GHP December 2015

ghp December 2015 | 27 industry insight Trends in Healthcare Investments and Exits – a UK Outlook As we move through the final quarter of the year, 2015 is shaping up to be a pivotal year in the life science investment market. Volatility seems to have returned with a vengeance and this, coupled with the normal uncertainties surrounding the 2016 US presidential election, means it’s worth contemplating what the future may hold. The first half of the year seemed to go according to the script: a healthy pipeline of crossover funded IPO can- didates that indeed went public and continued to have positive price performance. The financial performance was in turn supported by some important clinical mile- stones particularly in oncology such as Novartis’ data on its CTL019 study in non-Hodgkin lymphoma and multiple myeloma. It’s this kind of positive research news that continues to excite investors. The importance of crossover investors has been clear for some time. Silicon Valley Bank’s 2014 summary concluded that businesses attracting these investors enjoy higher valuations, quicker listings and superior post-IPO price performance. Bagging a crossover syn- dicate has, in the last few years, been almost a mark of approval and an inflection point in itself. The availability of crossover money and its importance in driving capital markets interest has also helped sustain fundraising at the VC level. Limited partners, who invest in VC funds, need to be sure the invest- ment partners can engineer a good exit or listing so that capital can be returned to them. Proving that the old adage, a return of capital is as important as return on capital, is true. Positive VC fundraising activity in 2014, up a staggering 56% on the previous year, means these firms have plenty of dry powder to deploy on new deals. The strong IPO market has also helped fuel the M&A market with upfront payments creeping up and again providing liquidity to the investors. That pattern continued into the first half of 2015 as five of the six US biopharma IPOs that raised more than $100 million were backed by crossover investors. Overall, nearly half of the 24 biopharma IPOs in the first half of 2015 had crossover interest. Furthermore, this optionality of allowing businesses to go public en- couraged the M&A market, particularly for early stage assets. Of the 11 deals struck in the first half of the year, six were pre-clinical or phase 1. In comparison, around 40% of the IPO biopharma candidates were pre-clinical. Medical device businesses, notable for their absence in the IPO scene, have also returned with the added bonus that two of the seven device IPOs in the first half of 2015 featured crossover investors. Overall, 2015 should top 2014’s 10 device IPOs. As a further benefit to the sector Medtronic, hampered earlier in the year by its merger with Covidien, returned as a buyer and concluded two deals. If further proof were needed that positivity knows no bounds, Europe’s capital markets seem to have re- sponded, albeit with more caution. Direct comparisons are harder because Europe’s more fragmented capital markets can be a weakness and a strength. It certain- ly appears to limit the scale of large biopharma IPOs which need specialist investment coverage. However, smaller businesses can find a happy home if they have a good story and willing investors. In the first half of 2015, 14 European businesses went public with 11 making their primary listing on a European exchange, compared to seven in the first half of 2014; although the total amount raised by the 11 businesses was slightly down at €400 million with an average raise of €36 million. In the pipeline for a London listing are two late stage biopharma businesses, Acacia and Shield, who are looking to raise enough money to propel them towards commercialisation. That’s a good point to pick up the story now. Both Aca- cia and Shield made their announcements towards the end of Q3 and the financial markets were undergoing turmoil with negative news on China, ambiguous data from the US economy and to cap it all off biotech had its own focus of attention with Turing Pharmaceuticals making the headlines for all the wrong reasons. When Turing Pharmaceuticals announced it was raising the price of Daraprim – a treatment for toxo- plamosis – by 5,000% it drew the ire of the industry. More importantly, in an environment when presidential candidates are working hard to connect with a some- what sceptical constituency, it was kept in the news by Hilary Clinton and nightly news pundits. This brought into sharp relief the economic and moral issues around expensive treatments and called into question their necessity and the process of how drugs are brought to market. The ensuing volatility has seen the NASDAQ biotech dip 25% from its peak and has seemingly caused consternation amongst potential IPO candi- dates. More so, when one considers that the shares of big pharma have not responded in the same way. Nooman Haque, Director of Healthcare & Life Sciences, Silicon Valley Bank UK Branch.