‘Solid’ Year Expected for Diagnostics Industry in 2015; Concentrated VC Investments Expected

2014 was a record-setting year by many business metrics for the biotechnology industry. The volume of initial public offerings by venture-backed life science companies was high, mergers and acquisitions were robust, and private fundraising was strong, particularly for diagnostics companies positioned in the vibrant big data/digital health area.

“The unprecedented IPO and M&A activity this year will make 2014 one for the record books and unlikely to ever be surpassed,” says G. Steven Burrill, founder of the bio tech investing firm Burrill & Co. and publisher of the Burrill Report. “While we expect 2015 to be another strong year for the sector with robust financial markets and dealmaking, we do expect financing activity to slow as companies put to work all of the money that’s been raised. …. Attention will shift away from the promise of companies to how well they execute.”
DTET examined the most significant transactions of 2014 to identify trends that will impact the financial health of the industry in the upcoming year.

Initial Public Offering
Venture-backed life science initial public offerings (IPOs) far exceeded tech IPOs in terms of quantity in 2014, with the top 20 life science exits of 2014 valued at $12.1 billion, according to data from CB Insights.

“The number of IPOs completed this year has exceeded the most optimistic expectations and has been unparalleled in the history of this industry,” says Burrill. “At some point, investors will grow concerned about the quality of offerings and raise the bar to go public. For now, though, companies … will continue to take advantage of that opportunity as long as they can.”

Mergers & Acquisition
In addition to the strong IPO market, investor exits through mergers and acquisitions (M&A) were robust in 2014, as witnessed by high deal flow between traditional diagnostics players, as well as with players from outside the industry. According to the Burrill Report, total M&A activity in the life sciences industry (therapeutics, tools, diagnostics, and digital health companies) for the first 11 months of 2014 reached a record $340.8 billion, up from $118.3 billion for the same period a year ago, even beating the previous $189.7 billion record set in 2009.

Perhaps the most prominent pharmaceutical acquirer of diagnostics companies was Roche (Switzerland). Throughout 2014, Roche made a series of acquisitions aimed at solidifying its position in the sequencing market. In mid-December, it announced its acquisition of the California-based bioinformatics firm Bina Technologies. Bina’s proprietary software Genomic Management Solution (Bina-GMS) enables genomic data analysis. While financial terms were not disclosed, it is expected that Bina will be integrated into the Roche’s sequencing unit in early 2015. Earlier in December, Roche announced another acquisition in the next-generation sequencing (NGS) space with the purchase of non-invasive prenatal testing company Ariosa Diagnostics (Harmony Prenatal Test). The sale price was not disclosed, but Ariosa earlier in the year had priced its IPO of 3.5 million shares at $16 to $18 per share, giving the company an estimated market capitalization of $323 million. Additionally, in October, Roche acquired NGS sample-preparation technology developed by AbVitro (Boston). The two companies will partner on applying the primer extension based target enrichment technology to the development of sequencing panels capable of performing directly from blood or other biological samples. These sequencing panels could be developed in partnership on platforms by both Pacific Biosciences (the Menlo Park, Calif. company previously announced a $75 million collaborative deal with Roche) and Genia Technologies (which Roche acquired in June). Genia is developing a next generation, single-molecule, semiconductor-based sequencing platform using nanopore technology. Roche paid $125 million upfront in cash to Genia, with additional payments milestone payments of up to $225 million.

One of the highest valued deals of 2014 was LabCorp’s (Burlington, N.C.) acquisition of Covance. The $6.1 billion deal, announced in November, allows LabCorp to diversify its revenue with Covances’ testing base in the contract clinical trial and international markets. In a smaller deal, but one more representative of deals in the industry, bio-analytical testing firm Eurofins Scientific (Luxembourg) signed a definitive agreement to purchase Boston Heart Diagnostics Corporation (Boston Heart; a portfolio company of Bain Capital Ventures) for a deal valued up to $200 million (inclusive of $60 million in milestone payments). The deal with Boston Heart, a provider of diagnostics for cardiovascular health management, strengthens Eurofins’ presence in specialty clinical testing markets, including genetic testing.

Private Diagnostic Investments
Investors are “flush”, Burrill says from successful exits through IPOs and M&A deals. This will likely have a cyclical effect that experts say will drive investment into the diagnostic industry in 2015.

“It is a good cycle,” Harry Glorikian, a Boston-based life sciences consultant, tells DTET. “It is not as much money as we were seeing in 2006 and 2007, but we are overall seeing healthy venture investment.”

Data from CB Insights suggests that investment in the biotech/pharmaceutical industries was poised to hit a 6-year high by the end of 2014, surpassing the $4.6 billion raised by the industries in 2013, with experts predicting a “healthy and sustainable” year for 2015 as well. However the analysts that DTET spoke to suggest there may be some subtle shifts underway in private diagnostic investments, including higher-dollar placements in fewer companies, as well as strong interest in diagnostics companies in the big data and digital health space.

“Instead of spreading out $2 million or $3 million investments to a broad number of companies and hoping for one winner, investors are taking a larger swing and betting on taking one company to the next level,” explains Glorikian. “It gives the executive team a chance to execute, rather than perpetually fundraise.”

In a further breakdown of fundraising efforts, health technology accelerator StartUp Health says that, as of mid-December, genomic companies raised $632 million and diagnostics companies raised $962 million. Virtually all analysis finds though that these sizable investments are being placed in fewer companies. Below is a sampling of 2014 transactions that typified this trend of more concentrated investments.

• In October, health care technology company NantHealth (a NantWorks company; Culver City, Calif.) raised a record $320 million. The NantHealth Clinical Operating System platform combines molecular science, near real-time patient signal monitoring, computer science, and big data technology. The company’s new labs are expected to be operational in early 2015.
• Invitae (San Francisco), also in October, closed $120 million to expand its presence in genetic testing for hereditary disorders and to accelerate the build out of its genetic information business. The company has panels for hereditary cancer, cardiology, and neurology conditions, which it says can all be delivered for $1,500 or less in three weeks.
• Also in the top private diagnostic fundraising deals of the year was Flatiron Health (New York), which raised $130 million back in May. The company has what it calls the oncology industry’s first cloud-based data platform that aims to provide a new standard for real-time insights and intelligence both for personalized care and research. The system aggregates both clinical and financial data from EMR and billing systems in real-time.

The highest fundraising companies in 2014 all partially encompass digital health. While the term is broad and can encompass wellness apps, experts say the diagnostics industry needs to take notice as advances in digital health will quickly blur the line between technology, communications, and traditional diagnostics.

According to data from CB Insights, the digital health industry has had explosive growth since 2009, with digital health projected to exceed $4 billion in fundraising in 2014, a 987 percent increase since 2009 and a 91 percent increase over 2013. Startup Health says, more specifically, the big data and analytics segment of digital health received $1.46 billion in 90 deals before the end of 2014.

“We need to seriously consider digital health as part of the diagnostics realm,” says Glorikian. “The irony is that those making the biggest investments and innovations in digital health, like Qualcomm, aren’t traditional players from our world. These may not be full-blown in vitro diagnostics, but there will be a blurring of the lines. You run a diagnostic to get information and physicians will not care if that information comes from a sensor or the blood.”

Takeaway: The diagnostics industry is poised for another solid year of financial transactions in 2015. Subtle trends to look for are larger, private investments concentrated in fewer companies, as well as continued interest in digital health companies that blur the line of traditional diagnostics.

Other Large Venture Capital Diagnostics Placements

While falling well below the $100 million mark, several other diagnostic companies closed the year with large venture capital investments.

• CardioDx (Redwood City, Calif.), maker of the Corus CAD gene expression test, announced mid-December it had closed a $35 million financing round after withdrawing its planned IPO earlier in the fall, citing “unattractive” market conditions. The funds will be used to broaden commercial use of the test and to further additional research efforts.
• Assurex Health (Mason, Ohio) closed a $30 million round of financing from new and existing investors to support the clinical adoption and development of the firm’s GeneSight neuropsychiatric pharmacogenomic tests. The company had announced earlier in the year that the Department of Veterans Affairs and Medicare both decided to the cover the test.
• Cancer diagnostics firm Helomics (Pittsburgh; formerly called Precision Therapeutics) announced the close of a $60 million round in November that it said will be used to expand its reach of personalized medicine services in genomics, proteomics, bioinformatics, and cellular analysis. The company offers a personalized reporting system for tumor profiling and predictive analytics to aid physicians in determining the most appropriate treatment.