BIO Report: Funding cools down after five-year run while early deals stay hot

March 27, 2017 ctheodoropulos


By David Thomas, Senior Director, Industry Research and Analysis, Biotechnology Innovation Organization (BIO)

If I had to summarize in a single phrase how last year went, it would be that things “cooled off” in 2016 for sector that had been having a stellar run.

There are five metrics we track at BIO to assess how emerging therapeutic-focused companies are faring, which are presented here in a graphic. It only takes a glance at this chart to see that there is a common theme across all categories of venture capital, public fundraising, and R&D-stage dealmaking.

The drop in public fundraising of more than 50 percent, and the other significant drops here, suggest the past year was likely due to an element of uncertainty, perhaps some of which stems from the ambiguity surrounding what governments might do to restrain drug prices, or else fears of possible changes on the regulatory front in the United States and in the United Kingdom.

However, even with that in mind I do not believe these numbers suggest that the sky is falling! In fact, behind each of these declines, there is a silver lining.

Take for example the fact that the absolute levels for each of the five measures venture funding, initial public offerings, follow-on funding, licensing deals and acquisitionsthe 2016 values are still strong compared to averages over the last 10 years. Further, consider that 2015 was a record breaking year on many fronts.

When we look at venture capital, which admittedly usually lags what we see in public markets, the drop is not nearly as pronounced as in the IPO and follow-on space. Yet here, the real silver lining is that in Europe, venture capital actually remained very strong at just under USD 2 billion, and saw a slight increase in actual number of financings.

Taking a closer view of the US data, when we look at first-time Series A financings, we do not see a drop, but actually a slight increase in total funding.

Lastly, limited partners stepped up their commitment to the sector, backing several new funds in 2016, and even in the past few months we have seen three new venture funds.

Moving to IPOs, although down 50 percent in the amount of dollars raised in both Europe and the US, there are two positive takeaways:

1)  We still see an environment where early-stage companies can raise money. In fact, we saw 13 preclinical or Phase I companies go public in 2016, exactly the same amount as in 2015. And these companies were able to raise USD 60 million on average. Most notable in the class of 2016 are the three CRISPR-based genome editing companies that now have additional capital to take preclinical programs into the clinic for the first time in the US, perhaps as early as this year.

2) I should also mention that this 2016 bolus of 26 IPOs brings the total number of public biotech companies trading in the US to over 400, so that now over half of all publicly-traded companies are actually from new IPOs since 2012, creating a very broad, diverse group of technologies for public investors to back.

Follow-on offerings saw the steepest drop from 2015 levels at more than 60 percent, and that might be expected when the biotech indices experienced their second worst performance for a calendar year in history.

It is harder to find a silver lining with a drop of that size, but we are still above 2013 levels, and if the market turns higher, as it has been doing in the last three months, then this will likely bounce back in 2017. Furthermore, when we look at the financings in 2016, we see many solid examples of companies that had positive clinical readouts and were able to quickly access the markets with offerings in the USD 100 million to USD 300 million range.

Turning to corporate R&D-stage deals, in the licensing of assets from preclinical through Phase III, the total upfront payments were down 51 percent across the US and Europe and the number of deals with valuations greater than USD 10 million dropped by roughly 20 percent, which represents a break in the upward trend we have seen for five years.

There is a positive story in this data. Pre-clinical deals fared well with 15 such transactions over USD 1 billion, which is greater than any other year in our records and the second-closest year saw four such billion-dollar deals. This tells us that pharma is not just committing words to the early stage prospects, they are actually putting cash behind their words and doing so aggressively. This bodes well for many of the platform companies and startups here today.

Moving to acquisitions of companies without a drug on the market, although down 55 percent in upfront dollars, we actually saw more acquisitions in 2016 for R&D-stage emerging biotechs than we did in 2015. The difference in the dollar amounts with 2015 reflects the big Phase III buyouts that year where in 2016 the bigger deals were actually Phase II for US companies, and these came in at a lower valuation in upfront terms.

In conclusion, the coming year will likely see more change, but hopefully less uncertainty about what that change will look like and we hope that this will translate into a stronger environment for funding and dealmaking. And as we progress through the new political realities, I want to emphasize that BIO will remain committed to being the voice for biotech innovation to policymakers around the world.

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