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The hottest disease field for biotech startups and M&A might surprise you

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Jon Norris, managing director of Silicon Valley Bank

After crunching the numbers on biotech launches and M&A deals reaching back 8 years, Silicon Valley Bank concludes that there's been a recent--and surprising--shift in the disease focus of companies getting funded in Series A rounds, while a surge in M&A deals saw upfront payments dwindle in 2012.

In its report, the bank's analysts found that biotech Series A rounds of more than $2 million have shrunk significantly, down from 93 companies in 2007 to a meager 47 in 2012. And while oncology remains one of the hottest fields in M&A in the industry, cancer drugs inexplicably dropped off the list of the top 5 disease fields for startups. Oncology was the number one disease arena for startups from 2008 through 2011. But last year, CNS took the lead--even as Big Pharma companies continued to retreat from the field--and CNS/pain stands out as the biggest growth area for the past 4 years. The full lineup of startups for 2012 was:

  • CNS – 9
  • Platform delivery – 8
  • Ophthalmology – 4
  • Anti-infectives – 4
  • Metabolic – 4

"Top company creation since 2009 shows CNS/pain companies leading with 37 companies, then oncology (35), platform discovery (31), diagnostics (20) and metabolic (11)," the bank reports.

"I was a little baffled myself" about the rise of CNS, says Jon Norris, managing director of Silicon Valley Bank. But we may see that longer term balance change if those platform companies choose lead cancer projects.

Big biotech exits in 2012, meanwhile, stayed level at a record 18 deals in 2012, matching the industry's performance in 2011. But the exits didn't stay quite as big, with the upfronts dropping 30% to an average of $216 million, on par with the pace set from 2008 to 2010. Analysts concluded that the slide had to do with a drop in the number of deals over the $425 million mark, down from four in 2011 to just one last year. Total deal value, including milestones, stayed steady at $413 million. And buyers were distinctly more interested in commercial-stage products than pipeline projects.

CNS also emerged as the top attraction in M&A last year, followed by oncology and cardiovascular. But if you add up the numbers for the past 8 years, cancer is way out in front, with $7.1 billion in upfronts and $6.3 billion in milestones among 24 acquisitions. CNS, respiratory and cardiovascular followed the cancer field in popularity.

"Structured deals continue to predominate in biotech," notes the report, "with 78 percent (14 ⁄18) containing milestones, up from 72% (13⁄18) in 2011. In these structured deals, the upfront portion of the deal (paid at deal close) slipped to 39% of the overall deal value, down from 52% in 2011. Thus, investors are getting less total deal value in upfront payments and must wait for milestones to be achieved to generate bigger returns. Over the last few years, the deals that are paid in full at deal close (all-in) tended to be commercial-stage. In 2011, four of five all-in deals were commercial, and in 2012 three of the four all-in deals were commercial."

Bank analysts expect the M&A market to remain strong in 2013, but look for some significant changes. High stock prices will give more companies better leverage at completing a deal, but the suddenly reborn IPO market may reduce the number of biotechs being bought out--and that can be a big plus for biotech companies and investors.

"I think the momentum (on IPOs) is really strong right now," says Norris. "As long as you see positive momentum, the trend will continue. It has a really nice effect on M&A as well."

Finally, the bank notes that milestones aren't just a shimmering, unattainable mirage.

"The biotech SRS data contains 26 milestones since 2008 representing potential payouts of $960 million. Of these milestones, 22 were development/regulatory and four were commercial. Forty-six percent have hit so far, paying out $384 million to investors. Another 12% were delayed but plan to hit, eight percent were delayed and plan to miss, and 34% were missed. Of the milestones that have come due, hit and plan to hit represent 58% and $557 million in potential investor returns. Digging in further, SRS measured performance on biotech milestones that have come due within the first two years since deal close (22 milestones). These results show a healthy 50% hit rate, with 23% delayed and 27% missed. The 46% hit rate of all biotech milestones and 50% hit rate of milestones within two years of exit shows tangible performance on these structured deals."

Norris says the milestone track record reflects venture capital firms' ability to set up good companies. 

"It shows their ability to create companies, get them into Big Pharma hands" and then see their projects move ahead in the clinic, says Norris. "And that's a real positive."

- read the press release
- here's the report (PDF)

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