Interview: Corporates funding healthcare at earlier stage

Corporate investors are investing in healthcare companies at an earlier stage and 2014’s fevered biotechnology IPO market is cooling off in the second half of the year, according to Jonathan Norris, managing director of venture capital bank Silicon Valley Bank’s healthcare practice.

SVB, which provides both equity funding and debt to early stage companies, recently released a report on merger and acquisitions (M&A) trends in healthcare, which Norris compiled.

Norris told Global Corporate Venturing that, while the share of funding taken by healthcare companies as part of overall venture funding had fallen to 22% in 2013 from a high of 32% in 2009, corporates are now investing in therapeutics companies at series A, rather than series C as they would have done five years ago. There are two reasons for that shift.

“Firstly, the oversyndication of rounds during that period of time made it very apparent that series A investors were taking away all the financing risk for these companies going forward, so that they did not have to look for new leads in series C and D, or even series B, to continue to raise capital,” Norris explained. “On the corporate side the idea was that they needed to get in earlier if they were going to get into these companies.

“The second point is that overall R&D spending in big biopharmaceuticals and biotech is down and [corporates] are looking to outsource that. Making sure they can see the type of early stage companies being developed and to keep an eye out for potential partnerships or M&A is an important part of them getting involved with early stage companies.”

The life sciences IPO market has witnessed fervent activity in 2014, carrying on a trend that saw the number of venture-backed flotations by pharmaceutical and medical device companies almost triple from 13 in 2012 to 37 in 2013. The market however is already starting to slow, as indicated by several recently underpriced IPOs for healthcare companies.

“2014 has already exceeded 2013 for venture-backed IPOs, but what we have seen in the second half of the year, over the last month or two, is that it is starting to cool off a little bit,” Norris said. “That is a cooling off in an exceptionally hot IPO market, so it is still a good IPO market, it’s just not generating the same number if IPOs we saw in the first half of the year.”

The interest in healthcare is not evenly divided however. Norris pinpointed oncology as a subsector of healthcare that has played host to a good deal of M&A activity, while anti-infective and cardiovascular medicines are two areas that are have also seen a resurgence.

In general, biopharmaceutical companies are outperforming medical devices significantly. There were 46 IPOs and M&A exits for biopharma companies in 2013 and only 18 for device companies.

“When I look at the biotech-pharmaceutical acquirer landscape, it is so much bigger than the landscape for medical device [companies],” Norris said. “There are so many firms out there that have bought numerous companies over the last three, four or five years.

“The street gives more credit to assets that are in development on the biotech and pharma side than the device side. Because of that, the expectations are that a pipeline needs to be built on the biotech-pharma side and that is what they are doing in order to make sure they have a viable stream of assets going forward.

“That to me seems to be the biggest reason why there continues to be so much M&A activity on the biotech side.”