Strong VC appetite points to healthy outlook
In our industry, Q1 is bookended by JP Morgan and the end of the tax year so it seems as tenuous a time as any to take stock of 2016.
According to our research, across Europe there were 46 VC-backed deals ($623m) in the first quarter, compared to 42 at this point last year ($137m USD). The increase is driven by the involvement of top tier investors with funds to deploy. Naturally we’d expect to see a cooling as these significant rounds are likely to provide sufficient runway through the year. Looking ahead, investors remain circumspect in their investment decisions but have funds to deploy. As one investor told me, “most of us have a lot of capital still to deploy, but we’re not in any particular rush, and asking prices still seem a little bullish”.
I was discussing the contrast in average deal sizes between Q1 2015 and Q1 2016 with a major European VC recently. The positive is that these large rounds are reflective of ‘US style’ deals (albeit with tranching) but the concern from this investor was a potential lack of discipline by giving management such large facilities. However, the experience from some of our clients that have received these large rounds is that capital discipline has been instilled at the early stages of a company’s formation, when they had to play with seed money; use virtual operations etc. to get to key inflection points. It’s also a great endorsement of European management teams — so often a convenient bugbear for overseas investors.
Compared to how European biotech was funded ‘in the old days’, this is a much healthier model. Far from ‘drip-feeding’, companies are forced to think innovatively and carefully about asking the right commercial questions, as well as the appropriate scientific ones, and investors rightly drive a hard bargain to get to those key inflection points, at which point companies are rewarded with the carrot of larger rounds. Capital efficiency has been proven time and time again to be a key factor (separate from the science) that distinguishes the best companies from the rest.
In the US, the pace of VC investment has matched this period last year, and this is in the absence of public market investors who have withdrawn support to a significant degree in the last two quarters. What it does mean though is that VCs are very likely to be more circumspect about the deals they do, knowing they’ll have to reserve more and be a little more ruthless about the companies they progress.
New European fundraisings were announced by Forbion and Endeavour Vision (around EUR 250m just for medtech and digital health). Add to this the Dementia Discovery Fund, Apollo Therapeutics, Imperial Innovations and other positive news I’ve heard privately from several leading European VCs on their fundraising, and the outlook for continued support of the sector remains strong. Again this is mirrored in the US where 2015 was a record year for life science VC fundraising with a total of $6.8bn raised.
The healthy VC environment is relevant to later stage financing. I hate to go on about public markets but a key requirement for such a market (and a bit of a chicken and egg situation) is a healthy supply of companies that can form a cohort and thus provide relevant pricing to inform investors. With the future supply of VC funds looking solid, and a capital efficient approach to developing companies, this mix should translate into a decent supply of companies, some of course who will transact with big pharma, but many of whom will look to raise public funds at some point.
An encouraging trend in the last quarter has been the continued involvement of US VCs in European deals. The funding from 5am, Versant, Sequoia and NSV (the last two supporting Cambridge Epigenetix’s B round) is of course recognition that there are sensible and attractive valuations available. However, these investors would not simply do a deal because of valuation — a black art at the best of times. Instead I believe it’s an endorsement of the strong science base and recognition that there are good management teams in place (which was always a convenient bugbear for non-EU investors). I don’t believe we’ll see a sudden flood of US investment here but give the funds at their disposal; the availability of strong local syndicate partners, and their increasing familiarity of investing in the EU, we can be positive that US interest will continue.
In January 2016 we forecasted seven to eight VC-backed BioPharma IPOs per quarter so at seven in Q1 we are right on target. Before we bemoan the apparent downturn in US public markets, this quarter is pretty much like Q1 2013 — a year that turned out to be a record at the time for US biotech IPOs. Personally I think if this is a return to normalcy then it’s for the better; a higher bar means for more efficient pricing, less noise and generally an environment when markets can do their job better for public, and impending public companies.
Other highlights include:
- BioPharma IPOs continue to be early stage: 5/7 deals Pre-Clin or Phase I
- Median $ raise was $50m, Pre money was $181m (Pre money similar to what we saw in 2015 though dollars raised slight down)
- Indications: Rare/Orphan and Oncology had two IPOs each
- 5/7 deals had top crossover investment in their private round — and these investors helped cover a significant portion of the IPO raise for these companies (except for Editas, which did not need insider participation)
- We think crossover participation is critical for IPOs in 2016 — there already is a strong pipeline of at least six crossover backed companies that are in the queue — hopefully a number of these will get out in Q2