR or CAR-T) leveraged decades of advances across the landscape and relied on largely uncelebrated research quietly conducted in both academia and industry. What is unique today is that we increasingly have new research tools and analytical capabilities, including the nascent entry of artificial intelligence and machine learning to help us understand the true biology behind disease. Sequencing has certainly played a big role, as the cost per gigabyte of data has plummeted over the past decade. But sequencing is not the whole story — it may tell us where to go, but other innovations are giving us something to do once we get there.
Clinical breakthroughs are benefiting patients and investors alike, leading to increased capital in the sector and more entrepreneurs willing to challenge the realm of the possible. The torrid pace of investing and company formation in 2017 resulted in $9.1 billion raised by venture capitalists and $17.3 billion in VC investment across the healthcare sector. Healthcare venture fundraising in 2018 is on pace to closely match 2017, and investments likely will surpass last year’s total. This activity combined with a collaborative FDA environment (2017 marked a 21-year high for novel drug approvals at 46, and another 16 have won approval in the first half of 2018) is making for a very favorable climate for innovation and continuing to draw capital into the sector.
What is driving the wave of biopharma IPOs?
Beginning in 2014, we saw a pronounced increase in buy-side institutional appetite for life science companies in the public markets, with the number of venture-backed biopharma initial public offerings more than doubling. A number of life science and healthcare venture firms realized portfolio returns, helping establish the foundation for strong fundraising in the years that followed. Drawn to healthy returns, crossover investors (public investors investing in the last private round before an IPO) have played an increasingly dominant role in the public market story. Already, 30 biopharma IPOs have priced in the first half of 2018.
Stay tuned for SVB’s midyear 2018 Trends in Healthcare Investments and Exits Report,written by my colleague Jonathan Norris and due out later in July.
How long will it last?
Without question, the economy will have its ups and downs, IPO windows will open and close and there will be no shortage of factors that could lead to exogenous shocks to the market. If you step back though, you realize that the innovations taking place today go well beyond short-term markets; they are going to change how humanity treats disease for generations to come. In the history of humanity, we are the first generation to understand the structure of DNA. Just 15 years ago, we sequenced the genome; and just five years ago, we learned how to rewrite it. We are living through the first generation of gene/cell therapy drugs (Biogen’s Spinraza, Sarepta’s Exondys 51, Novartis’ and Gilead’s CAR-T therapies and Spark’s Luxturna to name a few). These new therapeutic platforms may bring with them a resilience that over the longer term will be less susceptible to yield curves and market volatility.
Give us a preview of the most exciting advancements across the sector.
Areas like AI and ML are early in their healthcare journey. Their promise of amplifying the crowd’s wisdom will have profound applications in drug discovery, in delivery of care and eventually in creating a more sustainable health economic model. On the biopharma side, we will see off-the-shelf allogenic cell therapies replace the current first-generation CAR-T approaches. We will also see new treatments in the incredibly difficult neurodegenerative space — expanding our understanding of these indications and using novel approaches that lead to synaptic regeneration. Profound advances in data analytics, biomarker discovery, remote patient monitoring, diagnostics for earlier intervention and the delivery of care are just a handful of the factors converging to drive the industry forward.
On the investing side, increasingly we will see novel corporate structures designed to build a portfolio of assets with low-correlation risk in early-stage drug development. With incredible advances in understanding the specific mechanisms behind disease, there is a higher probability of clinical success and by extension a more predictable return for investors. Imagine a time when each 401(k) had a portion allocated to early-stage drug development — that may be exactly where we are headed.
Which life science subsectors are getting a lot of interest, and which are underfunded?
Oncology is advancing faster than ever, driven by cellular therapies, immuno-oncology and a focus on the heterogeneity of disease, leading to more-effective personalized treatment. In 2016 and 2017, oncology received twice as much investment compared with the next closest indication. And this may not correct anytime soon, as these investors have been well rewarded, with oncology providing a large share of life science big exits. A key opportunity for the industry is to apply the lessons and advances of the oncology revolution to other challenging areas such as neurodegenerative diseases.
Diagnostics and tools companies continue to see a flood of capital, notably from technology investors, with a plethora of private $100 million+ equity rounds since 2015. There are some exciting advancements, including new tools for synthetic biology, AI and ML for diagnostics and clinical decision-making and, of course, the promise of liquid biopsy for earlier intervention and better monitoring.
The device sector has been nearly absent from the IPO bonanza and is receiving well less than half the venture investment we are seeing in biopharma. Despite this, the sector has experienced a stable M&A market over the past several years. Truly innovative device companies (De Novo 510(k) and premarket approval pathways) have realized upfront M&A returns on par with biopharma and three neuro-focused companies went public in the first half of 2018. Longer term, the device subsector will benefit from the convergence of technology, leveraging microelectronics, digital health platforms and patient engagement tools to eliminate the use of drugs in a number of chronic conditions.
SVB co-hosts a China healthcare summit each September in Shanghai. Tell us how the life science climate is changing there.
Healthcare executives on both sides of the Pacific now recognize that being conversant in the Sino/U.S. opportunity is a strategic imperative rather than merely good cocktail fodder. There are several drivers behind this trend. At the highest level, the vastly different healthcare challenges facing the United States and China pose a unique opportunity for collaboration. While the U.S. is focused on reducing healthcare costs from the whopping 17.5 percent of gross domestic product, China is poised to significantly increase its healthcare spending from current levels of 6.2 percent of GDP. Getting the health economics model wrong would be magnified exponentially across China’s huge population. By focusing on consumer engagement in wellness for disease prevention, investing in early disease detection and closely monitoring the cost of treatments and medical devices, the Chinese government seems determined not to follow the same path that led to the economic challenges of the U.S. healthcare system.
China is also at the front end of a market transition, evolving from “Made in China” to “Created in China.” Economic (a growing middle class) and demographic (a surge in aging population) drivers are fueling the demand for innovative healthcare products and solutions to address the increased incidence of disease, including cancer, hypertension, diabetes, and cardiovascular and respiratory diseases. Lastly, Chinese corporates are increasingly using innovation and deal-making to make up for the legacy innovation gap. Domestic Chinese pharma companies spend a mere approximate 2 percent to 4 percent of their total sales on research and development, compared with closer to 15 percent for multinational companies. This gap is poised to narrow as select corporates move from lower-margin generics in favor of higher-margin innovative therapies.