Interview: Healthcare funding in 2015 reaches new heights

Healthcare investment reached new high during 2015 as corporate involvement in the sector stayed strong while ‘crossover’ investment increased substantially, according to Jonathan Norris, managing director for Silicon Valley Bank’s healthcare practice.

VC investment in healthcare was projected to reach $59bn by the end of the year, according to an SVB report, the largest figure since 2000 and an increase of more than 15% from what was considered to be a banner year in 2014. Corporates played a part in the increase too, with the most frequent participants being Johnson & Johnson Development Corporation (JJDC), Novartis Venture Funds and GlaxoSmithKline subsidiary SR One.

“[There was] continued investment by the corporate folks, even on the series A side,” Norris told Global Corporate Venturing. “I was surprised to see that corporate venture capital continued to be strong in series A at biotech, even with the crossovers participating in a lot more series A deals.

“JJDC did the most deals in biopharma, at least that was what we were able to see from the public data and our analysis, but what is interesting is that you continue to see very strong activity from the corporate players, and that along with the fact the venture folks, with the very good returns they have had over the last few years, were able to raise new funds.

“That means there is a lot of focused capital in the sector still around, which makes me feel comfortable that, even with a slowdown in crossover activity in 2016, there is still capital for new investment in the sector as well as follow-on investment in companies that have already been funded.”

According to Norris, a big part of the increase came from crossover investors such as investment firms and asset managers, which began investing a lot more heavily, and at earlier stages.

“The main spur for the increase in biotech funding was really the crossover activity,” he said. “We saw crossovers engage with private, venture-backed companies to an extent that I have never seen, culminating in Q3, which was the quarter where the top 15 crossovers participated in 67 deals in just that quarter alone.

“If you think about the type of capital the crossovers are deploying in a private, venture background, it is usually $5m to $10m, so if you say okay, these guys are putting in $7m per deal, in 2015 they would have supplied about $1.2bn to the venture-backed healthcare market. They were a huge part of the upswing in dollars provided to companies.

“Typically, crossovers come in in what is called the mezzanine round, the pre-IPO round which typically ends up being a series C or D, but over the last few years the round in which the crossovers participated began to come earlier and earlier until the crossover round last year was typically series B, and they did another 25 deals at series A.”

The interest of those crossover investors was piqued by what Norris described as the “public market receptivity of early-stage biotech companies,” as pharmaceutical companies increasingly filed for IPOs at earlier development stages. On the other hand, seeing some of those big name firms, known for investing in steady bets prior to IPO, helped to reassure public market investors which in turn made a good public market debut more likely.

Investment did fall back a bit in the fourth quarter of the year after peaking in Q3, which Norris put down to crossovers pausing for breath as their holdings in the sector stacked up and the IPO market began to be affected by wider issues in the financial markets and the sheer amount of healthcare IPOs in the 18 months before.

“In Q4 you did see a pullback on the overall amount of deals the crossovers did, and I think that was a function of a bumpy market at the end of the year,” Norris said. “Also, if you look at all the deals they have done in 2015 and 2014, these crossovers have a lot of companies that are still private which they would like to get into the public market.

“All those factors coming together – the need to push these companies out to the public market and maybe being a little bit full from companies in their private portfolio, and the bumpy public market – made crossover investing slow down in Q4. I think we will see a slower rate of investment from crossovers in 2016.”

– Photo of Jonathan Norris courtesy of Silicon Valley Bank. Stay tuned for the second part of the interview next week.