Emerging Pharma: Tracking Venture-Capital Funding

By Patricia Van Arnum - DCAT Editorial Director

November 1, 2017

Financing into the biotechnology industry is an important measure for emerging pharmaceutical companies. So how are the dollars flowing thus far in 2017?

In tracking US venture-capital funding, $2.2 billion was invested into biotechnology-related industries in the third quarter of 2017, a 20% increase from the second quarter, according to a PwC and CB Insights Healthcare Money Tree report. Biotechnology deals also increased 10% quarter on quarter to 102 deals in the third quarter. DCAT Value Chain Insights looks into the numbers.

Overall trends in venture-capital funding

To consider financing into the biotechnology sector, it is first important to examine trends for all of venture-capital funding as both a measure of investor activity and competition from other sectors for funding. Quarterly dollar funding to venture-capital-backed companies based in the US edged past levels in the second-quarter 2017 for an eight-quarter high, according to a MoneyTree Report from PwC and CB Insights. For purposes of the report, the analysis includes only funding into private companies and equity financings into emerging companies as venture-backed companies, which are defined as companies that have received funding at any point from either: venture capital firms, corporate venture arms, or super-angel investors.

In the third quarter of 2017, investors deployed $19 billion to US venture-capital backed companies across 1,207 deals, nearly the same as the last quarter. Funding activity was driven by another strong quarter of mega-rounds of $100 million or more as 26 deals were made in the third quarter of 2017. The deal total was one short of the tally in the second quarter of 2017 and just above the eight-quarter low seen in the fourth quarter of 2016.

"With 40% of value coming from mega-deals, the third quarter of 2017 saw the largest quarter for deal value in two years,” said Tom Ciccolella, PwC’s US Venture Capital Leader, in commenting on the report.

Seed activity as a proportion of all deals increased to 27% in the third quarter of 2017, up from an eight-quarter low the quarter before. Despite the jump, seed share has now remained below 30% for two straight quarters, according to the report. Early-stage deal share decreased to 24% from 28% in the second quarter of 2017, but early-stage deal size reached an eight-quarter high. Expansion and later-stage deal share remained constant, changing only a percentage point each. Later-stage deal size fell to $30 million in the third quarter of 2017 from $33 million the quarter before, but remains higher than all of 2016. Median expansion-stage deals declined to $15 million, the first decrease in three quarters.

Globally, total funding broke $40 billion for the second quarter in a row. Deal activity increased 3% in the third quarter of 2017 as investors distributed $42 billion across 2,645 deals to venture-backed companies. This represents a 4% decrease in total funding from the preceding quarter, but it is still 47% greater than the total of the first quarter of 2017. Deal activity in Asia increased by 25% despite a 15% decrease in funding. While European deal activity decreased 6%, total funding grew 18% in the third quarter to $5.2 billion.

“As with last quarter, we saw a healthy number of mega-financings in the third quarter, which drove strong quarterly funding totals," said Anand Sanwal, co-founder and CEO of CB Insights, in commenting on the results. "But mega-rounds now account for a rising share of total funding while overall deal activity remains in a lower range than 2015 and early 2016. In addition, the third quarter’s downtick in corporate participation is another trend to watch as a sustained pullback in corporate activity would be a negative for the venture ecosystem, given how big of a role corporations now play.”

On a global basis, corporate participation remains above 25% in 2017 year to-date. In the US, corporate participation fell in the third quarter of 2017, with corporate and corporate venture-capital participation in US deal activity declining for the first time in two quarters and dipping below 25% of all deals to venture-capital-backed companies to 23%, according to the report.

Unicorn births, defined as startups companies with valuations over $1 billion, declined in North America in the third quarter of 2017. Five new venture-capital backed companies in the US reached valuations of $1 billion or more in the third quarter of 2017, down from 10 in the second quarter of 2017. 

On an industry basis, funding for Internet-based companies led all industries again in the third quarter of 2017 and accounted for nearly half (48%) of venture-capital funding in the US. Funding for healthcare companies, which includes biotechnology, was ranked second with a 14% share, edging out mobile and telecommunications funding with a 13% share of US venture-capital funding. Funding for software companies (non-Internet and non-mobile) accounted for 7%, consumer-product companies 4%, and other industries the remaining 15%.

One specific area, funding for artificial intelligence (AI) in the US, topped $1 billion for the third quarter in a row. Both deals and dollars to US AI companies continued to be strong in the third quarter of 2017 as $1 billion was invested across 91 deals.

Venture-capital-backed digital health funding continues to be strong with the first three quarters of 2017 exceeding the combined total for 2016. In the third quarter of 2017, total venture-capital investments exceeded $900 million with significant investments in the areas of disease diagnosis, personalized health, and telehealth, according to the report. However, relative to earlier quarters in 2017, venture-capital funding in digital health declined in the third quarter. Deals and dollars to US digital health companies declined in the third quarter of 2017 with deals dropping 33% to 78 and total funding falling 66% to $919 million, making the third quarter the slowest quarter of 2017. Only one mega-round more than $100 million was recorded; the next largest round was $50 million.

Emerging pharma: venture-capital funding into the biotechnology industry

In looking at venture-capital funding into the US healthcare industry, which includes biotechnology-related companies and medical devices and equipment, funding raised remained relatively constant from the prior quarter with a slight increase in dollars and deals, according to the PwC and CB Insights' Healthcare MoneyTree report. Compared to the third quarter of 2016, dollars invested in the third quarter of 2017 decreased by 4% but the number of deals increased by 3%, with a resulting slight decrease in average deal value from $20.0 million in the third quarter 2016 to $18.6 million in the third quarter of 2017.

Dollars invested in US healthcare increased slightly to $3.2 billion in the third quarter of 2017, which was up 6% higher than the total funding in the prior quarter. Biotechnology-related industries remained on top of the healthcare sector in the US, holding a 70% share of third-quarter 2017 dollars invested while the medical devices and equipment-related industries accounted for 24% of the healthcare sector. Deal numbers were relatively constant with an increase of 2% from the prior quarter, with 171 deals closing in the third quarter of 2017. Total dollars raised from four megarounds was $789 million in the third quarter of 2017, making up 25% of total deal dollars, down five percentage points from 30% in the second quarter of 2017.

In looking at investments by stage in the US healthcare sector, early and expansion stages led with the highest market share of deals in the third quarter of 2017. The average deal share for the past eight quarters showed that early-stage deals made up 28%, and expansion-stage deals made up 26% of the market, according to the PwC/CB Insights Healthcare MoneyTree report. Seed-stage deals increased to 18% in the third quarter 2017, reversing the downward trend of the previous three quarters.

A total of $2.2 billion was invested into biotechnology-related industries in the third quarter of 2017, which was an increase of 20% from the second quarter of 2017. Biotechnology deals also increased 10% quarter on quarter to 102 deals in the third quarter of 2017.

The PwC/CB Insights Healthcare MoneyTree report notes that in the third quarter of 2017 the nature of deals showed a continued trend of large-sized financing rounds toward new treatment modalities, such as tumor neoantigens in immunotherapy and gene therapy/gene editing as well as more later stage, growth-oriented financing in agricultural/industrial biotechnology and consumer-oriented molecular diagnostics. The largest deals in the third quarter of 2017 for the biotechnology and drug development sectors were: Indigo Agriculture ($156 million), a Boston-based company using plant microbiomes to strengthen crops against disease and drought to increase crop yield; Gritstone Oncology ($93 million), an Emeryville, California-based personalized cancer immunotherapy company; SpringWorks Therapeutics ($103 million), a drug-development company focused on developing therapies for underserved patient populations; and Homology Medicines ($84 million), a Bedford, Massachusetts-based genetic medicines company focused on gene-editing and gene-therapy technology.

On a global basis, venture-capital investment in the third quarter of 2017 was $5.82 billion, representing 287 deals. Softbank Vision Fund’s investment of $1.1 billion into Roivant Sciences was one of the key deals for the third quarter of 2017. Roivant focuses on developing and commercializing therapies through its subsidiaries: Axovant (neurology), Myovant (women’s health and endocrine diseases), Dermavant (dermatology), Enzyvant (rare diseases), and Urovant (urology). Datavant, a new technology-focused subsidiary focused on improving the design, operations, and interpretation of clinical trials through data science and machine learning, will be the first company in Roivant to operate outside of traditional biopharmaceutical development, and is part of the recent funding.