NHpicFollowing the release of their ‘Trends in Healthcare Investments and Exits 2014’ report, Nooman Haque, Director of Life Sciences at Silicon Valley Bank, provides us with an overview of the report findings and their possible implications for the UK. The blog will be split into two posts, the second of which will go up tomorrow. Nooman will be appearing as a panellist on the ‘State of the Nation Update’ session at our UK Bioscience Forum next week, debating the findings of our latest report with EY which will be launched at the event.

Next week, at the UK Bioscience Forum, Steve Bates will review life science activity in the UK. I’ve had a sneak preview but no spoilers from me! Instead I want to look at Silicon Valley Bank’s 2013/14 ‘Trends in Healthcare Investments & Exits’ report from the US and share my thoughts on what this might mean for activity here. I’ll focus on fundraising and investments in this first post. A second post will follow that highlights trends in new company formation and deal activity. All four topics are linked through a chain of events.

Fundraising

In each of the last three years, venture fundraising for life sciences in the US has been around $3.5bn. This is far from the highs of $5bn – $8bn at the 2007 peak but represents a more sustainable level of innovation; too much money creates too many companies which can be detrimental to returns and thus jeopardise future fundraising.

The healthy IPO market is supporting the continued inflow of money into funds. This underscores how important a robust capital markets infrastructure is to lowering the risk premium for investors in VC funds and thereby encouraging them to invest.

Encouragingly, venture funds are increasingly supported by corporate VCs as well as traditional investors. We have seen good traction in 2014, further supporting our view that fundraising is likely to remain stable over the next year.

Investing

Investment into the US totalled around $6.7bn in 2013, around 1.3 times dollars raised and higher than we anticipated.

Many did not foresee the strong IPO environment in 2013 and its continued strength into 2014. In addition, healthy VC investment and a robust public market draws in alternative lenders. The result is intense competition amongst banks and mezzanine providers to support the financing of later-stage, VC-backed companies on the verge of going public.

Such financing bolsters company balance sheets and directly supports the equity story as the longer ‘cash runway’ mitigates innovation risk. Indeed it is crossover funds of the type that we don’t see in Europe, along with specialist lenders, who are supporting later stage companies in this way.

Another striking contrast between the US and Europe is that the US is home to a greater number of financiers who lend to the sector across all life stages, and complement VC money. Estimates vary but the amount of non-mezzanine debt in life sciences is around 15% of the VC money – a significant slug. The repeated use of such finance by VCs and their portfolio companies speaks to the value add of this non-dilutive finance.

However, we do anticipate and are seeing declining venture investment going forward. This is partly due to the larger 2006-2008 vintage funds becoming fully invested. This will have an impact on some momentum and cyclical public investors.

The effects of these combined forces means venture investment is likely to drop to around $5bn in the US in the next year or two.

To understand what impact this has on which sectors within healthcare are thriving and which lack support, and also hear about deal flow in the US as an indicator for the global market, please look out for my second post, to be published tomorrow.

Part two will follow tomorrow, 03 Oct