2018 has been a year where private rounds of funding have dominated headlines in the sector, and a record-breaking year for private investment in biotech. $13.5bn in venture capital poured into the sector in the first 10 months, easily beating the previous full year record of $11bn in 2017. The growing investment in the sector has been mirrored to an extent in venture capital (VC) fundraising – $9.77bn was raised for 2017 Funds focused on biotechnology, but in comparison $9.32bn had already been raised in the first 10 months of 2018.
Interestingly, this investment has been increasingly concentrated in large, established funds with a track record of investing in biotech. In addition, another interesting feature of these investments in the past year is that the funds have been deployed across fewer opportunities, reflective of new dynamics in the sector.
Biotech has long been a “winner takes all” space, where a handful of successful exits provide the lion’s share of returns to VCs, and it looks like investor sentiment appears to be shifting even more in this direction. Investors are writing bigger cheques while investing in fewer companies, a dynamic driven by the need to deploy larger and larger funds while maintaining discipline when evaluating opportunities and management teams. The result is that VCs are generally looking to take larger positions in fewer higher quality companies, suggesting greater confidence that they are able to pick the winners and that their concentrated backing of a few select biotechs will decrease their likelihood of failure.
The impact of positive news flow from the sector, both in terms of successful biotech exits via M&A, as well as important scientific and clinical achievements, continues to galvanise interest in the sector from specialists and generalists alike. As a result, there has been an excess of funding available for quality opportunities, with VCs having to try harder to court attractive biotechs and be willing to accept higher valuations or risk losing out to other investors. Although the above has been true in the US for some time, it is also becoming the norm in Europe as specialist VCs continue to raise larger funds and invest alongside generalist and foreign investors from both the US and China. UK companies are leading the way in transformational science and have raised significant capital to do so (see table 1).
Overall, 2018 has seen continued interest in biotech, and the increasing availability of finance should be positive for biotechs looking to raise capital, while resulting in increasing competition among VCs for the top-tier opportunities. These highly sought after deals are commanding higher valuations, giving companies the luxury of extending their cash runway further and reducing their financing risk in the near future. This is good news. The capital will allow companies to advance their programmes further and potentially develop and bring transformational treatments and therapies to patients worldwide.
John Cassidy is an investment associate at London-listed Arix Bioscience
