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Trends in Healthcare Investments and Exits 2016

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Silicon Valley Bank’s Trends in Healthcare Investments and Exits report analyzes the fundraising, investment, M&A and IPO activity of private, venture-backed biopharma, medical device and diagnostic/tools companies. Report author Jon Norris also gives his annual forecast of what’s likely to happen in 2016.

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Trends in Healthcare Investments and Exits 2016

  1. 1. Trends in Healthcare Investments and Exits 2016 Investor Confidence and Innovation Drive Healthcare Venture to New Heights Written by Jonathan Norris Managing Director Silicon Valley Bank M 650.575.1377 jnorris@svb.com @jonnysvb Paul Schuber Valuations Associate SVB Analytics Caitlin Tolman Senior Associate Silicon Valley Bank
  2. 2. 2 Table of Contents 3 Overview 4 Healthcare Venture Fundraising and Investment: A Year of RecordHighs 16 Crossover Activity Peaks in Q3, Slows in Q4 19 Healthcare Venture Exits: M&A Climate Improves as IPOs Slow 34 2016 Outlook 35 Glossary 36 Authors
  3. 3. 3 2015: Another Banner Year for Healthcare At the start of 2015, it was hard to imagine that we would have another year as successful as 2014. And yet, by most measures, 2015 came very close. • Led by a blockbuster M&A deal at the end of the year, potential returns to investors in 2015 rocketed to a new high. By SVB estimates, three years of strong performance has generated more than $55 billion in potential value back to investors. • With record investments in biopharma, 2015 saw more capital invested in healthcare VC-backed companies than in any other year. • Non-traditional “crossover investors” increased activity, participating in large mezzanine rounds to take advantage of the biopharma IPO market. • While IPOs dipped versus 2014, the public markets continued to be receptive to healthcare companies. Also, many companies going public in the past two years had very successful public follow-on fundings. • Biopharma M&A activity increased, culminating in AstraZeneca’s $4 billion payment to Acerta in December 2015. • Higher returns, greater investor confidence and faster investment cycles led some funds to raise again within two years of their previous fund. • Such a speedy fundraising cycle means venture healthcare has fresh capital to support existing investments and create new ones, and create a critical cash cushion as IPOs decline and crossover investors pull back. Despite the slowdown in Q4, the healthcare industry is poised for a strong 2016, though activity likely will not match 2015.
  4. 4. 4 Healthcare Venture Fundraising and Investment: A Year of Record Highs
  5. 5. 5 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3Q'15 $BillionsU.S. Healthcare Venture Investment Hits 15-Year High Healthcare as Percentage of Total Venture Investment Venture investments in healthcare were projected to reach $9.4 billion in 2015, the highest level since 2000. Biopharma venture investments reached a record $7 billion, and device remained steady at $2.4 billion. Total VC Dollars ($B) $105 $41 $22 $20 $23 $23 $28 $32 $30 $20 $23 $30 $28 $30 $51 $59 Biopharma 4% 9% 15% 19% 19% 17% 18% 19% 17% 19% 17% 16% 15% 15% 12% 12% Device 2% 5% 8% 8% 8% 9% 10% 11% 12% 13% 11% 10% 9% 7% 5% 4% $105 Total VC$ % Biopharma % Device *Projected total for 2015 Source: PricewaterhouseCoopers, Thomson Reutersand SVB proprietary data Thomson Reuters data includes life science anddx/tools inbiopharma and device categories. 2015*
  6. 6. 6 Strong Biopharma M&A and IPO Market Drive Investment and Fundraising U.S. Healthcare: Venture Dollars Invested and Raised Fundraising and investment each grew by 10 percent in the past year. SVB analysis found crossover investors deployed more than $1.2 billion in venture-backed pre-IPO rounds, as these investors rushed to get a foot in the door ahead of the IPOs. However, after peaking in Q3, crossover investment activity significantly declined in Q4. While not included in this fundraising data, corporate venture investment continued to add critical capital to venture-backed life science companies. The strong levels of 2015 fundraising should provide ample capital to support new companies over the next few years, which will prove critical as IPOs slow and crossover activity decreases. Declining capital flow ratio in the past five years is a positive development, indicating that fundraising is keeping a closer pace with investments. Capital Flow Ratio 127% 353% 211% 182% 169% 140% 139% *Projected total for 2015 Source: PricewaterhouseCoopers, Thomson Reutersand SVB proprietary data $9.4B $6.8B 0 1 2 3 4 5 6 7 8 9 10 2009 2010 2011 2012 2013 2014 2015 Proj $Billions HC VC $ Invested into Companies HC VC $ Fundraised Gap in Funding 2015*
  7. 7. 7 46 45 45 17 0 40 80 120 #ofDeals Biopharma Series A Investment Dollars Surge while Device and Dx/Tools Struggle Source: VentureSource,PitchBook, CB Insightsand SVB proprietary data Biopharma Series A investment amounts skyrocketed,fueled by considerably larger deal sizes: 36 percent of deals raised at least $20 million. Quick paths to exit drew crossover investors into Biopharma Series A. Corporate venture also remained active, participating in more than a quarter of all Series A deals. Declining investor interestin device led to a drop in new company formations, and the majority of Series A rounds were less than $5 million. Dx/tools faced challenges due to commercial reimbursement issues, regulatory uncertainty and difficulty protecting IP. 76 59 81 97 0 40 80 120 2012 2013 2014 2015 #ofDeals Total Series A ($M) $776 $1,102 $823 $1,871 CVC Deals % / # 22% / 17 29% / 17 27% / 22 29% / 28 BIOPHARMA 35 34 39 22 0 40 80 120 #ofDeals Total Series A ($M) $212 $215 $327 $96 CVC Deals % / # 9% / 3 18% / 6 15% / 6 32% / 7 DEVICE Total Series A ($M) $331 $257 $354 $165 CVC Deals % / # 4% / 2 11% / 5 9% / 4 24% / 4 DX/TOOLS U.S. Company Formation: Deals and Investments in Series A
  8. 8. 8 Venture Capital and Corporate Venture Accelerate Investing Pace *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data Of the top venture capital investors, three (OrbiMed, Sofinnova, Venrock) joined crossover syndicate partners in at least 50 percent of their 2015 new deals. Top biopharma investor OrbiMed Advisors raised a $950M fund in late 2015 and is likely to remain very active. WuXi Venture Fund separated from its corporate parent and in Q4 raised a traditional venture fund. GlaxoSmithKline appears on the CVC list twice: For its corporate venture arm (SR One) and for its early-stage parent company investments, many of which are with Avalon Ventures. Top VC Biopharma INVESTOR DEALS TOTAL $ OrbiMed Advisors 30 $1,300M Novo 20 $736M NEA 19 $713M Versant Ventures 16 $376M Sofinnova Ventures 15 $742M Fidelity Biosciences 12 $586M Venrock 11 $705M ARCH Venture Partners 11 $630M MPM Capital 10 $236M Atlas Venture 10 $143M Top CVC Biopharma INVESTOR DEALS TOTAL $ JJDC 18 $235M Novartis Venture Funds 13 $321M SR One 11 $305M Pfizer Venture Investments 9 $221M Celgene 8 $260M WuXi Venture Fund 8 $204M Roche Venture Fund 7 $198M Lilly Ventures 7 $106M Partners HealthCare Innovation 7 $104M GlaxoSmithKline 6 $92M Most Active* New VC Investors in Biopharma 2014-15: Venture Capital and Corporate Venture Capital
  9. 9. 9 Oncology Leads New Biopharma Investments Oncology 72 deals $2,492M Platform 31 deals $871M Anti-Infectives 28 deals $610M CNS 25 deals $743M Rare/Orphan 20 deals $664M Metabolic 13 deals $354M Auto-Immune 8 deals $211M Respiratory 7 deals $248M Ophthalmology 8 deals $303M GI 5 deals $125M Cardio 5 deals $111M Most Active* New VC Investments in Biopharma by Indication 2014-15 Oncology raised nearly 3X the dollar amounts of the next most active indication. Anti-infectives jumped from #9 to #3 in total deals in one year, while rare/orphan and metabolic deals doubled. CNS, ophthalmology and oncology posted the largest average deal sizes. *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  10. 10. 10 New Biopharma Hubs Emerge Outside the U.S. Most Active* New VC Investments in Biopharma by Geography 2014-15 Northern CA 48 deals $1,763M Southern CA 26 deals $592M Canada 8 deals $218M Top 5 U.S. Biopharma Top 5 OUS Biopharma United Kingdom 11 deals 410M France 7 deals $98M China 6 deals $48M Switzerland 7 deals $175M MA 46 deals $1,588M TX 10 deals $376M PA 7 deals $261M *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  11. 11. 11 Top Device Investors Ramp Up New Investment Activity Top VC Device INVESTOR DEALS TOTAL $ NEA 8 $136M Life Sciences Partners 7 $200M Windham Venture Partners 7 $183M OrbiMed Advisors 6 $240M Lightstone Ventures 6 $117M Novo 5 $136M Venrock 4 $150M Ally Bridge Group 4 $148M 5AM Ventures 4 $124M BioStar Ventures 4 $54M Top CVC Device INVESTOR DEALS TOTAL $ Boston Scientific 7 $75M Cleveland Clinic Innovations 5 $4M JJDC 4 $60M Xandex Investments 3 $3M GE Ventures 2 $66M Most Active* New VC Investors in Device 2014-15: Venture Capital and Corporate Venture Capital New entries to the top investors list included Windham Venture Partners (later-stage focused), Life Sciences Partners (mostly OUS), 5AM (focus on drug/device combinations) and Ally Bridge Group (Hong Kong-based). On the corporate side, JJDC and Boston Scientific increased their investing appetite for device companies. *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  12. 12. 12 Cardiovascular continues to be the most active. Orthopedics and vascular surpassed neuro and ophthalmology in the #2 and #3 spots. Drug delivery devices made the list for the first time, and this indication likely will continue to gain traction. Cardiovascular, Orthopedics Lead New Device Investments Most Active* New VC Investments in Device by Indication 2014-15 Cardiovascular 20 deals $368M Orthopedics 12 deals $159M Dermatology 6 deals $107M Drug delivery 6 deals $60M Vascular 10 deals $185M Surgical 9 deals $225M Ophthalmology 7 deals $198M Uro/Gyn 4 deals $123M Neuro 5 deals $9M *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data ENT 4 deals $90M
  13. 13. 13 Device Gains International Attention Most Active* New VC Investments in Device by Geography 2014-15 Top 5 U.S. Device Top 5 OUS Device Northern CA 32 deals $629M Southern CA 7 deals $207M MN 10 deals $194M OH 4 deals $22M MA 9 deals $142M United Kingdom 3 deals $46M Ireland 4 deals $28M Switzerland 6 deals $110M Austria 1 deal $13M China 1 deal $15M *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  14. 14. 14 Top CVC Dx/Tools INVESTOR DEALS TOTAL $ WuXi Venture Fund 5 $193M Novartis Venture Funds 3 $113M Qiagen 3 $50M GE Ventures 2 $62M Celgene 2 $50M JJDC 2 $35M Siemens Venture Capital 2 $23M Mayo Medical Ventures 2 $10M Dx/Tools Captures Interest of Larger VCs Top VC Dx/Tools INVESTOR DEALS TOTAL $ OrbiMed Advisors 5 $155M Khosla Ventures 5 $61M ARCH Venture Partners 4 $115M Morningside Group 3 $16M Serra Ventures 3 $9M Baird Capital 2 $68M Canaan Partners 2 $45M Life Sciences Partners 2 $35M Novo 2 $33M HealthQuest Capital 2 $24M Most Active* New VC Investors in Dx/tools 25: Venture Capital and Corporate Venture Capital 2014-15 A number of larger venture capital investors who are more active in other sectors made some bets in dx/tools. China-based investors WuXi Venture Fund and Morningside Group increased investments in dx/tools, joining the top investor list. Potential acquirers, including big pharma and biotech, also increased their appetite. *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  15. 15. 15 Canada 3 deals $39M United Kingdom 4 deals $40M Northern CA Continues as Most Active Region for Dx/Tools Top 5 U.S. Dx/Tools Top 5 OUS Dx/Tools Most Active* New Investments in Device by Geography 2014-15 Northern CA 15 deals $559M Southern CA 7 deals $112M TX 2 deals $21M MO 2 deals $42M MA 9 deals $196M Germany 4 deals $36M Israel 4 deals $35M *Most active defined astop 60 investorsbased on new investments Source: CB Insights, press releases, PitchBookand SVB proprietary data
  16. 16. 16 Crossover Activity Peaks in Q3, Slows in Q4 CROSSOVER INVESTOR 2013 2014 Q1’15 Q2’15 Q3'15 Q4'15 2013-15 RA Capital 4 12 7 5 9 4 41 Rock Springs Capital 1 8 5 5 7 3 29 Deerfield Management 5 11 1 5 3 3 28 Foresite Capital 4 5 3 4 4 2 22 Fidelity Investments 0 2 3 4 11 1 21 Cormorant 0 0 0 5 8 4 17 Jennison Associates 1 3 3 3 7 0 17 Perceptive Advisors 1 6 1 4 2 3 17 EcoR1 Capital 1 4 2 3 5 1 16 Redmile Group 2 7 0 2 3 2 16 Casdin Capital 4 2 0 5 2 1 14 Wellington Management 0 5 2 5 1 1 14 Adage Capital Management 1 6 2 0 2 0 11 Woodford Investment 0 4 0 3 4 0 11 Sabby Capital 0 6 1 1 1 0 9 Total Deals 24 81 30 54 69 25 283 Top Crossover Investors by Deals 2013-15 SVB analysis shows that the top 15 crossover investors poured more than $1.2 billion into private venture- backed healthcare companies in 2015. Crossover activity peaked in Q3 at 69 deals. Each of the top 10 biopharma deals in Q3 raised more than $75M, and eight of the 10 deals included at least one crossover investor. However, the pace of investment by crossovers slowed abruptly in Q4. Looking ahead, we expect these investors to continue to cautiously invest, but grow more focused on moving their private portfolio companies into the public markets. Source: CB Insights, press releases, PitchBookand SVB proprietary data
  17. 17. 17 Biopharma Gets Lion’s Share of Crossover Deals Top Crossover Investors by Sector 2013-15 Source: CB Insights, press releases, PitchBookand SVB proprietary data Top Biopharma Crossover Investors INVESTOR DEALS RA Capital 35 Rock Springs Capital 26 Deerfield Management 22 Fidelity Investments 19 Foresite Capital 18 Cormorant 16 EcoR1 Capital 16 Jennison Associates 16 Perceptive Advisors 16 Redmile Group 14 Top Device Crossover Investors INVESTOR DEALS Deerfield Management 6 RA Capital 4 Foresite Capital 3 Redmile & 9 others 1 Top Dx/Tools Crossover Investors INVESTOR DEALS Casdin Capital 6 RA Capital 2 Rock Springs Capital 2 Woodford Investment 2 Foresite & 6 others 1
  18. 18. 18 SeriesB 30 deals SeriesC 25 deals SeriesD 12 deals Series A 9 deals SeriesE+ 5 deals Series E+ 9 deals Series B 7 deals SeriesC 5 deals SeriesD 2 deals SeriesA 1 deal Top Crossover Investors Flock to Series B Mezzanine Rounds and Series A Deals Double Distribution of Round for Crossover Investments 2013-15 Source: CB Insights, press releases, PitchBookand SVB proprietary data 2013 Distribution Biopharma Device Dx/Tools 62.5% 20.8% 16.7% 2014 Distribution Biopharma Device Dx/Tools 88.9% 7.4% 3.7% 2015 Distribution Biopharma Device Dx/Tools 89.9% 4.5% 5.6% 2013 SeriesB 79 deals SeriesD 22 deals SeriesC 37 deals Series A 25 deals SeriesE+ 15 deals 2014 2015 Series A Series B Series C Series D Series E+
  19. 19. 19 Healthcare Venture Exits: M&A Climate Improves as IPOs Slow
  20. 20. 20 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 2009 2010 2011 2012 2013 2014 2015 TotalValue($Billions) 2015 Sets Record for Healthcare Investment Returns Pre-Money IPO Value ($B) $0.1 $1.8 $1.2 $2.1 $8.8 $12.1 $11.6 Big Exit Upfront Payments ($B) $4.5 $4.1 $6.6 $4.3 $5.4 $8.0 $9.9 Big Exit Milestones to be Earned ($B) $0.9 $1.1 $1.0 $1.8 $0.8 $1.0 $2.2 Pre-Money IPO ValueBig Exit Milestones to be EarnedBig Exit Upfront Payments Source: Investment bankresearch, VentureSource pressreleases, CB Insights, and discussions with life science professionals Potential Distributions* from VC-Backed IPOs and Big Exit M&A 2009-15 In 2015, returns reached a record $23.6 billion, driven in part by AstraZeneca's $4 billion payment to Acerta in December. In the last three years, potential distributions to investors reached more than $55 billion — a key reason behind the large increase in venture fundraising. While IPOs dipped in 2015, IPO pre- money values soared; Biopharma pre-money values grew40 percent over 2014. *Potential distributions are calculated assuming 75 percent venture ownership for upfront payments. IPOs are based on the pre-money valuation assuming 75 percent venture ownership. M&A milestone payments are discounted to 25 percent.
  21. 21. 21 Biopharma M&A Grows as IPO Market Slows Q1 Q2 Q3 Q4 Total 2013 IPO 3 10 11 8 32 M&A 3 3 4 3 13 2014 IPO 24 12 17 13 66 M&A 3 4 6 1 14 2015 IPO 11 13 9 10 43 M&A 7 4 6 4 21 VC-backed Biopharma Exits by Quarter 2013-15 M&A activity increased in 2015, as leading acquirers sought target companies before they went public. IPOs slowed as a result, but still exceeded 2013 totals. Source: CB Insights, press releases, PitchBookand SVB proprietary data
  22. 22. 22 Early-Stage Companies Dominate Biopharma IPOs VC-backed Biopharma IPOs by Stage 2012-15 For the second year in a row, 40 percent of biopharma IPOs in 2015 were pre-clinical or phase Istage. Early-stage focus crossed multiple indications, with oncology, anti- infectives, cardiovascular,CNS and metabolic each obtaining at least two pre-clinical or phase IIPOs. Even in 4Q, with heavy discounts in some cases in order to get out, five of nine IPOs were pre-clinical or phase I. Stage 2012 2013 2014 2015 Total Pre-Clinical 1 1 9 9 20 Phase I 0 8 20 9 37 Phase II 3 12 26 18 59 Phase III 6 8 6 6 26 Development Animal 0 2 0 0 2 Commercial 0 1 5 1 7 Total 10 32 66 43 Source: CB Insights, press releases, PitchBookand SVB proprietary data
  23. 23. 23 $61 $72 $62 $50 $70 $106 $63 $202 $174 $141 $95 $166 $266 $220 $- $50 $100 $150 $200 $250 $300 2012 2013 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 MedianValue($Millions) 2015 saw a sharp uptick in biopharma pre-money values, driving the 2015 median to nearly $200 million. Q4 posted a surprisingly high median of $220 million. Despite the overall decline in IPOs in 2015, the number of $100 million biopharma IPOs increased compared to 2014. Healthy invested capital multiples in Q4 — highest in the current IPO window — indicate that only the strongest IPOs went to market, as the overall IPO market stalled. Strong Crossover Activity Leads to Improved Biopharma IPO Metrics # of IPOs Raising over $100M 1 8 12 2 4 6 1 % of IPOs Raising over $100M 10% 25% 18% 18% 31% 67% 10% Invested Capital Multiple* 1.95x 2.00x 2.01x 2.03x 2.25x 2.46x 2.48x *Invested Capital Multipleisthe pre-money IPO valuationdivided by privatecapital raised. Source: CB Insights, press releases, PitchBookand SVB proprietary data VC-backed Biopharma IPOs 2012-15: Median Pre-Money and Dollars Raised 0 IPO $ Raised IPO Median Pre-Money
  24. 24. 24 0 5 10 15 20 25 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 #ofBigExits Biopharma M&A Activity Reaches Highest Level in a Decade # of Structured Deals # of All-In Deals Median Upfront ($M) $230 $410 $346 $200 $200 $148 $208 $125 $200 $225 $200 Median Total Deal ($M) $230 $435 $346 $285 $403 $325 $407 $375 $440 $413 $580 Median Years to Exit 4.9 4.9 6.5 4.8 5.0 4.1 5.8 5.1 6.2 4.0 4.2 Source: CB Insights, press releases, PitchBookand SVB proprietary data VC-backed Biopharma Big Exit M&A Deal Structure 2005-15 Venture-backed M&A deals reached their highest level since we started tracking the data in 2005. In 2015, upfront deal value was flat, but the median total deal value reached a decade-high $580 million. The time to exit dropped dramatically in the past two years, underscoring acquirers' appetite for innovative technologies and helping investors' internal rate of return. 2015 saw a higher percentage of all-in deals, underscoring the optionality and leverage held by VC-backed biopharma companies.
  25. 25. 25 Biopharma M&A Activity Continues Early-Stage Shift VC-backed Biopharma Big Exit M&A by Stage 2009-15 Pre-Clinical Phase I Phase II Phase III Commercial Source: CB Insights, press releases, PitchBookand SVB proprietary data 0 2 4 6 8 10 12 14 16 18 20 2009 2010 2011 2012 2013 2014 2015 Since 2013, there has been a major shift among M&A deals to companies at the pre-clinical or phase Istage. IPOs continued strong for most of 2015, which led acquirers to snap up earlier-stage companies rather than risk losing them to the public markets.
  26. 26. 26 0 1 2 3 4 5 2013 2014 2015 #ofBigExits Oncology CNS Becomes Biopharma Exit Leader while Early-Stage Interest Grows in Anti-Infectives and Cardio Source: CB Insights, press releases, PitchBookand SVB proprietary data 0 1 2 3 4 5 2013 2014 2015 CNS 0 1 2 3 4 5 2013 2014 2015 Anti-Infectives 0 1 2 3 4 5 2013 2014 2015 Cardiovascular 0 1 2 3 4 5 2013 2014 2015 Ophthalmology VC-backed Biopharma IPO and Big Exit M&A by Indication 2013-15 Pre-Clinical Phase I Phase II Phase III Commercial Represents # of IPOs Represents Big Exits 1 6 4 4 6 1 1 2 2 4 1 3 6 1 1 4 4 2 1 1 2 2 1 1 1 1 1 2 2 1 2 1 2 2 1 1 1 1 #ofBigExits
  27. 27. 27 Device Exits Hold Steady Q1 Q2 Q3 Q4 Total 2013 IPO 0 0 0 2 2 M&A 2 2 6 2 12 2014 IPO 1 5 1 3 10 M&A 2 9 5 2 18 2015 IPO 3 4 3 1 11 M&A 0 4 9 4 17 VC-backed Device Exits by Quarter 2013-15 Overall exit activity closely matched a very strong 2014, with Q3 2015 posting the greatestactivity. With a decline in Series A, company formation closely matched exit activity. This smaller pool of companies matched with the smaller number of investors should lead to more attractive valuationsfor investors and increase the chances of a successful exit. Source: CB Insights, press releases, PitchBookand SVB proprietary data
  28. 28. 28 Device Big Exit M&A Sees Earlier-Stage Activity Non-Approved CE Mark U.S. Commercial Source: CB Insights, press releases, PitchBookand SVB proprietary data 0 2 4 6 8 10 12 14 16 18 20 2009 2010 2011 2012 2013 2014 2015 #ofBigExits Represents # of IPOs Represents Big Exits 1 1 2 1 2 1 2 7 1 2 8 VC-backed Device Big Exit M&A by Stage 2009-15 2015 saw a significant pickup in early- stage activity, with five non-approved stage exits compared to one in each of the previous two years. For the first time since 2009, non- approved and CE Mark outpaced FDA-approved U.S. commercial acquisitions.
  29. 29. 29 0 2 4 6 8 10 12 14 16 18 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 #ofExits Early-Stage Deals Propel Median Values Source: CB Insights, press releases, PitchBookand SVB proprietary data VC-backed Device Big Exit M&A Deal Structure 2005-15 Median total deal value grewnearly 20 percent over 2014,helped mostly by early-stage deals. The five non-approved deal values averaged $294 million upfront and $478 million all-in. That also helped drop the time to exit to a four-year low. Six of the 17 M&A deals in 2015 were by Medtronic, which post-merger continues to be a major acquirer. Median Upfront ($M) $66 $132 $89 $150 $323 $160 $130 $95 $127 $180 $150 Median Total Deal ($M) $101 $150 $121 $250 $405 $200 $155 $195 $175 $185 $219 Median Years to Exit 5.8 7.3 7.5 7.5 4.9 7.0 6.0 7.0 6.6 6.9 5.5 # of Structured Deals # of All-In Deals
  30. 30. 30 0 1 2 3 4 5 6 7 8 9 10 11 #ofCompanies Cardiovascular Leads in Early-Stage Exits VC-backed Device IPO and Big Exit M&A by Indication 2014-15 Source: CB Insights, press releases, PitchBookand SVB proprietary data 1 2 Cardiovascular, surgical and vascular grabbed the majority of exits, with cardiovascular leading non-approved exits. Neuro-based companies sawtraction in the IPO market, as well as earlier- stage M&A. Non-Approved CE Mark U.S. Commercial Represents # of IPOs Represents Big Exits 1 3 2 1 1 1 1 1 2 2
  31. 31. 31 Dx/Tools Faces Stiff Challenges Q1 Q2 Q3 Q4 Total 2013 IPO 1 0 1 1 3 M&A 1 1 1 0 3 2014 IPO 2 2 3 0 7 M&A 2 3 0 5 10 2015 IPO 1 2 1 1 5 M&A 3 0 2 0 5 VC-backed Dx/Tools Exits by Quarter 2013-15 M&A and IPOs declined in 2015 as the sector continued to face challenges, including regulatory issues, slow reimbursement and poor IPO performance. Source: CB Insights, press releases, PitchBookand SVB proprietary data
  32. 32. 32 0 1 2 3 4 5 6 7 8 9 10 2009 2010 2011 2012 2013 2014 2015 #ofCompanies Dx and Tools Hit M&A Slump Dx Tools Source: CB Insights, press releases, PitchBookand SVB proprietary data Represents # of IPOs Represents Big Exits 1 1 3 5 2 5 VC-Backed Dx and Tools IPOs and Big Exit M&A Dx and tools M&A declined 50 percent. But exhibiting some resiliency, three of five IPOs raised more than $100 million, although prices have fallen at least 50 percent post-IPO. Dx challenges include the need for additional fundraising to get clinical data for reimbursement.This cut into the investor multiple. Tools companies remained attractive to investors looking to make a bet on or partner with companies involved in NGS. Lab miniaturization and automation may also find investor interest.
  33. 33. 33 0 2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 #ofExits Dx/Tools Sees Positive Deal Value Jump Source: CB Insights, press releases, PitchBookand SVB proprietary data VC-backed Dx/Tools Big Exit M&A Deal Structure The median upfront deal value jumped 43 percent over 2014. Dx/tools companies formed in the last few years have learned to become more capital efficient and figure out a way to exit. This led to a significant decline in time to exit. Median Upfront ($M) $73 $275 $223 $159 $127 $350 $133 $190 Median Total Deal ($M) $73 $275 $415 $159 $127 $450 $239 $200 Median Years to Exit 2.7 9.9 2.0 12.6 5.6 8.2 6.0 3.5 # of Structured Deals # of All-In Deals
  34. 34. 34 2016 Outlook: 2015 Will Be a Hard Act to Follow As 2015 closed, we saw some decline in exit activity and investor interest that indicate things are slowing. Here are our predictions for 2016: • Investment levels are poised to decline as crossover investors pull back from involvement in large mezzanine biopharma rounds and traditional investors slow their investment pace. • Fundraising, too, will fall off as most investors in this “up-cycle” have already raised new funds. • Series A investments in biopharma will drop slightly, but device may see an uptick to take advantage of the healthy ratio of Series A companies to exits. Dx/tools likely will stabilize after a challenging 2015. • The biopharma IPO window should remain open, but there will be fewer IPOs, about seven to eight per quarter in 2016. As a result, M&A will continue on pace as acquirers seek biopharma companies to replenish their pipeline, and high-fliers from the IPO boom now become acquirers. • Device IPO activity will decline. But as the pool of private device companies shrinks and acquirers look to innovate, M&A activity will likely remain stable. We believe this will lead to increased deal values and returns to investors. We anticipate continued acquisition flurries, similar to Q3 2015, as acquirers are pressured to innovate. • Dx/tools IPO activity will be difficult given ongoing challenges. M&A should pick up, and will include a mix of commercial stage companies without enough revenue to be IPO candidates and emerging tool companies that are able to leverage NGS, lab miniaturization and automation innovations.
  35. 35. 35 Glossary Big Exit Big Exits are defined as private, venture-backed merger and acquisition transactions in which the upfront payment is $75 million or more for biopharma deals and $50 million or more for device and dx/tools deals. Initial Public Offering IPO defined as venture-backed company raising IPO proceeds more than $25 million. Deal Descriptions: • Structured Deal This is a pay-for-performance system that pays some of the consideration upfront, but sets milestones in development that must be achieved before the full value of the transaction will be realized. • All-in Deal All consideration for the deal is paid when deal closes. • Big Exit Upfront Payments The upfront payment refers to payments in a structured deal that are made at the close of the deal; it does not include milestones. • Big Exit Milestonesto be Earned The milestones to be earned refer to payments in a structured deal that are made after the pre-determined goals are met. • Total Deal Value The total deal value of a structured deal includes both the upfront payment and the milestones to be earned. Regulatory Definitions: • Non-approved Non-approved refers to a device company that has no regulatory approval for its product. • CE Mark CE Mark refers to a device company that has a CE Mark-only product. CE Mark is a European Union designation that is less difficult to obtain than FDA approval, and the approval process typically has a faster timeline. • U.S. Commercial Commercial refers to a device company that has an FDA- approved product, and typically is in commercial stage. • SeriesA Series A companies are defined as U.S. companies raising their first round greater than $2 million in equity or backed by institutional or corporate venture capital.
  36. 36. 36 Paul Schuber Paul Schuber is an associate with SVB Analytics leading valuation engagements and specializing in the life sciences. Prior to SVB Analytics, Schuber facilitated clinical trials on behalf of pharmaceutical sponsors and pre-clinical trials to advance medical school research, which included writing and implementing IRB and IACUC protocols. Schuber’s healthcare experience also consists of working as an emergency medical technician and an electrocardiogram technician. He has a background in technology as well, working in many roles, including chief technology officer of an e-commerce company. Schuber earned a master’s degree in the business of bioscience from Keck Graduate Institute of Applied Life Sciences while also studying at Claremont McKenna College at the Robert Day School of Economics and Finance. Authors Jonathan Norris Jonathan Norris is a managing director for 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 sixteen 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. Managing Director, Silicon Valley Bank jnorris@svb.com Valuations Associate, SVB Analytics pschuber@svb.com
  37. 37. 37 About Silicon Valley Bank For more than 30 years, Silicon Valley Bank (SVB) has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators. Forbes named SVB one of America’s best banks (2015) and one of America’s best-managed companies (2014). Learn more at svb.com. This material, including w ithout 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 w e believe to be reliable, but w hich have not been independently verified by us and for this reason w e do not represent that the information is accurate or complete. The information should not be view ed 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. ©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks.

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