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Trends in Healthcare Investments and Exits 2017

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In our annual report on the healthcare industry, Silicon Valley Bank analyzes the fundraising, investment, M&A and IPO activity of private, venture-backed biopharma, medical device and diagnostic/tools companies.

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Trends in Healthcare Investments and Exits 2017

  1. 1. Trends in Healthcare Investments and Exits 2017 Strong Fundraising and Innovation Fuels Healthcare Momentum Paul Schuber Senior Associate SVB Analytics Written by: Jonathan Norris Managing Director Silicon Valley Bank Caitlin Tolman Senior Associate Silicon Valley Bank Visit svb.com Follow @SVB_Financial Engage #SVBHealthcare
  2. 2. Table of Contents Trends in Healthcare Investments and Exits 2017 2 2016 Key Highlights 3 Healthcare Investments and Fundraising 4 Top 15 Crossover Investors 18 Healthcare Big Exit M&A and IPOs 21 2017 Outlook 43 Glossary 44 About the Authors 45
  3. 3. 2016 Key Highlights • Series A investments set records in all sectors. Recently closed funds have eagerly invested in early-stage technologies. • Biopharma has kept up with the accelerated pace of overall venture investing between 2013 and 2016. However, crossover investors reduced private investments to focus on taking their portfolio companies public. • The most active device and Dx/Tools investors grew more diverse - corporate venture, angel groups, incubators and accelerators and private equity - all seeking to fill the void left by traditional healthcare venture. Tech-focused VCs became very active in Dx/Tools. • Potential distributions declined in 2016 but exceeded 2013 totals. AbbVie’s $9.4 billion acquisition of Stemcentryx dominated the 2016 total. • Biopharma IPOs, as predicted, declined more than 30 percent from 2015. M&A activity dipped slightly and focused on early-stage deals. • IPOs for device companies reappeared in late 2016. Big exit M&A activity remained consistent, and surprisingly orthopedics and ophthalmology were the top indications. • Dx/Tools companies continued to struggle to get to exit and had no IPO activity. Technology advancements in bioinformatics have led to large investment bets, setting the stage for M&A in the coming years. After an exceptionally strong 2015, we saw a decline in investment in 2016, but fundraising remains at historically robust levels. Trends in Healthcare Investments and Exits 2017 3
  4. 4. Trends in Healthcare Investments and Exits 2017 4 Healthcare Investments and Fundraising: Series A Activity Booms
  5. 5. Total VC Dollars ($B) 26.4 31.0 44.2 40.5 44.5 68.7 78.9 74.0 Biopharma 17.0% 12.4% 9.3% 11.6% 10.7% 9.9% 12.5% 11.3% Device 11.0% 11.3% 8.8% 9.3% 9.7% 6.6% 6.8% 5.3% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 2009 2010 2011 2012 2013 2014 2015 2016* TotalVCCapitalInvestedinBillions Total VC Capital Invested ($B) Biopharma as % of Total US VC $ Device as % of Total US VC $ Venture investments in companies from 2014-2016 nearly doubled compared with 2011-2013. Biopharma investments have scaled similarly. During 2014-2016, strong IPO and M&A big exit activity has spurred healthy returns, additional fundraising and an invigorated investment pace. Device companies maintained consistent overall exit activity, but it took longer to reach M&A exits, and there were fewer IPOs. As a result, many investors shifted dollars to biopharma. Biopharma Keeps Pace with Overall Venture Investing 5 Biopharma and Device Investment as a Percentage of All U.S. Venture Investing *Full data for 2016 was not available therefore total VC capital invested in 2016 was extrapolated based on 9/30/16 data and SVB proprietary data. Source: PitchBook, NVCA and SVB proprietary data. The PitchBook data does not contain a separate Dx/Tools category. Most Dx/Tools deals appear to be contained within the biopharma and device categories. PercentageofU.S.VentureInvesting Trends in Healthcare Investments and Exits 2017
  6. 6. $4.5 $3.9 $4.1 $4.7 $4.8 $6.8 $9.8 $8.3402 475 459 496 548 562 612 393 0 100 200 300 400 500 600 700 $0 $2 $4 $6 $8 $10 $12 2009 2010 2011 2012 2013 2014 2015 2016* Pharma & Biotech ($B) Pharma & Biotech (# of Deals) $2.9 $3.5 $3.9 $3.8 $4.3 $4.5 $5.3 449 486 548 600 598 614 583 383 0 100 200 300 400 500 600 700 $0 $1 $2 $3 $4 $5 $6 2009 2010 2011 2012 2013 2014 2015 2016* HC Devices & Supplies ($B) HC Devices & Supplies (# of Deals) BIOPHARMADEVICE $3.9 Biopharma Investing Off Record High and Device Declines Trends in Healthcare Investments and Exits 2017 6 Biopharma investments declined 15 percent from 2015 but marked a 20 percent increase compared with 2014. While Series A investments were up, later-stage dollars were down. The number of biopharma deals slid to the lowest level in four years. We anticipate similar deal and dollar activity in 2017. Device investments grew annually since 2012, but in 2016 the amount invested was projected to decline 25 percent, down $1.4 billion. That marks a four-year low, and the number of deals was at a six-year low. For 2017, we forecast device investment dropping to $3.5 billion. However, the recently enacted 21st Century Cures Act could provide additional capital and faster approvals, spurring increased investment. U.S. Biopharma and Device Investment Dollars and Deals *Full data for 2016 was not available therefore total VC capital invested in 2016 was extrapolated based on 9/30/16 data and SVB proprietary data. Source: PitchBook, NVCA and SVB proprietary data. The PitchBook data does not contain a separate Dx/Tools category. Most Dx/Tools deals appear to be contained within the biopharma and device categories.
  7. 7. $0 $2 $4 $6 $8 $10 $12 $14 $16 2009 2010 2011 2012 2013 2014 2015 2016 ($Billions) HC $ Invested in Companies HC VC $ Fundraised Gap in Funding $7.2B $12.2B Steady Fundraising Continues as Investments Come Off Record 2015 Trends in Healthcare Investments and Exits 2017 7 Spurred by biopharma investments, overall healthcare venture investing continued strong, though below the record year of 2015. Fundraising was robust as investors who saw large returns in recent years raised new funds. More than $20 billion in venture funds have been raised since 2013, which will continue to propel investment. Looking ahead the next two years, we expect investments into companies to level off at $10.5–$11 billion annually through a combination of venture, corporate and other investors. U.S. Healthcare Capital Invested and VC Dollars Raised Source: PitchBook, NVCA and SVB proprietary data.
  8. 8. 38 42 31 61 #ofDeals 39 34 29 63 #ofDeals Total Series A ($M) $746 $701 $1,843 $2,127 CVC Deals % / # 38% / 10 35% / 18 26% / 23 22% / 25 Top 3 Indications Oncology Platform Drug Delivery Oncology Neuro Anti-Infective Oncology Anti-Infective Neuro Oncology Orphan/Rare Disease Neuro BIOPHARMA DEVICE Total Series A ($M) $96 $268 $155 $235 CVC Deals % / # 24% / 4 16% / 5 14% / 5 6% / 3 Top 3 Indications Imaging Cardiovascular Neuro Cardiovascular Neuro Vascular Access Neuro Cardiovascular Ophthalmology Neuro Respiratory Cardiovascular, Orthopedic DX/TOOLS Total Series A ($M) $108 $137 $252 $503 CVC Deals % / # 20% / 3 18% / 3 13% / 4 19% / 10 Series A Takes Off in 2016 Trends in Healthcare Investments and Exits 2017 8 Biopharma Series A investments were up dramatically, spurred by newly raised venture funds and early-stage exits. Oncology led indications, and orphan/rare disease placed second. Series A also grew significantly for device, but corporate investments in early-stage companies dropped off. We expect corporate investment to return in 2017 and see increased engagement by Chinese corporate investors. Dx/Tools saw meaningful early-stage momentum in 2016. Dx outpaced tools, with 59 percent of the Series A deal flow and 60 percent of total investment. At $125 million, Grail was the largest venture-backed Dx/Tools Series A deal we have seen. U.S. Company Formation: Deals and Investments in Series A 60 75 87 137 2013 2014 2015 2016#ofDeals Source: PitchBook and SVB proprietary data.
  9. 9. 8 9 10 11 12 13 14 19 20 26 Venture and Corporate Investment in Biopharma Continues Strong Trends in Healthcare Investments and Exits 2017 9 Most Active New Investors in Biopharma 2015–2016* Seven of the top 20 investors are corporate. This underscores the continued support and influence of corporate venture in the biopharma ecosystem. Each of the top venture investors has raised a new fund in the last two years. It is likely that this list will not change substantially in 2017 as these top investors are quickly deploying new capital. After dominating biopharma investing in 2015, crossover activity scaled down significantly in 2016. We discuss crossover investment in biopharma later in this report. *Most Active New Investors in biopharma defined as Top 44 venture and corporate investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. # of Deals
  10. 10. 5 4 4 8 9 15 16 17 21 63 1 1 1 2 3 7 3 10 2 4 1 3 Cardiovascular Gastrointestinal Ophthalmology Metabolic Auto-Immune Anti-Infective Orphan/Rare Disease Neuro Platform Oncology Early Stage Late Stage Undesignated Oncology, Orphan/Rare CardiovascularTrends: Oncology Leads Biopharma Investments; Orphan/Rare Disease Sees New Interest Trends in Healthcare Investments and Exits 2017 10 Most Active New Investments in Biopharma by Indication 2015–2016* *Most Active New Investors in biopharma defined as Top 44 venture and corporate investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. Early-stage investment (series A and B) across all indications in biopharma represented more than 80 percent of deals in the last two years. This has been driven by a recent increase in early stage exits. Orphan/rare disease investments continue to rise in 2016, up from #5 in last year’s paper. This interest was driven in part due to time and cost reduction for gaining FDA approval. In addition, there is typically extended market exclusivity and better commercial economics. Aesthetics/dermatology was not in the top 10 for investments, but tied with oncology for the top M&A indication in 2016.
  11. 11. Massachusetts and Northern California See Majority of Activity Trends in Healthcare Investments and Exits 2017 11 Top 5 U.S. Biopharma Top 5 OUS Biopharma Most Active New Investments in Biopharma by Geography 2015–2016* *Most Active New Investors in biopharma defined as Top 44 venture and corporate investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. China 5 deals $285M United Kingdom 11 deals $379M Switzerland 5 deals $117M Canada 8 deals $417M Sweden 3 deals $96M Northern CA 43 deals $1,648M Southern CA 20 deals $631M MA 54 deals $2,127M NY 9 deals $316M WA 8 deals $192M
  12. 12. 3 4 5 6 7 9 Diverse Investors Focus on Device Trends in Healthcare Investments and Exits 2017 12 Most Active New Investors in Device 2015–2016* *Most Active New Investors in medical device defined as Top 36 investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. # of Deals The very diverse list of investors includes venture, corporate, PE, crossovers, angel groups and accelerators. Traditional venture investors have scaled back their investing in this sector. Corporate investors include Boston Scientific, Medtronic, GSK (through Action Potential), OSF and Johnson & Johnson. Investors outside the U.S. include LSP, GIMV, and Triventures.
  13. 13. 3 3 3 2 4 5 8 7 2 7 1 3 2 1 3 3 2 2 6 6 1 2 5 1 2 1 2 2 Drug Delivery Metabolic Ophthalmology Orthopedic Uro/Gyn Non-Invasive… Neuro Vascular Access Surgical Cardiovascular Early Stage Late Stage Undesignated New Category of Non-Invasive Monitoring Receives Substantial Investment Trends in Healthcare Investments and Exits 2017 13 Most Active New Investments in Device by Indication 2015–2016* *Most Active New Investors in medical device defined as Top 36 investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. Non-Invasive Monitoring, Cardiovascular, Neuro Aesthetics/Derm Trends: Non-Invasive Monitoring For the first time, we are reporting investments in non-invasive monitoring. This category is defined as medical data collection through sensors and other technology. We saw significant investment in this category. In ranking by deals, orthopedic fell from #2 in 2015 to #7 in 2016, despite continued exit activity in this indication. Neuro investment activity grew year-over-year, and drug delivery continued to draw investor dollars.
  14. 14. Device Deals Get Boost on West Coast Trends in Healthcare Investments and Exits 2017 14 Top 5 U.S. Device Top 5 OUS Device *Most Active New Investors in medical device defined as Top 36 investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. Most Active New Investments in Device by Geography 2015–2016* Northern CA 28 deals $663M Southern CA 9 deals $318M WA 7 deals $138M TX 7 deals $40M MA 11 deals $255M Israel 5 deals $55M France 3 deals $21M Switzerland 6 deals $180M Ireland 3 deals $47M Italy 3 deals $8M
  15. 15. 2 3 4 5 8 Tech-focused VCs Dive into Dx/Tools Trends in Healthcare Investments and Exits 2017 15 Most Active New Investors in Dx/Tools 2015–2016* *Most Active New Investors in Dx/Tools defined as Top 31 investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. # of Deals We observed that a number of tech-focused venture investors are pursuing technology advancements that can be leveraged to improve healthcare. Dx/Tools, for example, uses big data and is in a prime position to take advantage of improved tools for bioinformatics. Tech-focused firms like Data Collective, Felicis and AME Cloud Ventures have emerged as very active new Dx/Tools investors. Other active investors included angel groups (Keiretsu Forum and Golden Seeds), corporate venture (Google Ventures, LabCorp, GE and Illumina) and OUS firms (DeCheng, Invitalia).
  16. 16. Northern CA Continues to be Most Active Region for Dx/Tools Trends in Healthcare Investments and Exits 2017 16 Top 5 U.S. Dx/Tools Top 5 OUS Dx/Tools Northern CA 19 deals $1,193M Southern CA 7 deals $345M UT 2 deals $61M Most Active New Investments in Dx/Tools by Geography 2015–16* *Most Active New Investors in Dx/Tools defined as Top 31 investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. United Kingdom 1 deal $2M MA 7 deals $106M WA 2 deals $24M Canada 4 deals $42M France 3 deals $35M Israel 1 deal $13M Italy 2 deals $6M
  17. 17. Biopharma deal sizes have more than doubled since 2013. Our analysis indicates three major reasons: • Increased fund size – investors are putting more dollars to work per company • Series A lasting longer – many of the Series A deals we see are large tranched rounds that provide 3-4 years worth of financing. This allows company management to focus on growing the business instead of constantly fundraising • Bigger syndicates – larger syndicates mean larger round sizes and also provide financial security. A company can sustain itself for long periods of time with inside rounds if there is a down financial market Deal Sizes for Biopharma Soar Trends in Healthcare Investments and Exits 2017 17 Dx/Tools Device Biopharma $15.3 $23.0 $30.0 $36.0 0 10 20 30 40 2013 2014 2015 2016 MedianDealSize ($M) $15.2 $17.1 $16.3 $18.0 0 5 10 15 20 2013 2014 2015 2016 MedianDealSize($M) $10.0 $12.4 $14.2 $12.0 0 5 10 15 20 2013 2014 2015 2016 MedianDealSize($M) *Most Active New Investors in biopharma (60), medical device (36) and Dx/Tools (31) defined as top investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data. Median Deal Size for Most Active New Investors 2013–2016*
  18. 18. Trends in Healthcare Investments and Exits 2017 18 Top 15 Crossover Investors: Investments Decline as Crossovers Focus on IPOs
  19. 19. 4 4 6 6 11 Top Biopharma Crossover Investors 2016 2013 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Total PRIVATE INVESTMENTS 14 74 30 42 68 23 13 13 11 10 298 *Top 15 Crossover Investors: Adage Capital Management, Cormorant Asset Management, Deerfield Management, EcoR1 Capital, Fidelity Investments, Foresite Capital Management, Jennison Associates, Partner Fund Management, Perceptive Advisors, RA Capital Management, Redmile Group, Rock Springs Capital, Sabby Capital, Wellington Management and Woodford Investment Management Crossover Investments in Biopharma Decline Rapidly Trends in Healthcare Investments and Exits 2017 19 Crossover deals in private venture-backed companies dropped more than 70 percent in 2016 as the IPO market slowed. Crossover investors shifted focus from new investments to managing IPO expectations for still-private companies in their portfolios. A number of those companies went public in 2016, but there remains a backlog of more than 80 companies. A big question for private portfolio companies seeking additional private rounds: Will crossover investors provide equity support? We expect to start learning the answers in Q2-Q3 2017. Top 15 Crossover Investors in Biopharma 2013–2016* *Top 15 Crossover Investors based on new investments in 2015–2016. Source: PitchBook and SVB proprietary data.
  20. 20. *Top 15 Crossover Investors: Adage Capital Management, Cormorant Asset Management, Deerfield Management, EcoR1 Capital, Fidelity Investments, Foresite Capital Management, Jennison Associates, Partner Fund Management, Perceptive Advisors, RA Capital Management, Redmile Group, Rock Springs Capital, Sabby Capital, Wellington Management and Woodford Investment Management **Other Investors defined as venture-backed IPOs that do not include a Top 15 crossover in private investor syndicate. Top 15 Crossovers Drive Biopharma IPO Activity Trends in Healthcare Investments and Exits 2017 20 For two years in a row, the top 15 crossover investors drove more IPOs than all other venture investors. These crossover investors seek a foothold in private venture-backed companies interested in an IPO and typically are major participants in the resulting IPO. As the overall biopharma IPO market has slowed in recent years, the crossover share of IPOs has grown. Nearly 60 percent of biopharma IPOs had a top 15 crossover investor (16 of 28) in 2016. However, crossover-backed IPOs declined significantly (from 11 to 5) in the second half of 2016. We believe crossovers will resume their IPO push in early 2017. 2 8 23 16 32 58 19 12 0 10 20 30 40 50 60 70 2013 2014 2015 2016 #ofIPOs Top 15 Crossovers* Other Investors** Source: PitchBook, press releases and SVB proprietary data. IPOs with Top 15 Crossover Investors vs. Other Venture-Backed Investors
  21. 21. Trends in Healthcare Investments and Exits 2017 21 Healthcare Big Exit M&A and IPOs: Robust M&A Activity Continues as IPOs Slow
  22. 22. $4.3 $5.4 $8.0 $10.1 $9.2 $1.8 $0.8 $1.0 $2.0 $3.1 $2.1 $8.8 $12.1 $11.6 $4.4 0 2 4 6 8 10 12 14 16 18 20 22 24 2012 2013 2014 2015 2016 TotalValue($Billions) April 2016: Stemcentrx acquired by AbbVie for $5.8 billion Potential Distributions* Dip from Record High, But Up Cycle Continues Trends in Healthcare Investments and Exits 2017 22 Potential distributions nearly tripled between 2012 and 2015. However, as we predicted, such growth is not sustainable. The slower IPO market led to lower distributions in 2016, though they still outpaced 2013. In 2016, the value of big exit M&A upfront payments (see brown columns) outpaced pre-money IPO values for the first time since 2012. The Stemcentrx acquisition accounted for about half of the upfront M&A proceeds. In 2017, we expect potential distributions to closely match 2016. Biopharma 64.4% 79.9% 69.0% 69.2% 79.2% Device 26.6% 12.2% 21.2% 22.2% 17.1% Dx/Tools 9.0% 7.9% 9.8% 8.5% 3.7% Potential Distributions from VC-backed IPOs and Big Exit M&A 2012–2016 *Potential distributions calculated as 75% of upfront payments, 25% of milestones, and 75% of pre- money IPO value. Source: PitchBook, press releases and SVB proprietary data. Pre-Money IPO Value Big Exit Milestones to be Earned Big Exit Upfront Payments
  23. 23. Biopharma Big Exits and IPOs Slow Down Trends in Healthcare Investments and Exits 2017 23 We predicted IPOs would decline to about 7-8 per quarter, and 2016 ended with 28. We saw a steep decline in Q4. We were surprised to see M&A activity decline, with a 2016 total of 17 deals. Still, that's coming off an exceptionally strong 2015 (22 deals), and 2016 activity marked the second highest level since 2012. Orphan/rare disease exits increased to match oncology, with 7 exits each (M&A and IPOs). Exit activity also increased for aesthetics/ dermatology, rare (non-genetic) and metabolic indications. Neuro, cardiovascular and anti- infective saw the largest declines in exits in 2016. VC-backed Biopharma Exits 2012–2016 Source: PitchBook, press releases and SVB proprietary data. 10 34 66 42 28 15 12 14 22 17 0 20 40 60 80 100 2012 2013 2014 2015 2016 IPO M&A
  24. 24. Acquirers Flock to Early-Stage Biopharma Companies Trends in Healthcare Investments and Exits 2017 24 Early-stage big exits continued to dominate in 2016, with more than half occurring in pre-clinical and phase I. These indications included orphan/rare disease, neuro, oncology, aesthetics/dermatology and auto-immune. Aesthetics/dermatology tied with oncology for the most M&A activity in 2016 (3 deals). Neuro and orphan/rare disease had two deals each. Early-stage M&A activity is expected to continue in 2017. If corporate tax repatriation should occur, we think that would free up cash and lead to increased activity above 2015 levels. 1 1 5 7 2 4 2 3 4 8 3 4 4 9 6 1 2 1 6 3 1 1 0 5 10 15 20 25 2012 2013 2014 2015 2016 #ofBigExits Pre-Clinical Phase I Phase II Phase III Commercial VC-backed Biopharma Big Exit M&A by Stage 2012–2016 *Stage defined as last completed clinical trial in most advanced asset. Source: PitchBook, press releases and SVB proprietary data.
  25. 25. Biopharma Big Exit Deal Values Are Stable, Despite IPO Decline Trends in Healthcare Investments and Exits 2017 25 In 2016, the median upfront deal value for biopharma big exits was stable and substantial. The acquirers were a mix of big pharma and large biotech companies. Allergan, at the top of the list, acquired four companies. A possible new trend in 2017: Avalanche, which went public in 2014, became an acquirer in 2016. In 2016, we saw four disclosed big exits valued at more than $1 billion (including milestones). In order of total deal size: Stemcentrx, Afferent, Nimbus and Ganymed. Because of the IPO slowdown, acquirers felt less pressure to act, so time to exit increased. Median Upfront ($M) 125 213 225 200 200 Median Total Deal ($M) 375 452 413 570 535 Median Years to Exit 5.1 5.6 4.0 4.2 6.0 13 9 9 12 10 2 3 5 10 7 0 2 4 6 8 10 12 14 16 18 20 22 24 2012 2013 2014 2015 2016 #ofBigExits # of Structured Deals # of All-In Deals VC-backed Biopharma Big Exit M&A Deal Structure 2008–2016 Source: PitchBook, press releases and SVB proprietary data.
  26. 26. Number of Exits Median Years to Exit Pre-Clinical Phase I Phase II Phase III Commercial Oncology 18 4.3 8 4 4 0 2 Neuro 13 4.2 4 1 5 1 2 Respiratory 7 4.9 0 1 4 1 1 Aesthetics/Derm 6 6.1 0 2 2 0 2 Cardiovascular 6 5.7 1 2 1 0 2 Auto-Immune 5 3.7 2 2 1 0 0 Anti-Infective 5 5.6 1 3 1 0 0 Orphan/Rare Disease 4 1.4 1 1 2 0 0 Ophthalmology 3 4.1 0 0 2 1 0 Oncology, Neuro Lead Biopharma Big Exits; Orphan/Rare Disease Gains Early-Exit Traction Trends in Healthcare Investments and Exits 2017 26 VC-backed Biopharma Big Exit M&A by Indication 2012–2016 *Stage defined as last completed clinical trial in most advanced asset. Source: PitchBook, press releases and SVB proprietary data. Oncology saw the highest number of big exits since 2012, and 12 of 18 were early stage (pre-clinical or phase I). Orphan/rare disease has attracted significant venture investment in recent years, and now we are seeing remarkably quick exits: 1.5 years from Series A equity raise. Six of 9 indications (highlighted above) have a median time to exit of 5 years or less.
  27. 27. Anti-Infective and Cardiovascular See Largest Upfront Multiples Trends in Healthcare Investments and Exits 2017 27 VC-backed Biopharma Big Exit M&A by Indication 2012–2016 Source: PitchBook, press releases and SVB proprietary data. Number of Exits Median Invested ($M) Medium Upfront ($M) Median Upfront Multiple On VC $ Median Total Deal ($M) Median Total Deal Multiple On VC $ Oncology 18 $33 $238 6.7x $668 15.2x Neuro 13 $50 $185 3.1x $550 6.8x Respiratory 7 $36 $135 3.2x $430 5.4x Aesthetics/Derm 6 $32 $237 4.1x $310 10.6x Cardiovascular 6 $38 $250 8.3x $1,125 25.5x Auto-Immune 5 $27 $225 3.5x $325 10.2x Anti-Infective 5 $40 $325 9.4x $464 9.4x Orphan/Rare Disease 4 $43 $128 2.9x $252 6.6 Ophthalmology 3 $42 $160 1.9x $300 6.8x The median equity round size in 2016 was substantially larger than the median total invested for exits during the 2012–2016 period. This leads to a concern that the recent large round sizes may negatively affect future exit multiples. Cardiovascular and oncology saw the largest milestone upside.
  28. 28. Early-Stage Biopharma Companies Continue March to IPO Trends in Healthcare Investments and Exits 2017 28 1 1 9 9 5 8 20 9 8 3 13 26 17 6 6 8 6 6 7 2 5 2 0 10 20 30 40 50 60 70 2012 2013 2014 2015 2016 #ofIPOs Pre-Clinical Phase I Phase II Phase III Commercial VC-Backed Biopharma IPOs by *Stage 2012–2016 *Stage defined as current clinical trial in most advanced asset. Source: PitchBook, press releases and SVB proprietary data. For a third year, early-stage (pre-clinical and phase I) biopharma IPOs continued strong, accounting for 46 percent of all 2016 biopharma IPOs. However, there was a significant decline from the first half of 2016 (10 of 18) compared with the second half (3 of 10). The early-stage trend has been fueled by crossover investors putting up large pre-IPO venture rounds. In fact, venture-backed biopharma companies with a top 15 crossover investor accounted for more than 70 percent of early-stage biopharma IPOs in 2015-2016.
  29. 29. Dollars and Values Decline as IPOs Wane Trends in Healthcare Investments and Exits 2017 29 # of IPOs Raised Over $100M 1 8 12 13 1 % of IPOs Raised Over $100M 10 24 18 32 4 $202 $182 $141 $199 $156 $61 $71 $62 $70 $53 0 50 100 150 200 250 2012 2013 2014 2015 2016 MedianAmount($Millions) The number of large IPOs declined significantly in 2016: Intellia, which focuses on orphan/rare diseases, was the only $100 million-plus IPO. In 2015, nearly one of three IPOs raised $100 million-plus. Median pre-money valuations dropped to $156 million, compared with nearly $200 million in 2015. Still, 2016 was higher than 2014. We think a key reason crossover investors retreated from the IPO market in the second half is that pre-money valuations plummeted in Q2 and Q3 2016. On a positive note, Q4 2016 saw two solid venture-backed IPOs: CRISPR Therapeutics and Ra Pharmaceuticals. Each company raised $90 million-plus with healthy pre-money values and appear to be holding their values post-IPO. VC-backed Biopharma IPOs by Pre-Money Valuation and Dollars Raised 2012–2016 Source: PitchBook, press releases and SVB proprietary data.
  30. 30. Company IPO IPO Pre- money Value ($M) Acquisition Acq. Price ($M) Upfront Acq. Price ($M) in Milestones Total Deal Size ($M) Acquirer Sector Indication Stage* May. ‘15 RM** Sep-16 $695 $1,000 $1,695 Biopharma NASH Phase III Sep. ‘14 $69 Sep-16 $639 $0 $639 Biopharma Auto-Immune Phase II Jun. ‘14 $230 Nov-15 $2,700 $0 $2,700 Biopharma Cardiovascular Phase III Feb. ‘14 $186 Mar-15 $3,500 $0 $3,500 Biopharma CNS Phase III Sep. ‘13 $315 Jan-15 $1,000 $0 $1,000 Dx/Tools Dx Commercial Jun. ‘13 $596 Nov-14 $680 $160 $840 Biopharma Orphan/Rare Phase III May. ‘13 $55 Sep-14 $315 $95 $410 Biopharma Oncology Phase III May. ‘13 $182 Jul-15 $7,200 $0 $7,200 Biopharma Auto-Immune Phase III Jul. ‘12 $94 Oct-14 $675 $147 $822 Biopharma Anti-Infective Commercial Total $18,806 Acquisitions of Newly Public Companies Soar, Generating Significant Returns Trends in Healthcare Investments and Exits 2017 30 VC-backed IPOs Acquired within 2.5 Years from IPO/Reverse Merger 2013–2016 *Stage defined as current clinical trial in most advanced asset. **RM defined as reverse merger. Source: PitchBook, press releases and SVB proprietary data. The hot IPO market of the previous few years enabled many promising healthcare startups to go public. Over time, with ensuing data releases, larger companies snapped them up at significant valuations. Between 2013 and 2016, acquirers spent nearly $19 billion on these companies.
  31. 31. Biopharma Landscape – Oncology Exits Trends in Healthcare Investments and Exits 2017 31 0 200 400 600 800 1,000 1,200 1,400 Jan. '13 Aug. '13 Mar. '14 Sep. '14 Apr. '15 Oct. '15 May. '16 Nov. '16 TotalValue($Millions) 9,800 1,250 4,000 M&A* Pre-Clinical M&A* Phase I M&A* Phase II M&A* Commercial IPO** 2016: Undisclosed deal VC-backed Biopharma Big Exit M&A and IPO in Oncology 2013–2016 *Stage for M&A defined as last completed trial in most advanced asset. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.
  32. 32. - 100 200 300 400 500 600 700 800 900 1,000 Aug. '13 Mar. '14 Sep. '14 Apr. '15 Oct. '15 May. '16 Nov. '16 TotalValue($Millions)Biopharma Landscape – Neurology Exits Trends in Healthcare Investments and Exits 2017 32 VC-backed Biopharma Big Exit M&A and IPO in Neurology 2013–2016 *Stage for M&A defined as last completed trial in most advanced asset. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data. 2016: Undisclosed partnership payout M&A* Pre-Clinical M&A* Phase I M&A* Phase II M&A* Commercial IPO**
  33. 33. Device Big Exit M&A Charges On as IPOs Disappear Trends in Healthcare Investments and Exits 2017 33 VC-backed Device Exits 2012–2016 Source: PitchBook, press releases and SVB proprietary data. In 2016, device big exit M&A activity declined from the highs of 2014 and 2015, but beat 2013. Surprisingly, 2016 M&A exits declined each quarter, ending with a single deal in Q4. Orthopedic (4 deals) and ophthalmology (3 deals) led indications in 2016. This marks a change: since 2012, orthopedic ranked #4 and ophthalmology #5 in big exits. Surprisingly, Medtronic, the leading acquirer in earlier years, made no VC-backed acquisitions in 2016. Device IPOs reappeared in late 2016. Two 510k product companies (Tactile and iRhythm) were FDA- approved, and had a revenue ramp at $50 million-plus at IPO. PMA pathway company Obalon held an IPO immediately after FDA approval, without any significant commercialization. 1 2 10 11 3 14 12 18 19 13 0 5 10 15 20 25 30 35 2012 2013 2014 2015 2016 IPO M&A
  34. 34. 3 1 1 4 2 3 3 1 5 4 8 8 15 10 7 0 2 4 6 8 10 12 14 16 18 20 2012 2013 2014 2015 2016 #ofBigExitsDevice Acquirers Continue to Focus on Later-Stage Companies Trends in Healthcare Investments and Exits 2017 34 Non-Approved CE Mark Only U.S. Commercial Represents # of IPOs Represents Big Exits Acquirers continue to focus on buying companies with products that are FDA-approved and commercialized. This puts critical regulatory and commercialization risk squarely on the venture community, increasing investment time and capital required. All 7 U.S. commercial M&A deals were 510k products. This reflects the investor mindset of the early 2000s, which focused on products with easier FDA-approval paths, instead of PMAs, which had unpredictable FDA outcomes. That said, PMA companies are being acquired, typically before FDA approval is secured. In 2016, the 3 CE Mark Only and 2 Non-Approved exits were likely PMA pathway companies. 1 2 7 1 2 8 1 2 3 VC-backed Device Big Exit M&A by Stage 2012–2016* *Stage defined as current stage in most advance product. Source: PitchBook, press releases and SVB proprietary data.
  35. 35. Device M&A Time to Exit Increases in 2016 Trends in Healthcare Investments and Exits 2017 35 Median upfront deal values stabilized in 2016 at $120 million, but we saw a significant number of milestones to be earned. The time to exit rose in 2016, with 4 exits taking 10 years or more from close of Series A. Just 2 deals had time to exit under 6 years. We see 510k companies reaching approval and commercialization more quickly compared with 5 years ago. That should lead to quicker time to exit in the next few years. Median Upfront ($M) 95 127 180 125 120 Median Total Deal ($M) 195 175 185 141 300 Median Years to Exit 7.0 6.6 6.9 7.0 8.1 7 4 9 7 9 7 8 9 12 4 0 2 4 6 8 10 12 14 16 18 20 2012 2013 2014 2015 2016 #ofBigExits # of Structured Deals # of All-In Deals VC-backed Device Big Exit M&A Deal Structure 2012–2016 Source: PitchBook, press releases and SVB proprietary data.
  36. 36. Cardiovascular, Ophthalmology and Neuro Achieve Exits at Earlier Stage* Trends in Healthcare Investments and Exits 2017 36 VC-backed Device Big Exit M&A by Indication 2012–2016 *Stage defined as current stage in most advance product. Source: PitchBook, press releases and SVB proprietary data. Earlier stage (non-approved and CE Mark only) are focused in cardiovascular, ophthalmology and neuro. Commercial-stage products have dominated device exits. Acquirers appear to have limited bandwidth or P&L ability to take on non- approved stories, other than in huge growth markets where they have been forced to buy early based on acquirer competition. Cardiovascular is a good example of this. Number of Exits Median Years to Exit Non-approved CE Mark Only U.S. Commercial Cardiovascular 19 6.8 5 4 10 Surgical 13 7.0 1 2 10 Vascular 12 5.8 1 3 8 Orthopedic 8 8.9 0 0 8 Ophthalmology 7 8.2 2 3 2 Neuro 4 5.6 1 3 0 Imaging 3 12.8 0 0 3 Aesthetics/Derm 2 5.6 0 0 2
  37. 37. Cardiovascular and Vascular Lead in Milestone Upside for Investors Trends in Healthcare Investments and Exits 2017 37 VC-backed Device Big Exit M&A by Indication 2012–2016 Source: PitchBook, press releases and SVB proprietary data. Cardiovascular and vascular companies typically are acquired before U.S. commercialization, resulting in more milestone earnouts and a larger gap between upfront and total deal values. Orthopedic exits typically are ready-made tuck-in acquisitions. The acquirers seek to scale with existing sales staff so the new revenue accrues directly to the bottom line. For this reason, we have seen acquirers target venture-backed orthopedic companies with proven sales ramps which requires more equity investment and reduced multiples for investors. Number of Exits Median Invested ($M) Median Upfront ($M) Median Upfront Multiple On VC $ Median Total Deal ($M) Median Total Deal Multiple On VC $ Cardiovascular 19 $40 $124 2.6x $250 5.8x Surgical 13 $34 $110 3.4x $170 3.8x Vascular 12 $31 $138 4.4x $238 7.4x Orthopedic 8 $49 $125 2.1x $133 2.3x Ophthalmology 7 $62 $240 2.7x $400 4.8x Neuro 4 $56 $188 3.0x $210 3.3x Imaging 3 $83 $102 1.2x $102 1.2x Aesthetics/Derm 2 $21 $325 13.7x $325 13.7x
  38. 38. - 100 200 300 400 500 600 700 800 Feb. '13 Aug. '13 Mar. '14 Sep. '14 Apr. '15 Nov. '15 May. '16 Dec. '16 TotalValue($Millions)Device Landscape – Cardiovascular Exits Trends in Healthcare Investments and Exits 2017 38 2016: Undisclosed deal One cardio development stage M&A* Non-Approved M&A* CE Mark Only M&A* U.S. Commercial IPO** VC-backed Device Big Exit M&A and IPO in Cardiovascular 2013–2016 *Stage for M&A defined as current stage in most advance product. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.
  39. 39. - 100 200 300 400 500 600 700 800 900 Jul. '12 Feb. '13 Aug. '13 Mar. '14 Sep. '14 Apr. '15 Nov. '15 May. '16 Dec. '16 TotalValue($Millions)Device Landscape – Vascular Exits Trends in Healthcare Investments and Exits 2017 39 VC-backed Device Big Exit M&A and IPO in Vascular 2013–2016 M&A* Non-Approved M&A* CE Mark Only M&A* U.S. Commercial IPO** *Stage for M&A defined as current stage in most advance product. **IPO value is pre-money IPO value. Source: PitchBook, press releases and SVB proprietary data.
  40. 40. Dx/Tools Faces Exit Slowdown Trends in Healthcare Investments and Exits 2017 40 2015* Among the trends we are seeing: new tools to enable drug development and high-end sequencing, and substantial progress in move from invasive diagnostics to simple blood screens and liquid biopsies. Tech-focused investment in bioinformatics is on the rise. Investors expect these companies to develop technologies faster and become more capital efficient. Still, M&A continued to lag in 2016. There were no Dx/Tools IPOs in 2016, in the wake of poor after- market performance. All five 2015 Dx/Tools IPOs are trading below their IPO price. Two have seen their share prices fall by half. VC-backed Dx/Tools Exits 2012–2016 Source: PitchBook, press releases and SVB proprietary data. 4 7 5 6 3 10 8 4 0 5 10 15 20 2012 2013 2014 2015 2016 IPO M&A
  41. 41. Dx Tools Represents # of IPOs Represents Big Exits Tools Sector Grabs Majority of Big Exits Trends in Healthcare Investments and Exits 2017 41 6 2 6 4 1 1 4 4 3 0 1 2 3 4 5 6 7 8 9 10 2012 2013 2014 2015 2016 #ofBigExits 4 7 5 VC-backed Dx/Tools Big Exit M&A by Stage 2012–2016 Source: PitchBook, press releases and SVB proprietary data. For the first time since 2012, Tools exits outpaced Dx in 2016. Over the last two years, tools exits earned stellar multiples on capital. The average upfront multiples exceeded 14x (median 7x), and had shorter exit times. With burgeoning interest from tech- focused VCs, Tools are advancing quickly and we expect exits (particularly for NGS and drug discovery) to increase in 2017. While Dx exits declined in 2016, we see a significant number of companies ramping revenue towards $30-$50 million. We think that level should attract acquirer interest. Some early-stage Dx companies, using advancements in assay development and bioinformatics, may morph into drug development companies.
  42. 42. Dx/Tools Sees Stable Deal Values But Time to Exit Rises Trends in Healthcare Investments and Exits 2017 42 Upfront M&A values remained stable, while total deal value went up. Time to exit more than doubled from 2015. We have seen several advancements in Dx/Tools that will allow for faster, cheaper technology development, which could help continued engagement and collaboration with biopharma. We hope that these advancements will spur exit activity and reduce time to exit. Valuable assets have commanded a premium (Assurex and ACD), however we think acquirers are being selective, waiting to get specific assets at the right price. Part of the slowdown could be a timing issue as the acquirers were busy completing and digesting big mergers in 2016. Median Upfront ($M) 127 350 133 164 175 Median Total Deal ($M) 127 450 239 164 225 Median Years to Exit 5.6 8.2 6.0 3.6 7.7 1 8 2 2 6 2 2 6 2 0 1 2 3 4 5 6 7 8 9 10 2012 2013 2014 2015 2016 #ofBigExits # of Structured Deals # of All-In Deals VC-backed Dx/Tools Big Exit M&A Deal Structure 2012–2016 Source: PitchBook, press releases and SVB proprietary data.
  43. 43. In last year’s report, we predicted 2015 would be a hard act to follow. And we were right. Here are our projections for 2017: • Healthcare investments will closely match 2016 levels, and biopharma will continue as the strongest sector. • Fundraising will come close to 2016 amounts, though may decline slightly. The current quick pace of investing may lead firms that raised in 2014 or early 2015 to return to the market in 2017, bolstering fundraising. • After a remarkably strong 2016, Series A investments in biopharma may drop as funds turn their attention to supporting Series B and later stage companies that are unable to go public. Device and Dx/Tools likely will be stable. • The biopharma IPO window will remain open in 2017, anticipating between 28 and 32 IPOs (compared with 28 in 2016). Crossovers will continue to actively push their companies public. At least half of the biopharma M&A big exits will be for early-stage companies, with the total number expected to reach between 18 and 22. • After a very slow 2016 (three IPOs), device IPOs will at least double. M&A activity likely will remain stable (13 in 2016), driven by a flurry of early-stage acquisitions. • Dx/Tools big exit M&A activity will rise in 2017 and may reach double digits (four in 2016). We anticipate at least one major acquisition of $1 billion-plus in total deal value. 2017 Outlook: Healthcare Trends Continue Positive Cycle Trends in Healthcare Investments and Exits 2017 43
  44. 44. Glossary Trends in Healthcare Investments and Exits 2017 44 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 is defined as a 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 up front, 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 the 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 Milestones to be Earned The milestones to be earned refer to payments in a structured deal that are made after the predetermined 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. Time to Exit Company time to exit, measured from the close of its first institutional round of financing. Regulatory Non-approved Non-approved refers to a device company that has no regulatory approval for its product. CE Mark Only This refers to a device company that has a CE Mark approval but has not received FDA approval. 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. Series A 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. Corporate Investor Corporate investor is defined as both venture and parent company investment into venture-backed companies Indication Definitions Neurology CNS, pain, and psychology comprise neurology. Non-Invasive Monitoring Defined as medical data collection through sensors and other technology.
  45. 45. About the Authors Trends in Healthcare Investments and Exits 2017 45 AsaManagingDirector,Norrisoverseesbusinessdevelopmenteffortsforbankingandlendingopportunitiesaswellasspearheading strategicrelationshipswithmanyhealthcareventurecapitalfirms.HealsohelpsSVBCapitalthroughsourcingandadvisingonlimited partnershipallocations. Inaddition,hespeaksatmajorinvestorandindustryconferencesandauthorswidely-citedanalyses ofhealthcareventurecapitaltrends.Norrishasmorethan16yearsofbankingexperience workingwithhealthcarecompaniesandventurecapitalfirms.Norrisearnedabachelor’sdegreeinbusinessadministrationfromthe UniversityofCalifornia,Riverside,andajurisdoctoratefromSantaClaraUniversity. Jonathan Norris Managing Director Silicon Valley Bank jnorris@svb.com AsaSeniorAssociatewithSVBAnalytics,Schuberleadsstrategicadvisoryandvaluationengagements,specializinginthelifesciences. PriortoSVBAnalytics,Schuberfacilitatedclinicaltrialsonbehalfofpharmaceuticalsponsorsandpre-clinicaltrialstoadvancemedical schoolresearch,whichincludedwritingandimplementingIRBandIACUCprotocols.Schuber’shealthcareexperiencealsoincludes workingasanemergencymedicaltechnicianandanelectrocardiogramtechnician.Hehasabackgroundintechnologyaswell,working inmanyroles,includingchieftechnologyofficerofane-commercecompany. Schuberearnedamaster’sdegreeinthebusinessofbiosciencefromKeckGraduateInstituteofAppliedLifeScienceswhilealsostudying atClaremontMcKennaCollegeattheRobertDaySchoolofEconomicsandFinance.Schuberearnedabachelor’sdegreeinbiology, emphasisinphysiologyandminorinchemistry,fromCaliforniaStateUniversity,LongBeach. PaulSchuber Senior Associate SVB Analytics pschuber@svb.com CaitlinisaSeniorAssociatewithSVB’sLifeScienceandHealthcareteam.Afive-yearveteranoftheteam,sheprovidesmarket researchandtargetedanalysisofhistoricandcurrentinvestmenttrendswithinthelifescienceandhealthcareventurecapital industry.CaitlinworkstostrengthenanddeepenrelationshipstobuildtheSVBnetworkandoffermeaningfulconnectionsfor bothVCfirmsandSVBclients.Herpassionforinnovationisevidentintheworkshedoeseverydaytoidentifyemergingindustry andmarkettrends. AftergraduatingwithhonorsfromtheUniversityofMassachusetts,Amherst,CaitlinjoinedSiliconValleyBankasaclientservice advisorin2007.ShethenheldaroleinSVB’sGlobalSalesandSolutionsgroupandhelpedtodrivevariousproductandservice solutions,particularlyincashmanagementandpayments. CaitlinTolman Senior Associate Silicon Valley Bank ctolman@svb.com
  46. 46. About Silicon Valley Bank For more than 30 years, Silicon Valley Bank 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. 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. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. ©2017 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). CompID-Jan2017-172 About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.

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