Interview: Healthcare VC and exits compress as the market speeds up

Healthcare companies are raising substantial rounds more quickly, in turn allowing investors to exit after less time, Jonathan Norris, managing director for Silicon Valley Bank’s healthcare practice, has told Global Corporate Venturing.

As detailed last week, venture capital investment in the sector last year was the highest since 2000, and one of the most prominent features involved companies increasingly raising considerable amounts at series A and B stage, a development Norris partly put down to rounds being tranched.

“We have seen some very large rounds that in essence are a series A and B, and sometimes even a series C all put together but tranched out,” Norris said. “I think the vast majority of the big early-stage deals you see are tranched, and they are really a combination of multiple rounds just put together.

“On the good hand, that allows the syndication to be bigger, which allows for more players to get into that deal. In a time where the IPO market could get more difficult to get into, you still have all those players with money around the table to support those companies.

“These rounds are being condensed into one bigger round, but as long as the round is tranched it makes a lot of sense for these companies. If they can get to an M&A without hitting their second or third tranche that is still a good return, but there is still capital there to help fund them in case the public market is not as receptive as they want it to be.”

IPOs meanwhile continued to go from strength to strength in the first half of 2015, following on from a bumper year in 2014, and it was notable that companies in the sector were filing to go public earlier and earlier in order to take advantage of a fruitful market, with some looking to float in the wake of a series B round. This was despite their product candidates being at a relatively early stage of development.

“My feeling is that companies are going public early, and when you look at the numbers for 2014 as an example, 40% of the biotech IPOs were either preclinical or at phase 1 stage with their most advanced asset, which I thought was just stunning,” Norris stated. “That is a large percentage of early-stage companies going public.

“But in 2015 we matched that percentage – 40% of the IPOs in biopharma were preclinical or phase 1. What I thought was interesting was that if you compare 2015 to 2014, the pre-money valuations for these companies actually went up.”

In the second half of the year however, the general IPO market hit a slump that was first felt in a healthcare sector that suddenly began to see companies floating beneath their range while others pulled their flotations altogether.

Obviously, the slump was not regarded as good news for the industry but it is important to put the figures in terms of the 18 months that preceded them, and Norris argued that the IPO market tightening up  may have represented more of a correction than a panic.

“Q4 was bumpy, although there were still 10 biotech IPOs and if you look at a multiple of capital invested and the pre-money valuations, those numbers were actually pretty good,” he said.

“It is fair to say a lot of those companies priced below the range that was expected and I think that was a function of a bumpy financial market and the fact that there had been so many IPOs over the last two years so maybe there was a little bit of saturation there.

“But on the good news side you still had 10 deals go out, and half were early stage – preclinical or stage one – and frankly all of those were deals that raised a decent amount of money, so my perspective is that in Q4 there was a flight to quality.”

Norris predicts that 2016 will continue to be slow for healthcare IPOs while M&A deals stay steady due to pharmaceutical firms still being keen to beef up their pipelines.

An increase in corporate venturing has also increasingly allowed big pharmaceutical businesses to get an insight into possible targets. Being investors, they can get an early look at the data for drug candidates and decide whether portfolio companies are promising M&A candidates.

“Even if this year ends up being a tougher IPO year, I do not think we are going to see a decline in biotech M&A, just because big pharma and big biotech have outsourced their research,” Norris explained. “It has been outsourced to venture-backed biotech companies and that is where they will continue to build their pipeline.

“I think what we have seen over the past few years is that relationship has worked well. We have seen biotech companies continue to get created in really interesting areas with interesting technology, and those companies continue to get acquired by big pharma and big biotech. In fact, half the M&A deals we saw last year were preclinical or phase 1 companies that big pharma or biotech companies acquired to put into their pipeline.”

– Photo of Jonathan Norris courtesy of Silicon Valley Bank