Venture Capital Investment in Diagnostic Companies Strong in 2017
From - Diagnostic Testing & Emerging Technologies Venture capital investments in health care innovation reached an all time high in 2017, including in diagnostics/tools (Dx/Tools) companies, according to… . . . read more
Venture capital investments in health care innovation reached an all time high in 2017, including in diagnostics/tools (Dx/Tools) companies, according to Silicon Valley Banks’ preliminary 2018 Healthcare Investments and Exits Report. Investment was strong in Dx/Tools companies, particularly in 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.
In total, U.S. health care venture fundraising reached a record $9.1 billion, a 26 percent increase over 2016. The previous record was $7.5 billion raised in 2015. Dx/Tools fundraising increased 40 percent, reaching $2.8 billion in 2017. However, 60 percent of this total—or $1.6 billion—came from investments in liquid biopsy companies Guardant Health (Redwood City, Calif.) and GRAIL (Menlo, Park, Calif.), an Illumina spin off.
AI, Liquid Biopsy Led Dx/Tools Investments
- In total, 19 Dx Test companies received more than $2 billion in investment.
- Large 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.).
- The Dx/Tools subset that Silicon Bank calls R&D Tools, defined as research equipment and services for biopharma and academia, closed 42 deals valued at $981 million in 2017, up 50 percent since 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.).
- Liquid biopsy investment “exploded” with $1.8 billion (85 percent of the total raised) in Guardant Health, Grail, and Human Longevity.
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 versus 55 in 2016). However, the value of investments fell slightly from $516 million 2016 to %500 million in 2017. This caused the median round size to also drop from $5.3 million in 2016 to $4.7 million in 2017.
- The R&D Tools subset had four series A investments at $25 million or more. Norris attributes this interest in R&D Tools companies to the lack of regulatory and reimbursement hurdles facing 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 initial public offering. Given the strength of investments in Dx/Tools, Norris does anticipate big exits in the sector in the next few years. This, he says, will be driven by two factors tech giants who have been making investments in the sector will also 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.”
Overall, Norris expects a slight pullback in health innovation-related investment in 2018, predicting that fundraising will “be strong,” but will decline to below $7 billion in 2018. In line with this, Dx/Tool investments will also decline. However, the decline may appear dramatic, as the 2017 numbers were substantially boosted by large investment in just a few deals, namely GRAIL. Despite the anticipated decline in the value of investment, Norris, expects the number of Dx/Tool deals to remain “steady” in 2018.
Takeaway: the Dx/Tools sector saw strong venture capital investment in 2017, driven in large part by huge interest in artificial intelligence-based analytics and liquid biopsy technology.
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