December 1, 2023

Healthcare Global

Splash Healthcare Global All Over

Corporate investors remain key pillars of life sciences and healthcare

Overview: Corporates active in VC-backed investments and M&A

Entering 2023, the private venture-backed life sciences and healthcare landscape undoubtedly looks and feels different than it did during the fast-paced, valuation-rich days of 2021. Silicon Valley Bank’s most recent Healthcare Investment and Exits report revealed that 2022 was still the second-largest year on record for venture capital investment into healthcare companies in the US, UK and EU. However, investment dollars dropped 34% from 2021’s peak, and public markets were eerily quiet, with only 31 private venture-backed healthcare IPOs versus 174.

Lengthy conversations about what milestones are needed to unlock the next round of capital have suddenly become more commonplace for companies and their investors, as well as uncertainty about where that capital will come from (venture capital, corporates, crossovers, growth equity, etc.). Amidst this changing investment landscape, SVB has kept a pulse on the venture healthcare ecosystem and what investors — in this case, corporate investors — are doing and feeling. With that in mind, we have sought to highlight corporates’ role in the life science and healthcare ecosystem in recent years and why they continue to be a crucial part of the puzzle in the current financing and exit environment.

Since 2018, corporates have participated in over 3,500 private venture-backed life science and healthcare deals across the US, EU and UK.1 While corporate deal activity (and volume) peaked in 2021, in 2022, we still saw corporate deal count near 2020 levels (the record before 2021) even as macroeconomic factors began to put significant pressure on the venture ecosystem at large. Our data also suggests that corporate involvement as investors can lead to a higher likelihood of companies exiting via M&A. We expect M&A will be a top exit strategy for companies in the current financing environment while the IPO window remains largely shut. Some in the industry have questioned corporates’ willingness and ability to continue supporting the venture ecosystem as varying layers of uncertainty and market disarray took hold last year. However, corporate investors have remained optimistic concerning the industry’s health, and we have seen data-driven evidence of their long-term commitment to the healthcare innovation ecosystem.

Biopharma corporates instrumental in $100M+ financings

Investment: Biopharma has consistently attracted the highest level of corporate involvement in healthcare over the past five years, driven by a) impending patent cliffs, which have increased the need for big pharma and biotech to acquire new assets or platforms, and b) healthy returns with what had been (until recently) an increasingly receptive IPO and M&A market.

Within the last five years, corporate investors have participated in 41% of US, EU and UK private VC-backed biopharma deals.2 While the need for outside innovation hasn’t dwindled, the number of corporate-backed biopharma deals dipped from 2021’s high (350 deals) to 237 in 2022, putting corporate deal activity between 2019 and 2020 levels. This aligns with an overall slowdown in deals across the private biopharma sector and what corporates have anecdotally signaled as a necessary higher bar on new investments.

Amidst the current conditions, we’ve heard corporates are hyper-focused on pinpointing truly novel science following the surge in company formation that accompanied industry advancements in cell/gene therapy, mRNA approaches, and drug discovery/AI, among other areas. The slowdown in deal pacing in 2022 could also be reflective of corporates spending more time with existing portfolios and lingering prudence around valuations, which we know impacted corporates’ ability to justify new deals in 2021 despite the record levels of activity. Despite the slowdown, there is ample evidence that corporates have played a meaningful role in supporting both early and late-stage innovation in 2022 despite market headwinds. Corporates participated in just under 30% of 2022 seed/Series A3 deals in biopharma (On pace with 2021 and down slightly from 2020). They also led or participated in all three of the largest seed/Series A deals in 2022: Areteia Therapeutics (GV, Sanofi), Upstream Bio (Maruho Co.) and Affini-T therapeutics (Alexandria, Leaps by Bayer).

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Source: PitchBook and SVB proprietary data.

We noticed Areteia (focused on asthma) and Upstream (focused on allergic and inflammatory diseases) were both interesting bigger bets which required larger rounds to support big later-stage clinical trials, compared to oncology or platform deals which have attracted most of the recent early-stage activity. The most active corporates in new seed/Series A deals were Alexandria, GV, Eli Lilly, J&J, and Merck & Co. (specifically MRL Ventures, the therapeutics-focused venture arm).

Similarly, while investors (specifically crossovers) began to withdraw from funding late-stage deals4 in 2022, corporates participated in nearly 40% of late-stage deals, with an average deal size of $71M, much larger than deals without a CVC ($41M). Furthermore, despite a 25% drop in $100M+ financings in biopharma broadly in 2022, we found that over 60% of those deals had a corporate in the syndicate (consistent with 2021). In fact, we saw multiple $100M+ deals containing as many as three or more corporates, the two largest being Recode Therapeutics ($200M financing, led by Pfizer with Bayer, Amgen and Sanofi) and Lifemine ($175M financing with participation from GSK, MRL Ventures and GV). Alexandria, Pfizer, Eli Lilly, and GV topped the list of most active corporate investors in new deals in 2022.5 While the investment pace for most of those groups did slow to align more closely with 2020’s pace, groups like Pfizer and GV increased or maintained their investment pace from 2021 to 2022. Positive momentum for CVC was underscored by Sanofi’s announcement in January 2023 that they had upsized their venture fund to more than $750M, further suggesting corporate support of venture innovation remains high.

M&A: Since 2018, the median time to exit for biopharma deals has been just 3.9 years,6 which is the shortest across the healthcare sectors. Within that period, the top five corporate acquirers of private venture-backed biopharma companies have been Roche (7), Novartis (4), Takeda (4), Bayer (4), and Gilead (4). Over 40% of M&A deals were pre-clinical companies, underscoring corporate appetites for early-stage assets. Top indications for M&A included oncology (28% of all deals), followed by platform and neurology. Notably, while CVC participation in biopharma deals averaged 41%, we found that over 70% of biopharma companies acquired since 2018 had a corporate investor in the syndicate prior to their acquisition. This suggests that not only are corporates involved in higher quality deals but also that having a corporate in the syndicate leads to a higher likelihood of exit by M&A. We also found that only 22% of biopharma companies were acquired by a corporate that was previously an investor, dispelling the myth that corporates solely invest with the intention of acquiring. As we look ahead, now that the market has given big pharma time to re-evaluate venture portfolios, and as valuations come down from 2020 and 2021’s highs, it will be interesting to see if the large wave of M&A many predicted last year will take place in 2023. We believe the exits in 2023 may be barbell shaped, with big pharma acquiring later-stage deals that will not be able to go public, as well as fast-to-exit pre-clinical deals that help reinvigorate pipelines with new platform technologies.

Device companies see corporates pick up the pace

Investment: Corporates have historically been the least active in the device sector, participating in less than 30% of all private VC-backed deals since 2018. However, in contrast to the other sectors, we found that corporates participated in a greater percentage of venture-backed device deals in 2022 than in 2021 (27% of overall deals versus 25%), suggesting that corporates have leaned in to support innovation in the down market. Corporates moved in tandem with the broader market, investing in a higher percentage of late-stage medical device profiles in 2022 versus early-stage.

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Source: PitchBook and SVB proprietary data.

In fact, three of the top five largest late-stage deals included corporate investors, including Biofourmis7 ($320M financing with Intel Capital, CVS Health, and MassMutual Ventures), AliveCor ($150M financing led by GE Healthcare with Qualcomm Ventures) and Biolinq ($116M financing with M Ventures, Hikma Ventures and Taisho Pharmaceutical). Unsurprisingly, all three of these financings were non-invasive monitoring companies, which attracted the largest financings and highest valuations in device last year. Behind non-invasive monitoring, we also saw an increased interest in surgical deals as corporates doubled their investment activity in these deals in 2022 (examples include HistoSonics, Neocis and Moon Surgical). We noticed Intuitive Surgical (who launched their venture fund in October 2020) appeared to pick up steam and was the leader in both new late-stage deals and new deals overall in 2022, increasing their investment pace above 2021 levels. Other active new corporate investors included OSF, Ascension, GE Healthcare and GV. Based on anecdotal comments by investors, we understand the data doesn’t capture a portion of deals being done by some large corporates who prefer to operate in stealth and do not publicly announce their investments; however, we have heard these corporates reinforce their commitment to funding early-stage opportunities, particularly those with a strategic fit. We are also aware of large corporates involved in early-stage build-to-buy deals where technologies may be incubated/seeded internally or financed by a handpicked syndicate of investors.

M&A: Over the last five years, the median time to exit for device deals was 7.0 years,8 which is the highest across all sectors. This was likely driven by a subset of acquirers looking for companies to raise commercialization rounds and ramp revenue before making the acquisition, especially those with 510(k)9 pathway products. Since 2018, the top three acquirers of private venture-backed medical device companies have been Boston Scientific (12), Medtronic (5) and Stryker (5). Within that time, roughly half of the device companies acquired were backed by corporate investors. Similar to biopharma, you’ll notice that’s a much higher percentage than the 29% participation we saw from corporate investment in venture-backed device deals during the same time period, which supports the case that companies with corporate investors have an increased likelihood of getting acquired. Since 2018, corporate acquirers have been most active in buying orthopedic and cardiovascular companies, which jointly contributed to just under a third of M&A deals (32%). However, cardiovascular and non-invasive monitoring acquisitions had the highest affinity for attracting corporates as investors. Both median deal sizes ($225M) and median upfront values ($190M) were larger for companies with corporates in the syndicate. The biggest corporate deals by total deal value were in non-invasive monitoring (Preventice), cardiovascular (Affera, Farapulse), surgical (Auris) and oncology (Augmenix). Notably, Preventice, Farapulse and Affera were all instances when the corporate acquirer was an investor before acquiring the company. While less than 20% of device companies were acquired by corporates who were also equity investors between 2018-2022, we think this is a playbook that will continue to be implemented in device going forward, given the strategic focus of many of the most active corporates. We also expect recent or planned divestitures by big players like GE and Medtronic to add hungry buyers to the list of potential acquirers.

Dx/Tools companies seeing increased interest from Biopharma corporates

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Source: PitchBook and SVB proprietary data.

The percentage of corporate participation in dx/tools deals was 35% over the past five years, falling between device and biopharma activity. In 2022, investment into private VC-backed dx/tools companies saw a broad decline, particularly in the year’s second half. However, that didn’t preclude corporates from participating in roughly 25% of seed/Series A deals and 40% of late-stage deals. This pace was largely consistent with corporate involvement in 2021. Bruker (primarily focused on dx analytics and dx tests companies) and Alexandria (primarily focused on dx tests and R&D tools companies) were the two most active new corporate investors in early and late-stage deals in 2022. New late-stage participation was also driven by Bristol-Myers Squibb (R&D tools), GV (primarily dx analytics) and Tencent (primarily R&D tools).

The biggest corporate-backed deals in 2022 focused on advancements in testing/liquid biopsy and DNA sequencing: Ultima Genomics ($600M financing led by Regeneron Pharmaceuticals), Delfi Diagnostics ($225M financing with new investor Eli Lilly), and DNAnexus ($200M financing backed by GV).

Dx analytics companies benefitted from an upswing in interest from biopharma corporates, who participated in two of the top three largest dx analytics deals in 2022 (Cleerly and Verana Health). This is in step with a broader industry push for more tailored medical insights and precision medicine. Notably, we saw fewer deals where corporates were disclosed as new investors (versus follow-on) in late-stage deals in 2022 (66 deals in 2022 versus 98 in 2021). This suggests corporates were hyper-focused on supporting existing portfolios; however, it is also a byproduct of the material decline in dx/tools deals overall.

M&A: In the last five years, the median time to exit for venture-backed dx/tools companies has been 5.9 years,10 although we saw this decrease in 2022 to 4.6 years. Dx/Tools corporations have been the most frequent acquirers in the sector since 2018, led by bioMérieux (3) and Invitae (3). Corporate investors backed 58% of dx/tools acquisitions. Similar to the other sectors, it’s worth underscoring that this percentage is much higher than the 35% participation in overall dx/tools financings during the same period revealing that M&A has tended to favor companies with corporate backers versus companies without them. Deals backed by corporates tended to be larger, with median total deal size ($248M) and median upfront values ($215M) noticeably bigger than deals without corporate investors. By subsector, corporate acquirers were most active in R&D tools deals. R&D Tools was the subsector where we also saw the highest percentage of companies with a corporate backer achieving M&A (>50% of corporate backed M&A deals). Following this trend line, we saw scattered M&A from biopharma buyers (including Beam Therapeutics, Relay Therapeutics and Galapagos) who zeroed in on R&D tools technologies augmenting drug discovery, CAR-T manufacturing and drug delivery for genetic medicines. It will be interesting to monitor the trend of biopharma acquirers folding R&D tools into their businesses in the upcoming years.

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Source: PitchBook and SVB proprietary data.

Healthtech lands top spot for corporate-backed deal count in 2022

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Source: PitchBook and SVB proprietary data.

Investment: Healthtech11 has been an exciting sector to watch in the last few years as the pandemic propelled new venture-backed innovations around virtual/hybrid care, clinical trial optimization, and digitizing/improving the patient experience, all demanding the attention of pharma, health systems, payers and big tech. This surge contributed to corporate investors participating in 33% of overall venture-backed deals since 2018. In 2022, the sector also became the most active healthcare space for overall corporate deal activity, surpassing biopharma (253 deals versus 237) for the first time within our five-year look-back period. Despite this healthcare record and like the broader market, investment pace became more measured in healthtech in 2022. Corporates increasingly began to assess which companies were genuinely differentiated and possessed sustainable business models while demonstrating clear outcomes/cost savings. As overall seed/Series A healthtech investments set a record of $3.2B in 2022, 20% of those deals included a corporate investor, lower than the ~25% in 2021 and 2020. However, at the later stage, we noticed an uptick in deals where corporates were disclosed as new investors (versus follow-on), demonstrating that corporates are still eager to incorporate new, more mature business models into their portfolios. Specifically, we noted that of the late-stage corporate-backed deals in 2022, 84% had new corporate investors join the last round syndicate in 2022 versus 78% in 2021. Overall, corporates were most actively investing in provider operations and alternative care deals in 2022, which is also where we saw the top three largest corporate-backed deals: DispatchHealth ($259M financing led by Optum with Humana and Blue Shield of California), Somatus ($325M financing with Optum, Blue Venture Fund, Elevance Health and Inova Health System) and Lyra ($235M financing with participation from Salesforce Ventures).

The top five most active new late-stage corporate investors in 2022 were Optum, Blue Cross Blue Shield, Northwell, Leaps by Bayer and Cigna (Cigna has ample capital to deploy following a $450M boost to the venture capital arm, announced in March 2022). Apart from Optum, all groups either maintained or increased their new investment pace year-over-year (YoY) in 2022. We’ve also continued to see corporates stepping up in large deals into 2023, including the $375M financing for Monogram Health (Humana, CVS Health, Cigna), a company that partners with health plans to improve acute, complex and chronic care delivery in the home and the $100M financing for Carbon Health (CVS Health), a hybrid primary care provider whose model fits with CVS Health’s vocalized interest in expanding into primary care.

M&A:12 In the last five years, the median time to exit for healthtech companies was 5.8 years. Since 2018, healthtech has been home to a less concentrated set of acquirers compared to the other sectors, with corporates responsible for 55% of acquisitions, followed by private equity firms at ~20%. We found that 57% of companies acquired between 2018-2022 had a corporate investor in the syndicate, much higher than the 33% participation of corporates in overall healthtech financings during the same period. The median deal size was higher for deals backed by corporates ($198M) than those without ($180M). Corporate acquirers gravitated mostly to provider operations technologies, specifically clinical decision support tools and workflow optimization technologies. Workflow optimization attracted the most support from corporate-backed syndicates prior to M&A. We believe we will see more private-private consolidation amongst VC-backed healthtech deals in the future as companies look to deepen their capabilities in pursuit of more well-rounded care (such as Ro’s acquisition of Dadi to expand fertility offerings) and greater market reach (such as Cedar’s acquisition of OODA to scale their financial technology platform). This will provide more scaled targets for groups like hospitals/payers/employers to consider acquiring. Recent acquisitions pursued by Amazon (One Medical), CVS (Oak Street/Signify Health) and Walgreens/VillageMD (Summit Health) have also revealed ambitions for groups outside of traditional healthcare institutions to expand more into primary care and home health and reinvent how care is accessed and delivered. As these new entrants seek to leverage digitization and their proximity to consumers to improve the healthcare experience, we expect hospitals/health systems, payers and other venture-backed healthcare companies to feel added pressure to look for venture-backed solutions to help them better compete.

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Source: PitchBook and SVB proprietary data.

What do we expect to see from corporates?13

We are in a very uncertain time, and no one knows what the future holds. We believe the next twelve months will continue to experience a slowdown in deal count and capital deployed by the investor community, likely aligning more closely with 2020 levels. As market uncertainty persists, investors will undoubtedly face tough decisions around valuation re-sets and the support of their existing portfolio. However, we expect corporates will continue to lean in and be resilient in their support of innovation. We’ve consistently heard from corporates that they have an appetite for new deals and a strong commitment to ongoing support in existing investments. While many aspects of this market are unknown, the data supports our sentiments that corporates have become a relevant and increasingly important source of committed capital for innovative companies within healthcare.

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