2021 is the largest healthcare fundraising year ever.
Despite market volatility, global funding to private companies reached $61 billion in February, surpassing the $60 billion mark for the fourth time in the past 12 months. What’s more, according to Crunchbase, nearly $3 billion was invested in seed rounds worldwide last month, with startup investors pouring in another $18 billion in early-stage and more than $40 billion in late-stage and technology growth.
Healthcare funding hits a new record. Venture capital has reached new heights. New venture funds allocated to healthcare nearly doubled 2020 records. Investments in companies exceeded $86 billion, a 30 percent increase. Every industry hit new highs, with medtech investment up 157%.
The rapid pace, coupled with the ever-faster turnaround from first VC to exit, pushed companies to deploy capital faster than ever, and the bubble market allowed companies to increase fund size and double down on investments considered portfolio winners. What’s not to be excited about?
Wait…not so fast.
Yes, healthcare investment has more than doubled every two years since 2017. From $16 billion to $34 billion, to $86 billion in 2021; but 2H 2021 saw lower investment, with biopharma seeing the biggest decline, down 24% from Q1 to Q2, and from Q2 to Q3 It was down 17% quarter-on-quarter and 9% from Q3 to Q4.
Prosperity is natural when the space is active, and it can be a safe haven when interest rates rise, but venture capital is a long-term business. The key exit drivers go well beyond valuation and current market dynamics.
For most VCs, exits are through IPOs (highly dependent on macroeconomics and driven by interest rates and uncontrollable geopolitical dynamics), or through strategies featuring features such as licensing deals, milestone-based payments, or specific metric structures Sales.
Big wins in healthcare are attractive. But just buying a biotech at a solid price doesn’t mean the next company targeting the same indication will emerge.
Commercialization is the key
Many parameters affect whether your investment will result in a successful exit. On top of that is strong commercialization; the capabilities of the core technology, management and TAM, as well as regulatory, pricing, marketing and other considerations. Robust handling of these key parameters greatly increases the likelihood of an exit.
One of the areas of healthcare that has sparked interest from investors and buyers is oncology. Promising preclinical and clinical data are easy to impress. But things can go wrong. Clinical trials are increasingly complex, and oncology trials are particularly vulnerable to recruitment challenges, protocol bias, and large volumes of data that can add months to time.
The three phases of the oncology trial may each take 14 to 18 months and last nearly 12 years, compared with 8 years for the non-oncology trial. Oncology trials typically involve more countries and study sites and require more patient visits. What’s more, the number of investigational oncology drugs has nearly quadrupled since 2000, from 421 trials to 1,489 trials in 2021.
The shift to precision medicine, new molecular targets, and improvements in genetic sequencing technologies make it difficult to fit selective patient criteria. Phase 2 was especially challenging; only 14% of screened participants enrolled and ultimately completed the trial, compared with 54% in non-oncology trials.
Finding the right buyer can be a challenge, even after overcoming registration hurdles while completing the campaign and shortening regulatory scrutiny. Of the 249 healthcare (not just biopharma) M&A deals announced in the U.S. and EU since 2017, only 19 of those valued at more than $1 billion were for revenue targets below $25 million. More than half of these deals were done by just 4 large pharma companies. Finding an outlet for LPs is a challenge unless larger firms are interested. In 2021, the healthcare sector closed more than 2,500 deals, but there is speculation as to how many would justify exits. Add the 2020 and 2019 years and the problem widens.
sdrawkcab kroW (works backwards)
Working backwards helps to assess the likelihood that a given seed or Series A investment will be “commercializable”. For most biopharma companies, a reasonable time frame is around 5 years, with potential coming from direct revenue (healthtech or diagnostics companies), licensing or strategic sales, or IPOs.
M&A is defined globally as an all-private, venture-backed transaction with an upfront payment of at least $75 million. The current public markets further demonstrate the importance of revenue as a commercialization metric. For the top-performing healthcare companies — defined in the U.S. and EU as at least a 50% price increase since the pandemic and a market capitalization of more than $1 billion — the median revenue growth rate was 33%, with the top 10 growing more than 58%. The worst-performing companies—those whose prices fell at least 50%—had a median revenue growth rate of 10.6%, while the bottom 10 had a -17.5% growth rate.
Applying this rapid performance assessment can quickly identify the best prospects for commercialization, i.e. the products that are most likely to be successfully exited.
The key is to focus on unmet needs that are truly unmet. Marginal improvements like 2-month OSR (overall survival rate) for cancer patients, 10% lower cost of the next hospital equipment, or the next weight loss health app sounds interesting at first, but you need to make sure you have a doctor to buy or buy your cancer drug; you have a large medtech company ready to deploy your device; and a large distribution platform willing to accept your app on its platform. If these don’t exist, you need to work harder to get them in place or understand when and how to add them. As a VC, if you start thinking about commercialization after investing, you need more than luck to make those investments yield good returns.
Photo: Abscent84, Getty Images
