Investment Trends: Dx/Tools Venture Capital Keeps Flowing Despite Decline in Early-Stage Investment

Continuing a four-year trend, total U.S. venture capital investment in health care surged in 2018, reaching a new all-time high of $9.6 billion, according to Silicon Valley Bank's (SVB) Trends in Healthcare Investments and Exits annual report. While the largest gains were in biopharma, the diagnostics and tools sector (Dx/Tools) also had a strong year with slight growth in investments, with strength in later-stage company investments offsetting slight declines in Series A investment.

Dx/Tools By the Numbers
In 2018, Dx/Tools venture capital flows were $4.8 billion (spread over 211 deals), up from $4.3 billion in 2017 and representing roughly half of the $9.6 billion total generated by the entire health care industry. SVB breaks down the Dx/Tools sector into three primary categories:

Slight Decline in Dx/Tools Series A Investment
The strong growth in overall fundraising within Dx/Tools belies the year-over-year decline in the number of Series A deals, i.e., first-round from institutional or corporate venture investments of at least $2 million, from 70 to 64. There was a corresponding decrease in Series A investment dollar totals, from $845 million to $621 million. "Following multiple large Series A investments over the past two years, it is not surprising to see a slowdown in early-stage investment as investors wait for things to play out," wrote report author Jonathan Norris, managing director of SVB's Life Science and Healthcare Practice."

Even so, median Series A round size remained stable at $6 million. There were also eight Series A raises in Dx/Tools sector in 2018 of over $20 million, including by:  

• Glympse Bio (Cambridge, MA);
• Paige.AI (NY, NY);
• Shine (Janesville, WI);
• Celsius Therapeutics (Cambridge, MA);
• ArcherDx (Boulder, CO);
• Now Diagnostics (Springdale, AR);
• Mammoth Biosciences (SF, CA); and
• Alveo Technologies (Alameda, CA).

Later-Stage Investments Pick Up the Slack
The flip side of investors' wait-and-see attitude was that 85% of Dx/Tools sector investments in 2018 went to later-stage companies. Overall, there were 25 raises of over $50 million during the year, including eight rounds of over $100 million by:

• Tempus (Chicago, IL);
• Helix (San Carlos, CA);
• HeartFlow (Redwood City, CA);
• Synthego (Redwood City, CA);
• Twist Bioscience (SF, CA);
• Grail (Menlo Park, CA);
• 10x Genomics (Pleasanton, CA); and
• Zymergen (Emeryville, CA).

Billion-Dollar Companies
Six private Dx/Tools companies were valued at more than $1 billion in the last two years,  the largest number of any sector, SVB says, including the aforementioned Grail, 10x Genomics and Tempus, as well as:

• 23andMe (Mountain View, CA);
• Human Longevity (SD, CA); and
• Ginkgo Bioworks (Boston, MA).

M&A and IPOs
After a slow 2017 in which there was just one IPO and no mergers and acquisitions in Dx/Tools, activity in the sector rebounded in 2018 with strong with two successful IPOs in 2018 (by Guardant Health (Redwood City, CA) and Twist Biosciences), and 10 acquisitions.

M&A deal value, led by $1.9 billion in upfront M&A payments, set a six-year high but still substantially trailed biopharma and other health care sectors. Among the 10 M&A deals in Dx/Tools, four were between diagnostic test companies (three of them commercial) and six involved R&D tools companies. Three of the four diagnostic companies were commercial. "Nine of 10 deals were at a commercial stage and acquired by traditional lab instrument, research and diagnostic companies," writes Norris. "We are surprised to see no new acquirers, especially tech players, emerge."

Of the companies with exits, the median years to exit was 9.1, the highest reported in the past six years.

Geographical Breakdown
Geographically, California remained the center of the Dx/Tools deals universe in 2018 with 82 deals valued at $2.371 billion, including:

• 65 deals valued at $2.09 billion in Northern California; and
• 17 deals valued at $362 million in Southern California.

Massachusetts had 31 deals in 2018 valued at $579 million. Other key deal venues included New York (11 deals valued at $148 million) and Pennsylvania (7 deals valued at $36 million).

What to Expect in 2019
So, what's in store for the coming year? SVB predicts that overall investment in the life science and health care space will continue at a "healthy pace." overall. Predictions for the Dx/Tools sector in 2019:

• Series A deals will "likely climb" even though overall investment dollars could shrink following the multiple larger financings of 2017 and 2018;
• Tech acquirers will likely scoop up a few diagnostic test, tools and analytics companies, which could drive an uptick in M&A deal value; and
• There could be two to four IPOs among revenue-generating, R&D tools companies.