Despite frequent grumblings heard throughout our industry, the data show that the Life Science investing climate might not be as bad as we were all led to believe. In the July Silicon Valley Bank report “Continued Rebound: Trends in Life Science M&A”, by Jonathan Norris, it looks like Life Science “Big Exits” (upfront payment of at least $50MM device/$75MM biotech) are on the rise. SVB looked at private merger or acquisition transactions of U.S. venture-capital backed Life Science companies since 2005 and pointed to positive momentum in the life science industry and continued solid exit activity. The report focuses on (1) exit activity in large, venture backed M&A and (2) Series A company creation and performance by indication. The report looked at both biotech and device companies, and I will highlight some of their device findings here.
First, the good news. With 18 total “Big Exit” transactions, 2011 saw more “Big Exits” for devices than any other year since 2005.
Unfortunately, other than that, 2011 was just so-so for device companies.
Although we are seeing an increase in total number of exits, the total deal value for devices is down from both 2009 and 2010. The report claims this downturn from 2010 is a result of outlier Ardian ($800MM cash up front from Medtronic) more than any other factor. But if you look at the data (see Exhibit 7) this downturn appears to be more significant than that. Years 2008 and 2009 each saw three exits with upfront cash over $600MM, while 2011 did not see any. Despite this decrease, the report remains positive, stating that the sheer number of deals is an indication of acquirer interest and that while lower than 2009 and 2010, deal values are still comparing favorable to values in 2005 through 2008.
Time to exit for all of Life Science has increased in 2011. Device companies’ times to exit are now averaging close to 8.5 years. Biotech increased in 2011 to just over a seven year to exit average. Due to biotech companies conventionally taking longer to market, I found it surprising to note that, except for 2008, these data show device companies have consistently taken more time to exit than their biotech counterparts. The report cites the cause as most likely being acquirers’ increasing move toward requiring significant regulatory and commercialization progress from device companies prior to their acquisition due to the increased risk imposed by uncertainty at the FDA and from payors.
The device exits of 2011 mostly fall into one of two camps: (1) faster-to-exit (about 5 years from first venture money in) with less than $30MM in total investment and almost a 4X average multiple; and (2) slower-to-exit (about 10 years from first venture money in) with more than $60MM in total investment and mixed multiples results. There are more companies in the second bucket leading to the 2011 increase in time to exit mentioned above. This report definitely falls in favor of the faster-to-exit company strategy. It is interesting to note that when the author looked at capital deployed as a function of multiples generated, of the 28 device Big Exits between 2005 and 2008 that a achieved a multiple greater than 4X, only four did so with more than $50MM in venture investment. Exits over 10X averaged only $24MM in venture investment!
Looking at recent experiences from Stanford Biodesign alumni, the trends seen in the report are hitting home. Two of the most successful spinouts from the program, iRhythm Technologies (founded in 2006 by fellow alum Uday Kumar, MD) and Spiracur (founded in 2007 by class alums Dean Hu, Moshe Pinto, and Kenton Fong), have achieved significant milestones, including excellent clinical data, FDA approval, and targeted commercial success. However, these two companies are entering their seventh and sixth years, respectively, since founding, despite mitigating all regulatory risk and their obvious clinical and cost advantages in an increasingly cost-constrained healthcare system. Despite the neutral-to-positive news on investments, these long timelines to exit are the “new normal”, and will continue to pose challenges to up-and-coming medical device start-ups.
And finally, the data show that device Series A Investments (of at least $500,000) are flat from last year. The numbers aren’t apocalyptic but aren’t great either. The Life Science sector overall was boosted this year by a couple of large tranched biotech transactions, but the report was quick to point out those were not indicative of other deals. The general sentiment of the report was that we will continue to see fewer new venture-funded companies over the next few years.
All in all, a great report, and well worth the read. We can put away the doomsday sirens, but we aren’t out of the woods yet.