Crossover Investors Swarm to Pre-IPO Healthcare Companies

Silicon Valley Bank takes mid-year pulse of healthcare investing

The boom in healthcare investments and exits continued in the first half of 2015, driven by the large appetite of non-VC crossover investors for biopharma and device companies preparing for an IPO. This signals that 2015 will mark the third consecutive year of strong activity for the healthcare sector, according to the mid-year update of Silicon Valley Bank's Trends in Healthcare Investments and Exits.

For this update, we analyzed private, venture-backed healthcare activity from January-June 2015.* The late summer pullback in the global equity markets has impacted this sector, however we believe the fundamentals of the healthcare venture market are solid. We will be carefully watching to see how IPOs now in the pipeline perform and if investing patterns by crossover investors change.

Biopharma: We saw numerous private financings, the vast majority of the most valuable financings (13 of 15) involving these crossover investors. Typically, these deals included groups of two or three crossover investors.

About half of the 24 IPOs in the first half of 2015 had investment from crossover investors prior to the IPO, which helped boost the subsequent public offering. Of the half-dozen IPOs that raised more than $100 million, five were backed by crossover investors. IPO activity continues to be robust. This leads us to stick with our March 2015 forecast of 45-55 IPOs for the year, down from 66 in 2014.

IPO optionality translated to a high number of M&A deals, particularly in the first quarter. Acquirers, both large biopharma and an emerging group of mid-cap public biotech companies, are looking to snap up early-stage companies with compelling technology and large markets prior to an IPO.

The M&A focus remains on early-stage companies: Six of 11 M&A deals in the first half of the year were in pre-clinical or Phase 1 stage. In a blockbuster early-stage deal, Bristol-Myers Squibb acquired up small-molecule cancer company, Flexus Life Sciences, in February for $800 million in upfront money with up to another $450 million more in milestone payments. The company, founded in 2013, provided an exceptional IRR and cash multiple to investors. Overall M&A deal size has held relatively steady in the past three years, and the current median upfront stands at $200 million and total deal value at $400 million.

Biopharma Exits by Quarter

Device: This sector is the beneficiary of some new attention by crossover investors who are expanding their focus beyond biopharma. Four of 15 top private financings in the first half of 2015 included crossover investors. Of four IPOs, two involved crossover investors. It is healthy to see crossover activity begin to fuel IPOs, and three large financings by crossovers in Q2 create a nice potential IPO pipeline. Given this, we expect IPO activity to be on pace to exceed 2014 totals, in line with our March 2015 prediction.

In Q2, Medtronic got back in the game, reenergizing M&A activity after an inactive Q1. Of the four Q2 deals, Medtronic made two of the acquisitions. This is a strong sign that the company will remain an active acquirer during its integration with Covidien (which it acquired at the start of the year). Medtronic also made some equity investments. Through the first half of Q3, device saw another five M&A exits, building on Q2 momentum.

The average upfront deal value in the first half was $112 million, with a fairly defined range of $63 million to $175 million upfront. This could be considered a cautionary tale for companies raising $35 million-plus in equity (the median amount in the top 15 financings in the first half of 2015), as so far there seems to be a fairly limited range in exit values.

Device Exits by Quarter

Dx/tools: This sector is lagging in major private financings, with only two large rounds: Adaptive and Natera. Four of the top 15 financings did include crossover investors. While M&A activity started out positive early in the year, not a single deal was made in Q2. Our speculation is that the strong dx/tools companies are leaning toward IPOs rather than M&A, as M&A values have been low so far this year.

IPOs, however, are on pace to match 2014 totals. Both Q2 IPOs were at the commercial stage. Of three additional deals in the IPO pipeline at the end of Q2, two are backed by crossovers, including Natera, which went public in early Q3.

Dx/Tools Exits by Quarter

Much of healthcare investing for the first half of the year was propelled by venture firms that raised new funds and by the very active crossover investors. While we predict this active equity market to continue, IPO activity for the full year likely will dip slightly from 2014, except for device, and M&A will remain stable.

Overall, 2015 is set to be another banner year for the healthcare industry, driven by investor confidence, healthy access to capital, and exit optionality.



The sources for all the data cited in this article are: CB Insights, press releases and SVB proprietary data.

* Equity refers to private, venture-backed equity financings. M&A refers to private, venture-backed M&A in device and dx/tools of at least $50M upfront, and in biopharma of at least $75M upfront. IPOs refer to private, venture-backed companies that raise at least $25M in an IPO.

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.

About the Author

Jonathan Norris is a managing director for business development in SVB's Healthcare practice. 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 nineteen 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.