RESEARCH

The Year in Dx VC Investment: Dx/Tools Outperforms Health Care & Liquid Biopsy/AI/ Informatics Outperforms Dx/Tools

In a year that witnessed venture capital health care investment reaching an all-time high, diagnostics/tools (Dx/Tools) companies made out particularly well, according to Silicon Valley Banks’ preliminary 2018 Healthcare Investments and Exits Report. Investment was especially strong in Dx/Tools companies using artificial intelligence, informatics and liquid biopsy technologies. "As Dx/Tools companies integrate computational methods such as artificial intelligence, we see tech investors, many new to health care, starting to invest in these deals," writes lead author of the report Jonathan Norris, managing director at Silicon Valley Bank.

The Big Picture
In total, U.S. health care venture fundraising reached a record $9.1 billion in 2017, shattering the previous record of $7.5 billion set in 2015 and 26% above 2016 levels. The Dx/Tools sector enjoyed a disproportionate share of the wealth with a year-over-year increase of 40%, $2.8 billion in total.

AI, Liquid Biopsy Attract Lion’s Share of Capital
Success within the Dx/Tools sector was also disproportionate with 60% of total sector investment ($1.6 billion) going to liquid biopsy companies Guardant Health (Redwood City, Calif.) and GRAIL (Menlo, Park, Calif.), an Illumina spin off. A total of 19 Dx/Tools companies received more than $2 billion of the total sector investments. Liquid biopsy investment "exploded" with $1.8 billion (85% of the total raised) in Guardant Health, GRAIL and Human Longevity.

"We anticipate that techfocused investors will continue to apply their software expertise in Dx Analytics deals that leverage artificial intelligence. While tech corporate venture participation has increased, these investors focus on a small set of deals most compatible with their own technologies."

—Jonathan Norris

R&D Tools Subsector
R&D Tools, the Dx/Tools subset that Silicon Bank defines as research equipment and services for biopharma and academia, closed 42 deals valued at $981 million during the year, up 50% from 2016. These investments benefited the analytics platform company Human Longevity (San Diego, Calif.) and liquid biopsy tools makers Quanterix (Lexington, Mass.) and RareCyte (Seattle, Wash.).

Dx Analytics
Big investments were also made in the Dx Analytics space with 16 companies receiving a combined $749 million, including 23andMe (Mountain View, Calif.), WuXiNextCode (Cambridge, Mass.), Color (South San Francisco, Calif.) and AccuraGen (Menlo Park, Calif.).

Early-Stage Investments Are Smaller
In contrast to previous years, series A investments were made in early-stage Dx companies. Overall, the Dx/Tools sector saw an increase in the number of series A investments (73 in 2017 vs. 55 in 2016). However, the value of investments fell slightly from $516 million to $500 million. This caused the median round size to drop from $5.3 million in 2016 to $4.7 million in 2017.

The R&D Tools subset had four series A investments of $25 million or more. Norris attributes this interest in R&D Tools companies to the lack of regulatory and reimbursement hurdles facing the other Dx/Tools subsectors.

However, the majority of deals valued at $10 million or more were companies using artificial intelligence, like PathAI (Cambridge, Mass.) and M2Gen (Tampa, Fla.).

Dx/Tools Companies Lacking Exits in 2017
Dx/Tools had no big mergers and acquisitions in 2017 and only one IPO. Given the strength of investments in Dx/Tools, Norris anticipates big exits in the sector in the next few years. Tech giants who have been making investments in the sector will emerge as potential acquirers.

"We anticipate that tech-focused investors will continue to apply their software expertise in Dx Analytics deals that leverage artificial intelligence," explains Norris. "While tech corporate venture participation has increased, these investors focus on a small set of deals most compatible with their own technologies."

Predictions for 2018
Overall, Norris expects a slight pullback in health innovation-related investment in 2018 While fundraising will "be strong," it will decline to below $7 billion, he predicts. Dx/Tool investments will also decline. On paper, the decline may be dramatic given that the 2017 numbers were substantially boosted by large investment in just a few deals, namely GRAIL. But while anticipating decline in investment value, Norris also expects the number of Dx/Tool deals to remain "steady" in 2018.

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