trends in private company financing & exits in ophthalmology

Healthcare Investments and ExitsMid-Year 2016 Report – OIS August 8, 2016

Prepared by:

Jonathan NorrisManaging DirectorSilicon Valley Bank

Healthcare Investments and Exits, Mid-Year 2016 Report

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Venture Healthcare Topics:

Key Highlights 1H 2016

Healthcare Investments and Fundraising

Healthcare Big Exit M&A and IPO

Cover Photo: Cytotoxic T lymphocytes attacking cancer cell


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Key Highlights 1H 2016: New Patterns Emerge as Investor Confidence Drives DealsLike investing and exits overall, healthcare experienced a bumpy start in 2016 — but also had some surprising highlights.• Venture fundraising declines, but Series A investment is up in all

sectors.• We expect healthcare investment to reach $9B-$9.5B for full-year

2016, down slightly from 2015.

• Crossover investment slows, but newly raised funds, corporate venture and family offices are largely filling the gap. Crossover investors are instead focusing on getting biopharma portfolio companies to an IPO.

• Biopharma round sizes are skyrocketing, while exits focus on early-stage companies.

• Device remains healthy, as M&A big exits are on pace to meet full-year 2015.

• Diagnostics (dx) has experienced exit pullback due to regulatory and reimbursement uncertainty. However, investment has picked up and M&A activity should increase.

4Healthcare Investments and Exits,

Mid-Year 2016 Report

Healthcare Investments and Fundraising: Series A Activity Booms


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With very healthy funding over the last few years, we continue to see strong investment into companies and expect it to continue for at least the next two years.

Based on Q1 2016 data, we think investment into companies will reach $9-$9.5B for the full year, down slightly from 2015. This reflects less crossover activity.

Fundraising in 1H 2016 is down compared to 1H 2015, driven primarily by the closing of three big funds ($2.75B total) in 2015. But we continue to see LP interest in investing into healthcare.

Investors See Strong Future in HealthcareU.S. Healthcare: Capital Invested and VC Dollars Raised

Capital Flow Ratio 127% 368% 207% 189% 175% 149% 141%

HC $ Invested into Companies HC VC $ Fundraised Gap in Funding

2009 2010 2011 2012 2013 2014 20150123456789

1011

$ Bi

llion

s

Source: PricewaterhouseCoopers, Thomson Reuters and SVB proprietary data

$7.5B

$10.5B


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Series A Activity Is Strong across All Sectors

Total Series A ($M) $1,107 $862 $1,843 $994CVC Deals % / # 28% / 17 27% / 20 26% / 23 33% / 19

BIOPHARMA

Biopharma is on pace in 2016 for 100+ Series A deals (up 30% over 2015) with $2B in invested capital. Both would be record highs, if investment velocity continues.

• Significant pre-clinical focus, especially in platform, oncology, anti-infective, neurology and orphan/rare disease companies

Device deals already have eclipsed 2015 totals, driven by angel activity.

• Significant investment activity in neurology, cardiovascular and surgical companies

Dx/tools deals and dollars in 1H 2016 have exceeded 2015 totals, despite an M&A pullback.

• Grail raised $125M in Series A, accounting for almost half of dollars raised in 1H 2016

DEVICE

DX/TOOLS

Total Series A ($M) $227 $337 $92 $104CVC Deals % / # 18% / 7 14% / 6 22% / 4 4% / 1

Total Series A ($M) $234 $252 $165 $263CVC Deals % / # 10% / 4 12% / 4 24% / 4 21% / 5

2013 2014 2015 2016

04080

120

60 75 8758

# o

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40

80

120

38 4218 24

# o

f Dea

ls

0

40

80

120

39 3417 24

# o

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ls

Source: CB Insights, PitchBook, press releases and SVB proprietary data

U.S. Company Formation: Deals and Investments in Series A

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Venture and Corporate Investors Keep Active


Trends suggest the number of deals by the most active investors will increase 30% over 2015.

Pfizer, a corporate investor, leads all investors with 9 new deals in 1H 2016.

The majority of the most active VCs in 1H 2016 have raised new funds between January 2015 and June 2016.

Active crossover investors include Deerfield Management (7), Fidelity Investors (4) and Cormorant Asset Management (4). See page 13.

Top 2015 VC+CVC BiopharmaINVESTOR DEALS TYPE

OrbiMed Advisors 16 VC

New Enterprise Associates 9 VC

Novartis Venture Funds 9 Corporate

ARCH Venture Partners 8 VC

Sofinnova Ventures 8 VC

Novo 7 VC

Pfizer Venture Investments 7 Corporate

Versant Ventures 7 VC

Celgene 6 Corporate

Johnson & Johnson Innovation 6 Corporate

SR One 6 Corporate

Top 1H 2016 VC+CVC Biopharma

INVESTOR DEALS TYPEPfizer Venture Investments 9 Corporate

OrbiMed Advisors 8 VC

Frazier Healthcare 6 VC

Novo 6 VC

AbbVie Biotech Ventures 5 Corporate

ARCH Venture Partners 5 VC

New Enterprise Associates 5 VC

Canaan Partners 4 VC

MPM Capital 4 VC

Johnson & Johnson Innovation 3 Corporate

Roche Venture Fund 3 Corporate

Most Active* New Investors in Biopharma 2015 versus 1H 2016

*Most active is defined as top 60 investors based on new investments.Source: CB Insights, PitchBook, press releases and SVB proprietary data

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Oncology Leads New Biopharma Investments


Oncology has almost three times the number of deals compared to any other category.

Anti-infective, ranked ninth in number of deals in our 2014 analysis, is now tied for second.

Platform, orphan/rare disease and neurology continue to receive significant investment.

Oncology62 deals$2,419M

Anti-Infective22 deals$686M

Platform22 deals$914M

Neurology22 deals$816M

Orphan/Rare Disease19 deals$749M

Auto-Immune

6 deals$232M

Metabolic9 deals$243M

Cardiovascular

5 deals$109M

Gastrointestinal

6 deals$128M

Respiratory4 deals$155M

Ophthalmology

5 deals$201M

Most Active* New VC Investments in Biopharma by Indication 2015–1H 2016

*Most active is defined as top 60 investors based on new investments.Source: CB Insights, PitchBook, press releases and SVB proprietary data


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Biopharma Deal Size Increases

Median investment round size from most active investors has increased 40% over 2015.

The median deal size has almost tripled since 2013.

Recent larger equity raises in biopharma could compress M&A multiples down the road, especially as IPO optionality declines.

2013 2014 2015 2016$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$15.3

$23.0

$30.0

$42.8

Med

ian

Dea

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Median Deal Size by Top 60 VC and Corporate Investors


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Device Gains Traction in Large Late-Stage Deals

Active* InvestorsINVESTOR TYPE INVESTOR TYPE

Action Potential Venture Capital Corporate Lightstone Ventures VC

Aisling Capital VC Longitude Capital VC

BioStar Ventures VC Medtronic Corporate

Deerfield Management Crossover New Enterprise Associates VC

Edwards Lifesciences Corporate OrbiMed Advisors VC

Endeavour Vision VC Sante Ventures VC

GE Ventures Corporate Sofinnova Partners VC

HealthQuest Capital VC SV Life Sciences Advisers VC

Johnson & Johnson Innovation Corporate Venrock VC

KCK Group Family Office Vertex Healthcare VC

Analysis of the top 10 1H 2016 device deals:• The median deal size

jumped to $46M in Q2 2016 — the largest median round size in two years.

• The increased deal sizes underscore the funding of late-stage pivotal trial and/or commercialization rounds.

• Cardiovascular received the most investments in 1H 2016; this indication requires significant clinical trial investment. We also saw recent big exit M&A activity in this indication, with 8 of 17 device big exits in 2015.

Active* Investors in Device 1H 2016

*Active defined as investors that are actively investing or actively looking at deals.Source: CB Insights, PitchBook, press releases and SVB proprietary data

11Healthcare Investments and Exits,

Mid-Year 2016 Report

Healthcare Big Exit M&A and IPO:Robust M&A Activity Continues as IPOs Slow


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Strong Biopharma Big Exit M&A Continues, while IPO Market Slows

Q1 Q2 Q3 Q4 Total

2013 IPO 3 10 13 8 34

M&A 3 3 3 3 12

2014IPO 24 12 17 13 66

M&A 3 4 6 1 14

2015IPO 11 12 9 10 42

M&A 7 4 6 4 21

2016IPO 7 8 15

M&A 5 4 9


VC-backed Biopharma Exits by Quarter 2013–1H 2016 Full-year 2016 biopharma IPOs are estimated to come close to the 2013 total.

Of the 15 IPOs in 1H 2016, 7 companies were trading above their IPO price and 8 trading below at the end of the first half of 2016.

We anticipate M&A big exits to pick up in 2H 2016 and exceed the 2015 total.

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Early-Stage Companies Dominate Biopharma IPOs


Stage 2012 2013 2014 2015 1H 2016

Pre-Clinical / Phase I 1 9 29 18 9

Total Biopharma IPOs 10 34 66 41 15

% Early-Stage IPOs 10% 26% 44% 44% 60%

Biopharma IPOs were focused predominantly on early-stage companies in 1H 2016.

In 1H 2016, median IPO dollars raised was $53M, down from $75M in 2H 2015. Median pre-money valuation in 1H 2016 of $176M is healthy, but below the 2H 2015 median of $233M.

Following a strong 2015 for neurology and anti-infective IPOs, these indications had none in 1H 2016. This may be related to recent clinical setbacks at newly public companies.


VC-backed Biopharma IPOs by Stage 2012–1H 2016

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Biopharma M&A Big Exit Multiples Surge;Early-Stage Focus Continues


Pre-Clinical Phase I Phase II Phase III Commercial

2012 2013 2014 2015 20160

2

4

6

8

10

12

14

16

18

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# o

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VC-backed Biopharma Big Exit M&A by Stage 2012–1H 2016Biopharma deals in 1H 2016 had a strong median upfront multiple of 4.7X. Even more impressive, the median all-in multiple reached 14X, up significantly from 2014 and 2015.

7 of 9 M&A big exits were pre-clinical or Phase I:

• Pre-clinical deals were in neurology, auto-immune and orphan/rare disease.

• Phase I deals were in oncology (2 deals), metabolic and aesthetics/dermatology.


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Early-Stage Biopharma M&A Remains Strong, while Exit Time Decreases


2012 2013 2014 2015 1H 2016$0.0

$100.0$200.0$300.0$400.0$500.0$600.0$700.0

0.01.02.03.04.05.06.0

$325M

$500M$413M

$600M$600M

5.04.1

5.3 5.6 4.7

Median Total Deal Size and Time to Exit (Pre-Clinical & Phase I)

Median Total Deal Size Median Time to Exit (years)

n=5 n=3 n=8 n=11 n=7

2012 2013 2014 2015 1H 2016

31.8%51.7%

74.0%

36.9% 51.2%

68.2%48.3%

26.0%

63.1% 48.8%

Median Total Deal Size (Pre-Clinical & Phase I)

Upfront % Milestone %

$325M $500M $413M $600M $600M

M&A median total deal size remains at record high, even as IPO optionality is decreasing.

This suggests competition among acquirers, which is leading them to pay more at deal close to acquire early-stage assets.

Biopharma M&A continues to show a quick time to exit.


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Device Big Exit M&A Charges On as IPOs Disappear

Q1 Q2 Q3 Q4 Total

2013 IPO 0 0 0 2 2

M&A 2 2 6 2 12

2014IPO 1 5 1 3 10

M&A 2 9 5 2 18

2015IPO 3 4 3 1 11

M&A 0 4 9 4 17

2016IPO 0 0 0

M&A 5 4 9


VC-backed Device Exits by Quarter 2013–1H 2016In 1H 2016 there were no device IPOs, but we did see some reverse merger activity.

At the same time, there were 9 M&A big exits — on pace to match the 2015 total.

In each of the past five quarters, there have been at least four M&A device big exits.


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Device Big Exit M&A Trends to Later Stage

Non-Approved CE Mark U.S. CommercialRepresents # of IPOs Represents Big Exits

2012 2013 2014 2015 20160

2

4

6

8

10

12

14

16

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# o

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1 2

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The orthopedic indication leads with three deals in 1H 2016.

There were no Medtronic venture-backed acquisitions in 1H 2016 (13 big exit acquisitions in 2014-2015). However, we expect Medtronic activity in 2H 2016.

Discussions with investors suggest that the next flurry of early stage acquisitions could focus on atrial fibrillation, heart failure, stroke or neurostimulation.

VC-backed Device Big Exit M&A by Stage 2012–1H 2016


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Device Big Exit M&A Propels Higher Median Values

MedianUpfront ($M) $95 $127 $180 $150 $120

MedianTotal Deal

($M)$195 $175 $185 $219 $300

MedianYears to Exit 7.0 6.6 6.9 5.5 9.2

# of Structured Deals # of All-In Deals

2012 2013 2014 2015 201602468

101214161820

# o

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Exi

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In 1H 2016, 7 of 9 M&A device big exits were structured. There have never been more than 50% structured deals in any year.

Looking at regulatory pathways in 1H 2016, the majority of deals (6 of 9) are 510k pathway. These companies typically require revenue ramp-up prior to acquisition. This helps to explain the longer time to exit and later-stage focus.

VC-backed Device Big Exit M&A Deal Structure 2012–1H 2016


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Ophthalmology #4 Indication in Device and Biopharma Exits since 2013


In venture-backed Big Exit M&A and IPOs Ophthalmology is in the top 5 and top 6 in IPOs and M&A

In overall exits (M&A + IPO), Ophthalmology ties for #4

VC-backed Big Exit M&A and IPO by Indication 2013 – 1H 2016IPO Big Exit M&AOncology 36Cardiovascular 18Neurology 23 Oncology

15Orphan/Rare 15 Neurology 12Anti-Infective 12 Vascular

10Ophthalmology 11 Surgical

10Ophthalmology 8


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Glossary

Big ExitBig Exits are defined as private, venture-backed merger and acquisition transactions in which the upfront payment is $75 million or more for biopharma deals and $50 million or more for device and dx/tools deals.

Initial Public OfferingIPO is defined as a venture-backed company raising IPO proceeds more than $25 million.

Deal DescriptionsStructured DealThis is a pay-for-performance system that pays some of the consideration upfront, but sets milestones in development that must be achieved before the full value of the transaction will be realized.All-in DealAll consideration for the deal is paid when the deal closes.Big Exit Upfront PaymentsThe upfront payment refers to payments in a structured deal that are made at the close of the deal; it does not include milestones.Big Exit Milestones to be EarnedThe milestones to be earned refer to payments in a structured deal that are made after the pre-determined goals are met.Total Deal ValueThe total deal value of a structured deal includes both the upfront payment and the milestones to be earned.

Regulatory DefinitionsNon-approvedNon-approved refers to a device company that has no regulatory approval for its product.CE MarkCE Mark refers to a device company that has a CE Mark-only product. CE Mark is a European Union designation that is less difficult to obtain than FDA approval, and the approval process typically has a faster timeline.U.S. CommercialCommercial refers to a device company that has an FDA-approved product, and typically is in commercial stage. Series ASeries A companies are defined as U.S. companies raising their first round greater than $2 million in equity or backed by institutional or corporate venture capital.

Indication DefinitionNeurologyCNS, pain, and psychology comprise neurology.


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About the Author

Jonathan NorrisJonathan Norris is a managing director for SVB's Life Science and Healthcare practice. Norris oversees business development efforts for banking and lending opportunities as well as spearheading strategic relationships with many healthcare venture capital firms. He also helps SVB Capital through sourcing and advising on limited partnership allocations.

In addition, he speaks at major investor and industry conferences and authors widely cited analyses of healthcare venture capital trends. Norris has more than sixteen years of banking experience working with healthcare companies and venture capital firms. Norris earned a bachelor's degree in business administration from the University of California, Riverside and a juris doctorate from Santa Clara University.

Managing DirectorSilicon Valley [email protected]

mailto:[email protected]


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About Silicon Valley BankFor more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. ©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. 0716-160

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