CAPITAL

Industry Trends: New Report Sheds Light on DX Tech Capital Flows

The health care industry has raised $5 billion in venture fund investment in the first half of 2017 and is well on pace to smash the single year record of $7.5 billion set in 2015, according to Silicon Valley Bank (SVB). Here’s an overview of the key findings in the SVB report (called Trends in Healthcare Investments and Exits: Mid-Year 2017).

Where the Money Is Flowing

Venture fund investment is focusing more on biopharma and DX/Tools, the report notes. While traditional investors have “lost interest” in the device sector, private equity, family offices, angel groups, corporate funds and other nontraditional venture investors are still investing in devices.

Early-stage, Series A investments across all sectors are on pace to exceed 2016 records, according to the report. For the first half of 2017, Series A investment has been “strong” in the Dx/Tools sector. SVB managing director Jonathan Norris writes in the report that almost 40 percent of these deals did not disclose investors, which suggests “significant angel investment.”

Who’s Getting In

Within DX/Tools, the most active investors are tech-focused firms, including AME Cloud Ventures, Data Collective, Innovation Endeavors, Felicis Ventures and Khosla Ventures. Corporate investors like biotech (Lilly Ventures), tools (Illumina), general health care (GE Ventures) and tech (Google’s venture arm, GV) are also investing heavily in the sector, largely in Dx/Tools companies involved in artificial intelligence (AI)- and machine learning-based technology.

Since 2015, $2.2 billion has been invested in 44 deals involving Dx/Tools AI- and machine learning-based technologies companies. While the median deal size was $12 million, companies like Grail, Guardant Health and Human Longevity have raised multiple $100 million rounds, and 11 other companies have each raised more than $30M, since 2015. Norris expects this “aggressive fundraising” to continue in the second half of 2017 and into 2018, Norris predicts.

Who’s Getting Out

There were no Dx/Tools exits (M&A or initial public offerings) in the first half of 2017 that Norris calls “troubling,” but he does see future opportunities due to the “significant” investments in the sector, including “big bets” that have been placed on next-generation sequencing, liquid biopsy, AI- and machine learning-based technology activities.

“We expect to see some exceptional exit opportunities in the next two to five years, and possibly a $1 billion-plus M&A exit in 2017,” writes Norris, with acquirers likely to include large pharmaceutical and tech companies.

Trend to Watch

Look for more investment in innovative early-stage device companies and, perhaps, reallocation by traditional venture funds to device. Since 2015, pre-market approval (PMA)/de novo 510(k) device acquisitions have generated larger upfront multiples and a quicker time to exit than iterative 510(k) pathway exits, Norris reasons. These returns are now approaching what we see from biopharma M&A.

Norris explains the dynamics behind the trend. Companies pursuing iterative 510(k) pathways typically require regulatory clearance followed by an equity raise for commercialization and revenue ramp before generating acquirer interest. However, “nearly all” innovative PMA/de novo 510(k) acquisitions occur pre-approval.

Takeaway: The broad health care industry is poised for a strong 2017 in terms of investment. Look for large, future exits in the Dx/Tools sector.

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