Venture capitalists are pouring cash into U.S. biotechs at a rate set to replicate 2018’s record deal count, according to PitchBook and the National Venture Capital Association’s third-quarter Venture Monitor report.
In the first three quarters alone, VCs struck 609 biopharma deals — the majority of which were Series A or B — and contributed $11.5 billion in investments.
Notably, the average deal size shrunk from a 2018 high of $25.6 million to $21.2 million. That figure reflects growth in early stage investments but significant declines in late stage.
European biotechs have done equally well in attracting financing, according to McKinsey.
Compared to the stretch between 2005 and 2011, VC investments more than tripled to strike $2.3 billion between 2012 and 2018.
What Does The VC Landscape Look Like?
The number of VC deals this year is on track to surpass 10,000 for a total of $100 billion in financing. Companies have already raised $96.7 billion to date. Mega-deals — those exceeding $100 million — are proceeding at a record pace.
“Many in the industry anticipate an uptick in fundraising activity in the coming months as several VC firms try to close their vehicles before a possible recession hits the economy,” according to Venture Monitor.
“Further adding to fundraising optimism are realized returns that will soon be flowing back to LPs from the many massive exits we’ve seen this year. This will enable LPs to allocate capital back into the numerous VC funds seeking it.”
Between IPOs and buyouts, this year has been the most lucrative in a decade, according to Venture Monitor. With one quarter remaining, VCs have realized $200 billion in exit value — more than a quarter of which came from biopharma.
What Role Has Policy Played?
Chinese investment in U.S. biotechs is lagging, and Silicon Valley Bank expects significant reductions in Chinese inputs as the economy slows and U.S. regulators increase scrutiny of foreign money.
“Many VCs are waiting on the final rules of the CFIUS expansion to be implemented in February 2020, which will have a major impact on capital flows from foreign investors into U.S.-based startups,” according to Venture Monitor.
The NVCA said U.S. immigration policy has also affected investments: innovative scientists and prospective entrepreneurs have had difficulty entering the country. The politics of the 2020 election are expected to create a further drag on VC deals.
“Of particular note are proposals by some Democratic presidential candidates and legislators on taxing unrealized capital gains and on drug pricing, both of which could have unintended consequences for startup investing,” according to Venture Monitor.
European biotechs have seen continental slowdowns in patent procurement relative to U.S. processes.
What Does It All Mean?
The action in pharma investments isn’t necessarily indicative of a bubble, SVB analysts said. Yet they expect a near-term off-cycle amid economic slowdowns and geopolitical tension.
“Top of mind for the industry ... is the pricing of these high-profile IPOs and their subsequent performance after listing,” Venture Monitor said.
“These recent listings will likely affect the sentiment around the next wave of companies looking to go public in 4Q and into the upcoming election year.”
Still, the authors consider public markets a “viable exit route” for start-ups in tech and life sciences.
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