Life Sciences in a Changing World: Startup Outlook Through 2020
As early-stage, high-growth startups prepare for the future, venture capital and partnerships will look different—but opportunity is still out there.
Life sciences startups have always been on a mission to improve human health through innovation. The global impacts of the COVID-19 crisis have made the importance of that work clearer than ever. Whether its work directly relates to virus relief efforts or not, every startup in this industry has felt the impact of the crisis. And for startup leaders looking toward the future, it’s important to understand how funding plans could change.
Peter Meath, Co-Head of Healthcare & Life Sciences for J.P. Morgan Commercial Banking, notes that the pandemic has drawn attention to the space, thereby creating an enormous tailwind of opportunity. And this isn’t just contained to companies focusing on COVID-19—it’s across the board. The public is increasingly recognizing the novel innovation generated by life sciences startups, and investors have a renewed desire to deploy capital in the space.
The funding environment is evolving, and it’s not clear where it will land. Until COVID-19 shocked the economy, valuations were on the rise, partnerships were booming, and startups were increasingly accessing liquidity through venture capital and the public markets.
Now, as early-stage, high-growth startups seek to chart their path forward, here’s a look at the evolution of two key funding areas—venture capital (VC) and corporate partnerships—with a deep dive into key subsectors.
2010: 438 R&D Partnerships, 183 Academic Research/License, 156 M&A, 72 Pipeline/Business Unit Purchases, 92 Sales/Co-Promotion, 318 Venture Rounds, 32 IPOs
2011: 622 R&D Partnerships, 400 Academic Research/License, 167 M&A, 94 Pipeline/Business Unit Purchases, 122 Sales/Co-Promotion, 329 Venture Rounds, 12 IPOs
2012: 513 R&D Partnerships, 374 Academic Research/License, 145 M&A, 95 Pipeline/Business Unit Purchases, 124 Sales/Co-Promotion, 348 Venture Rounds, 18 IPOs
2013: 670 R&D Partnerships, 413 Academic Research/License, 171 M&A, 93 Pipeline/Business Unit Purchases, 188 Sales/Co-Promotion, 385 Venture Rounds, 70 IPOs
2014: 579 R&D Partnerships, 350 Academic Research/License, 186 M&A, 101 Pipeline/Business Unit Purchases, 121 Sales/Co-Promotion, 420 Venture Rounds, 100 IPOs
2015: 690 R&D Partnerships, 428 Academic Research/License, 192 M&A, 102 Pipeline/Business Unit Purchases, 96 Sales/Co-Promotion, 472 Venture Rounds, 69 IPOs
2016: 654 R&D Partnerships, 408 Academic Research/License, 189 M&A, 83 Pipeline/Business Unit Purchases, 81 Sales/Co-Promotion, 442 Venture Rounds, 40 IPOs
2017: 729 R&D Partnerships, 499 Academic Research/License, 221 M&A, 87 Pipeline/Business Unit Purchases, 92 Sales/Co-Promotion, 309 Venture Rounds, 38 IPOs
2018: 930 R&D Partnerships, 597 Academic Research/License, 316 M&A, 124 Pipeline/Business Unit Purchases, 129 Sales/Co-Promotion, 479 Venture Rounds, 81 IPOs
2019: 900 R&D Partnerships, 598 Academic Research/License, 343 M&A, 112 Pipeline/Business Unit Purchases, 159 Sales/Co-Promotion, 460 Venture Rounds, 65 IPOs
2020 (Through 7/1/20): 599 R&D Partnerships, 337 Academic Research/License, 155 M&A, 47 Pipeline/Business Unit Purchases, 87 Sales/Co-Promotion, 277 Venture Rounds, 35 IPOs
Throughout the 2010s, life sciences saw a nearly uninterrupted boom in venture investment. In 2018 and 2019, funds were flush with capital earmarked for life sciences companies, and VC funding for healthcare set record highs as a result. Early-stage capital deployed has largely trended upward for several years, with bigger VC funds funding increasingly larger amounts of capital into Series A and B rounds. In 2019, 15 mega-funds closed deals, according to PitchBook data.
Funding raised by venture capitalists in healthcare and life sciences in the first half of this year may be on pace to surpass those raised in 2018 and 2019. The trend in very large financings or “mega-rounds” has not abated as much as expected during the crisis. That means capital is still being deployed at near record levels, though the pace of new financings has continued to flatten.
Source: DealForma Database. Updated through July 1, 2020.
There appears to have been a structural shift in the venture funding landscape over the past few years, Meath says, with rounds increasing in size across multiple therapeutic areas and companies accessing the public market at earlier and earlier stages.
John Whittaker, Managing Director, Healthcare for J.P. Morgan Investment Bank, says the industry is also seeing robust activity in crossover investing pre-IPO, where public investors enter the private market to engage with companies at earlier stages of company development. Private firms may consider strategies around when is the best time to approach these investors and how they fit in an overall capital strategy. “They’re committing meaningful amounts of capital to private investments in this space, and it is a strategic part of the overall fundraising ecosystem to consider,” he says.
Looking ahead, Meath says that while a crisis like the coronavirus outbreak has never been seen before, it has set off a series of events similar to other downturns.
“On the venture side, in every downturn you’re going to see a shifting of capital trends,” Meath says. “For example, attracting new investors from an A to B round can be more difficult, and venture investors might retain more capital so they can double down on current portfolio winners. You’re naturally going to see the structure of existing financings change as the leverage tends to move from the entrepreneur to the venture fund.”
John Whittaker, Managing Director of Healthcare, J.P. Morgan Investment Bank
It’s worth noting that investing in life sciences is quite different from other venture markets. Macroeconomic factors such as consumer demand, facets of GDP growth and even unemployment numbers do not typically hold sway in the ultimate success of many of these companies. Timelines for unlocking the value of innovation also tend to be longer for life sciences investors than investors in other sectors—hence the need for adequate runway. The path to growth and success is long and data-intensive, and investors behave accordingly.
“These are companies that take years and years to get going,” Meath says. “I think you have to look at it through that lens of, yes, there are some immediate needs right now for the pandemic, but venture funding, by nature, is not an immediate exercise.”
Partnerships and Licensing
From biologics to gene therapy, life sciences startups have developed a wave of promising new innovations in recent years. And because large pharma and biotech firms didn’t always have these paths to innovation, they moved to license new therapies by partnering with startups. The total deal value for biopharma, platform, medtech, manufacturing tech and diagnostic partnerships exceeded $110 billion in 2019, DealForma reports, which is three times the total a decade earlier.
“Heightened collaboration is a hallmark of today’s industry,” says Whittaker. “Big pharma and biotech players don’t necessarily have to buy innovative companies to get access to emerging modalities.” He says partnerships can be a strategic step for early-stage life sciences companies to seek both validation and financing.
R&D partnerships for therapeutic platforms and biopharma, for example, totaled $34.5 billion in 2009. In 2019, it was nearly three times that, according to DealForma. Increasingly, these R&D partnerships have been signed in earlier phases, even before a treatment is in preclinical trials.
Number of R&D Partnerships by Subsector
2010: 288 Therapeutic Platforms and Biopharma; 14 Medtech, Device, Digital Tx, Wearables; 65 Diagnostics, Sequencing, Omics, Tools; 71 Manufacturing Tech, Others
2011: 385 Therapeutic Platforms and Biopharma; 18 Medtech, Device, Digital Tx, Wearables; 141 Diagnostics, Sequencing, Omics, Tools; 78 Manufacturing Tech, Others
2012: 330 Therapeutic Platforms and Biopharma; 15 Medtech, Device, Digital Tx, Wearables; 103 Diagnostics, Sequencing, Omics, Tools; 65 Manufacturing Tech, Others
2013: 377 Therapeutic Platforms and Biopharma; 15 Medtech, Device, Digital Tx, Wearables; 168 Diagnostics, Sequencing, Omics, Tools; 110 Manufacturing Tech, Others
2014: 339 Therapeutic Platforms and Biopharma; 12 Medtech, Device, Digital Tx, Wearables; 135 Diagnostics, Sequencing, Omics, Tools; 93 Manufacturing Tech, Others
2015: 448 Therapeutic Platforms and Biopharma; 13 Medtech, Device, Digital Tx, Wearables; 118 Diagnostics, Sequencing, Omics, Tools; 111 Manufacturing Tech, Others
2016: 427 Therapeutic Platforms and Biopharma; 15 Medtech, Device, Digital Tx, Wearables; 108 Diagnostics, Sequencing, Omics, Tools; 104 Manufacturing Tech, Others
2017: 449 Therapeutic Platforms and Biopharma; 16 Medtech, Device, Digital Tx, Wearables; 124 Diagnostics, Sequencing, Omics, Tools; 140 Manufacturing Tech, Others
2018: 525 Therapeutic Platforms and Biopharma; 32 Medtech, Device, Digital Tx, Wearables; 207 Diagnostics, Sequencing, Omics, Tools; 166 Manufacturing Tech, Others
2019: 508 Therapeutic Platforms and Biopharma; 48 Medtech, Device, Digital Tx, Wearables; 227 Diagnostics, Sequencing, Omics, Tools; 117 Manufacturing Tech, Others
2020 (Through 7/1/20): 408 Therapeutic Platforms and Biopharma; 23 Medtech, Device, Digital Tx, Wearables; 106 Diagnostics, Sequencing, Omics, Tools; 62 Manufacturing Tech, Others
As large firms assess how to respond to the shifting economic landscape, Meath has seen a greater pace of partnership activity, particularly for pharma and biotech companies in the first two quarters—a trend he thinks may continue.
At the same time, startups could be more inclined to pursue these deals now than they were before, given that venture funding has dried up. “Maybe now partnering and bringing in some non-dilutive financing is actually a more preferable route for smaller companies,” Meath says.
Subsectors in Focus
Biotech and Biopharma
The last decade has seen a wave of new technologies such as biologics and gene and cell therapies. These developments were highly coveted by large pharma and biotech firms, which often lacked them among their core competencies. Meath says areas such as oncology, rare disease and the central nervous system will continue to be a focus for long-term pipelines and value.
The share of biopharma R&D partnerships signed at the platform stage has grown since 2016. In 2014, 54% of all partnerships were these early-stage deals, compared to 19% in phase 2 or 3 of development. In 2019, 63% of partnerships were inked in the platform stage, and 18% were in phase 2 or 3, per DealForma data.
These figures reflect a trend over the past 10 years toward more financings and dollars flowing to preclinical companies. In the recent past, more investors have been willing to fund startups earlier in the development cycle to secure access to better opportunities, Meath says. Whether there will be a pullback toward the later stage, as happened after the last recession, remains to be seen.
Looking ahead, total deal values may be on track for a record year. COVID-19 seems to have spurred interest in the biotech space from those previously not involved in it. “We’re seeing a significant recognition of novel innovation across all biotech areas, from a sentiment perspective, and increased desire to deploy capital in the space,” Meath says. While many clinical trials have been paused or delayed, he expects that the coronavirus will have limited impact on new product launches and product sales within biotech.
Average Venture Rounds: Therapeutic Platforms and Biopharma
Source: DealForma Database. Updated through July 1, 2020.
While not many venture funds focus on this subsector compared to others, a medical device company can measure its success by whether doctors use the core product, which makes results easier to measure and future performance easier to predict. Whereas biotech presents a data-driven value proposition that often relies on the prediction of future outcomes rather than current results, medical devices are procedurally driven.
In the first half of 2020, total venture funding was up year over year. “The expected dip in these deals as a result of COVID-19 didn’t really materialize, and investments held up,” Meath says. Series A volume continues to be driven by noninvasive monitoring and neurology.
How specific fields within medtech are affected over a longer period remains to be seen as patients reevaluate office visits and elective procedures. On top of this, hospitals are under enormous financial stress, and capital expenditures and buying patterns will likely shift as a result.
Average Venture Rounds: MedTech, Devices, Digital Health Therapeutics, and Wearables
Source: DealForma Database. Updated through July 1, 2020.
Tools and Diagnostics
COVID-19 shined a bright light on the diagnostic space. Total venture funds in this subsector reached the highest first half year in recent years.
“We’re seeing more venture investment because people have realized that in a crisis like this, or when some new affliction presents itself, speed, accuracy and remote monitoring are key,” Meath says.
This area is also taking in new capital from tech investors not traditionally present in life sciences, thanks in part to an emerging crossover subsector that uses AI and machine learning in combination with diagnostic data to better drive clinical outcomes. AI approaches addressing oncology analytics seem to be trending, he says.
That said, Meath believes more established tools, diagnostic products and channels will be under enormous stress going forward as hospital capital spending is adjusted due to the strain COVID-19 has put on the system. Areas like dental, ophthalmology and others will likely face significant headwinds in the near to medium term.
Average Venture Rounds: Diagnostics, Sequencing, Genomics, Proteomics, and Research Tools
Source: DealForma Database. Updated through July 1, 2020.
Generics and Specialty Pharma
Pharma companies are responding to the crisis while continuing to pursue their long-term strategies of building a pipeline of new therapeutics and drugs. For generics and specialty pharma, most of the deal action is typically in asset sales for a basket of brands and formulations.
That wasn’t the case, however, in May 2020 with the $354 million contract the U.S. government awarded to Phlow Corp. to supply common generic medications used in COVID-19 treatment. That deal can expand to more than $800 million. While the virus has disrupted supply chains, the full effects aren’t yet clear. But there is upside in some deals, such as Phlow.
Big asset purchase deals include drugs that are packaged into special purpose vehicles and sold off as business units. These aren’t really partnerships, nor are they M&A, but they’re big deals, Meath says.
Contract Research, Development and Manufacturing Organizations
Specialization is an ongoing trend within contract research, development and manufacturing organizations, or CRO/CDMO/CMOs.
“There are a lot of new technologies that are coming out, both in the device and the drug space, and some of the larger CDMOs either haven’t been well-equipped to partner in the development of these innovative products or have been out-maneuvered by smaller, more niche competitors,” Meath says. “What you’re seeing is a lot of these specialty CDMOs pop up that might focus just on biologics or just focus on the microbiome or just focus on certain areas.”
Some innovative technologies are coming from smaller, private, venture capital-backed companies. These companies are less likely to use an overseas partner because of complexities in funding and money supply overseas. He believes that, as a result, many domestic competitors have benefited.
The crisis has led to an increased focus on protecting pipeline and manufacturing capability, as life sciences companies look to ensure that vital drugs and therapies are cushioned against shocks today and in the future. Pharma companies are expected to invest more heavily in their manufacturing and development chain, which could provide opportunity for large and small companies alike.
Domestic CDMOs have seen a push to not only recapture the chemical and API supply chain from a multi-decade outsourcing trend, but also to repurpose existing manufacturing lines to produce everything from new COVID-19 drugs to hand sanitizer. “There will have to be a balance of how much to invest in new capacity and expansion with a longer-term view of what this means for the industry,” Meath says. “But regardless, the renewed focus has created demand and growth opportunities in the industry.”
All of these factors might result in greater consolidation.
Future in Focus
The current environment is unlike any we’ve seen before, but life sciences companies are well-poised to develop the innovations to weather this crisis and future challenges. Whether they’re tapping into the power of light to disinfect equipment or developing new drugs, these companies are doing essential work to benefit their communities and the world.
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