Diagnostics Sector Saw Increased Investment, Exits in 2018

Life science and health care companies had a banner year in 2018, with a record-breaking year for venture capital investment, according to Silicon Valley Bank’s Trends in Healthcare Investments and Exits annual 2019 report. While the largest gains were in biopharma, the diagnostics and tools sector (Dx/Tools) had a strong year with slight growth in investments, but a “rebound” in exits.

Overall, U.S. health care venture fundraising reached a record $9.6 billion, continuing a four-year upward trend. The Dx/Tools sector saw a modest increase in the U.S. fundraising, up from $4.3 billion in 2017 to $4.8 billion in 2018 spread over 211 deals.

Silicon Valley Bank (SVB) breaks down the Dx/Tools sector into three categories.

Device and Dx/tools sectors are expected to remain stable in 2019.

• Research and development tools companies saw total 2018 investment of $2.4 billion in 95 deals
• Diagnostic test companies (yes/no diagnostic tests) had $1.28 billion of investment in 64 deals
• Diagnostic tools and analytics (actionable data analytics) raised $1.11 billion in 51 deals

Despite modest growth in fundraising overall, the Dx/Tools sector attracted fewer series A deals (down from 70 in 2017 to 64 in 2018) and dollars (down from $845 million to $621 million). (Series A investments includes all first-round investments from institutional or corporate venture investment of $2 million or more.) Yet, the median series A round size remained stable at $6 million. Some of the biggest series A raises in the Dx/Tools sector in 2018 (over $20 million) included Glympse Bio (Cambridge, Mass.), Paige.AI (New York), Shine (Janesville, Wis.), Celsius Therapeutics (Cambridge, Mass.), ArcherDx (Boulder, Co.), Now Diagnostics (Springdale, Ark.), Mammoth Biosciences, and Alveo Technologies (Alameda, Calif.).

“Following multiple large Series A investments over the past two years, it is not surprising to see a slowdown in early-stage investment as investors wait for things to play out,” write the report authors led by Jonathan Norris, managing director of the Life Science and Healthcare Practice at SVB. “As a result, most investments (85 percent) went to later-stage companies.”

Over all Dx/Tools investments, there were 25 raises valued at over $50 million. Combined, these deals made up the majority of sector’s financing. There were eight rounds over $100 million in 2018. These companies included: Tempus (Chicago, Ill.), Helix (San Carlos, Calif.), HeartFlow (Redwood City, Calif.), Synthego (Redwood City, Calif.), Twist Bioscience (San Francisco), Grail (Menlo Park, Calif.), 10x Genomics (Pleasanton, Calif.), and Zymergen (Emeryville, Calif.).

Six private Dx/Tools companies were valued at more than $1billion in the last two years—the largest number of any sector, SVB says, even exceeding biopharma unicorns. Companies included Grail, Tempus, 23andMe (Mountain View, Calif.), Human Longevity (San Diego, Calif.), 10x Genomics, and Ginkgo Bioworks (Boston).

After just one initial public offering (IPO) in 2017 and no mergers and acquisitions (M&A), Dx/Tools came back strong with 10 acquisitions and two successful IPOs in 2018. The sector’s deal value set a six-year high, led by $1.9 billion in upfront M&A payments, which still substantially trailed other sectors, like biopharma. M&A was divided between diagnostic test companies (four deals) and research and development tools companies (six deals). Three of the four diagnostic companies were commercial. Of the companies with exists, the median years to exit was 9.1 years, the highest reported in the past six years.

“Nine of 10 deals were at a commercial stage and acquired by traditional lab instrument, research and diagnostic companies,” writes Norris. “We are surprised to see no new acquirers, especially tech players, emerge.”

In 2018, both Guardant Health (Redwood City, Calif.) and Twist biosciences had successful IPOs.

Geographically, California still dominates in the Dx/Tools space with 65 deals valued at $2.09 billion in Northern California and 17 deals valued at $362 million in Southern California. Massachusetts had 31 deals in 2018 valued at $579 million. Other deals occurred in New York (11 deals valued at $148 million) and Pennsylvania (7 deals valued at $36 million).

So what is in store for the coming year? Norris and colleagues predict investment will continue at a “healthy pace” overall in the life science and health care space. For the Dx/Tools sector, SVB predicts

• Series A deals will “likely climb” in 2019, although overall investment dollars could shrink following multiple larger 2017 and 2018 financings
• Tech acquirers will likely scoop up a few diagnostic test, tools, and analytics companies, which could drive an uptick in M&A deal value.
• There could be two to four IPOs among revenue-generating, R&D tools companies

Takeaway: The diagnostics sector, like the broader life sciences and health care sector, had a strong 2018, with upticks in investment and a rebound in exits.