Inside the Lab Industry: Silicon Valley Bank Reports Steady 2016 Dx Investments, Declining Exits

Investments in the diagnostics and tools (Dx/Tools) sector remained steady in 2016, according to Silicon Valley Bank's annual report, Trends in Healthcare Investments and Exits 2017. The report's authors found the industry is attracting new investors and is optimistic that the sector's prospects for big exits (valued at $50 million or more) will improve in 2017.

Investment Levels
Silicon Valley Bank (SVB) says that overall health care venture investing was "strong" in 2016, but did not reach the record levels set in 2015. However, in 2016, Series A investments in early-stage technologies set records in all health care sectors, including Dx/Tools.

Deal Volume
SVB data shows that the Dx/Tools sector saw "meaningful" early-stage momentum in 2016, with 51 deals closing during the year, the most since 2013 which witnessed the closing of 39 deals. The value of these deals rose to a high of $478 million, the highest since 2014's $252 million in series A investment. Within the sector, Dx outpaced tools garnering 59 percent of the Series A dollars invested. Grail was the largest venture-backed Dx/Tools Series A deal ($125 million) seen.

Investor Diversity
Encouragingly, the most active investors in the device and Dx/ Tools sectors grew more diverse (e.g., corporate venture, angel groups, incubators and accelerators, and private equity). Tech-focused venture capitalists became "very active" in Dx/Tools, with Data Collective (San Francisco) leading investors with eight active Dx/Tools deals in 2015-2016. These investments follow the trend of increasing use of big data and bioinformatics within the Dx/ Tools sector. LabCorp and Illumina emerged as active corporate venture investors with, respectively, three and two active deals in the Dx/Tools space in 2015-2016.

Geography
Geographically, California remained the most active region for new investment in Dx/Tools with 19 deals in Northern California (valued at $1.193 billion) and seven deals in Southern California (valued at $345 million). Massachusetts was the second most active state for new investments in the Dx/ Tools space with seven deals valued at $106 million.

Exits, IPOs & M&A
Within the overall health care industry, a slower pace of initial public offerings (IPOs) led to lower distributions in 2016. As a sector, though, Dx/Tools companies struggled to reach big exits and had no IPO activity. SVB analysts say, though, that "large investment bets" have been made in advancements in bioinformatics, potentially "setting the stage" for more big exits in the coming years. In addition to big data, SVB analysts are watching companies with new tools to enable drug development and high-end sequencing, as well as those working to make diagnostics less invasive (e.g., liquid biopsies).

"While Dx exits declined in 2016, we see a significant number of companies ramping revenue towards $30-$50 million," writes the report's lead author, Jonathan Norris, managing director at Silicon Valley Bank (Santa Clara, Calif.). "We think that level should attract acquirer interest."

In 2016, the Dx/Tools sector had just four mergers and acquisitions (M&As) and no IPOs, compared to eight M&As and five IPOs in 2015. Of the four big exits (deals valued at $50 million or more) in 2016, three were in the tools space and only one was a diagnostics deal. Despite the low number of deals, the total deal value went up ($175 million in 2016 versus $164 million in 2015), while the median years to exit (from the time of the close of its first institutional round of financing) increased in the Dx/Tools space to 7.7 years. For a review of the 2016 year in M&A, see LIR, Dec. 29, 2016.

While the IPO market was slow overall, the Dx/Tools sector may have been particularly hampered by the "poor" after-market performance of previous IPOs. SVB says all five 2015 Dx/Tools IPOs are trading below their IPO prices.

Takeaway: Experts are not expecting large swings in investment in the Dx/Tools sector during 2017, although they are optimistic that M&A activity will pick up in 2017.