Nooman Haque, Director of Life Sciences & Healthcare at Silicon Valley Bank, shares his thoughts on the UK’s biopharma funding landscape with five key insights uncovered in the bank’s recently published ‘Trends in Healthcare Investments and Exits’ report.
Silicon Valley Bank’s annual ‘Trends in Healthcare Investments and Exits’ report revealed that whilst the short-term funding landscape in healthcare won’t change dramatically, the UK needs to move away from having lots of early-stage biotech companies towards supporting the development of firms through to later-stage.
- Crossovers boosting investment and fundraising
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Investment and fundraising both showed significant increases over the year. Last year, we predicted that investment activity would fall because non-VC investors – or crossovers – would not keep pace with the level of company creation. Yet crossovers, boosted by strong returns, continued to have a healthy appetite. Investments in 2014 stood at $8.6bn, up 30% on 2013, and at the highest level since 2008. Biopharma attracted over two-thirds of this amount. On the back of a buoyant M&A and IPO market, venture firms increased fundraising by a staggering 56% to stand at just over $6bn. Investors have been attracted to the sector partly because of the macro environment and there are signs that Europe’s big institutional investors are realising that to deliver promised returns they must also bet on the sector.
- Crossovers help companies reach superior valuations and post-IPO performance
The 15 most active crossover investors made 57 unique investments from 2013 to 2014 and as of February 2015, 25 of those had achieved an exit – creating an exceptional exit rate of 44 percent within two years. The companies had pre-money valuations that were almost 52 percent higher than their peers and raised around 48 percent more upon exit.
In addition, 6 months following their IPO, these companies had a median value 20 percent higher than their IPO price and their average valuation was 70 percent higher than their peers.
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The findings don’t reveal cause and effect relationships but, from talking to investors and companies, it’s clear there’s a pattern whereby genuinely innovative science is backed by strong VC’s who in turn are able to count on support from strong crossover investors. The very tentative emergence of a crossover sector in the UK and very selective US investors may boost required returns critical to fundraising.
- UK enjoys highest investment activity from US investors outside of the States
Although US VC’s concentrated their biopharma investments at home, the UK is actually the fourth most important destination for US investors because of a traditionally strong science base and the desire of venture firms to leverage offshore cash held by big pharma companies for M&A and partnerships, followed by Switzerland with 7, and France and Germany with 6 each.
- Sensible valuations at IPO?
2014 easily exceeded the previous year for IPO’s, median pre-money valuations continue to trend down at $141mn compared to $174mn in 2013. This is in part driven by the proportionately large increase in pre-clinical and phase I companies listing, with statistics showing that 9 pre-clinical companies listed in 2014 compared to 1 in each of 2012 and 2013. The industry is receiving sustained demand for biotech equities from generalist investors; this is allowing even lower quality companies to come out. Yet still, the market is discerning – something that may be hard to believe as the index creeps ever higher.
- Capital efficiency is key to exit success
The most surprising conclusion from this report is the importance of capital efficiency. The research showed an inverse relationship between equity dollars invested and exit multiples achieved. Top quartile exits, an 8x minimum, had just over a third of the capital invested of the next quartile.
It’s clear from this that, unless a company is building to access a market directly, large investments do not translate into big exits. Companies in the top quartile were judicious in their use of partnerships, grants and other non-dilutive funding including debt.
What does this mean for UK biopharma?
Funding continues to be challenging in the UK, especially for phase II companies. From a simple demand and supply analysis, one might conclude that there’s too much biotech for the money available.
This is a controversial conclusion, but one should consider that genuine innovation is the most important driver of successful investments and exits. Might it be better to allocate scarce funds towards those truly outstanding companies who could use the extra cash and leverage other sources of funding – not to create mega A series rounds – but to be securely funded through key development stages and to have sufficient firepower to open up additional value-adding pathways to innovation. In turn, these successful companies will provide their investors with better returns leading to a much improved fundraising environment.
Innovation requires a diversity of ideas to compete in the marketplace and a degree of collaboration between them. Thankfully, we are far from the days of drip-feeding a large number of very early-stage companies. However, the funding environment will not change dramatically in the short-term and we might end up in a situation where this drip-feeding is required to support the development of larger companies, thus moving the UK away from being considered as just an early-stage biotech factory and more towards creating truly independent companies.
Nooman Haque is the Director of Life Sciences with Silicon Valley Bank’s UK Branch. He leads a team dedicated to supporting early, growth-stage and established businesses in all sectors of life sciences.
He is also a mentor on the OneStart program, the world’s largest life sciences and healthcare accelerator organised by SR One and the Oxbridge Biotech Roundtable where he is offering his industry experience to early stage entrepreneurs.
