How Has COVID-19 Influenced Investment Trends?

BY LUCIE ELLIS

Executive Summary

Health care funding in the first half of 2020 reached $10.4bn, according to a mid-year report from Silicon Valley Bank, nearly matching 2019’s full-year record. As well as the COVID-19 pandemic though, other global events, such as the US election, could become distractions in the second half of the year.

The first half of 2020 has been unprecedented in more ways than one. The first six months produced the largest two-quarter investment period ever for venture-backed health care companies, according to a recent report from Silicon Valley Bank (SVB). Biopharma saw increased investment versus 1H 2019, “despite financial market turbulence and negative impacts to many companies due to COVID-19,” SVB said in its Mid-Year Report 2020, Health Care Investments And Exits.

“A flurry of venture capital (VC) fundraising in 1H 2020 nearly eclipsed 2019’s full-year record, building on a three-year trend of increased allocation to health care,” said SVB analysts (see Exhibit 1). They also noted a number of VCs focused on biopharma had closed new funds in the first half of 2020, “on average 30% larger than their last funds.” Notable VC firms that closed new funds between January and June 2020 include: Flagship Pioneering, Deerfield, Arch Venture Partners, Atlas Venture and Lightspeed.

Exhibit 1. Health Care Venture Capital Fundraising Year-On-Year

Nooman Haque, managing director of life sciences and healthcare at SVB’s UK branch, told In Vivo that the year so far was a tale of two quarters, where Q1 seemed ordinary and Q2 had more activity. He said that while some people date the COVID-19 pandemic from when regions outside of China started to lock down in March, investors in health care had visibility of what was coming. He said specialist investors and health care companies were likely preparing earlier, which could be a factor in the high number of investments in the first half of the year. “I don’t want to overstate the impact of COVID-19 on that, but clearly, that’s been a large part of the story.” He said companies had pivoted on their plans markets later in the year, and likely bringing forward funding rounds where possible.

Aside from the pandemic though, Haque said Source: Silicon Valley Bank

for 2020, sensing possible issues in the capital

investors in general, were being pushed towards “riskier” assets and more were looking to biotech. “They’re losing money if they invest in so called ‘safe’ assets, because of a zero or negative yield environment in some countries. This has pushed investors out onto the risk spectrum.” Haque added that biotech and healthtech were not as “fringe” investment sectors anymore, which was also having an overall effect on the industry. “Biotechnology is in the news now. I haven’t been in an Uber for a while, but I have in the past had a conversation about CRISPR with an Uber driver! When things like that become more mainstream, it is a sign that biotech is not a fringe asset class anymore.”

Haque said there had been a cultural shift in the last few years, whereby early-stage biotech had become a more mainstream investment opportunity.

In 2020 so far, investment dollars have remained stable, with more deals than 1H 2019. Still, SVB is predicting a trend of more, smaller series A rounds in 2020. “While we continue to see many $50m+ series A deals, a number of venture firms have recently launched collaborations to help academic labs transition from science projects to venture endeavors. We anticipate this will lead to more small seed/series A investments by traditional venture investors in 2020,” the SVB report noted.

What’s Trending?

While 1H 2020 had been extremely active for private financing rounds, Haque noted that this would likely slow in the second half. Exhibit 2. Series A Rounds in 1H 2020 By Top Indications Healthtech investments remained steady in the first half of 2020 but showed an 18% increase in deals versus the same period in 2019. In a change of events, alternative care, which includes companies providing virtual care during COVID-19, However, 2020 should still end up as a record year for health care investing. He highlighted the upcoming US election, and ongoing Brexit procedures in the UK and Europe as just two macro events that could slow financing activities in the second half. “Elections are always distracting to a certain extent.”

For start-ups in the first half, oncology remained the top target with more series A rounds for companies active in cancer R&D than any other indication or technology (see Exhibit 2). “Oncology always tops tables, but CNS has seen a resurgence this year,” Haque said, adding that “anti-infectives

have bounced this year and been quite hot.” Source: Silicon Valley Bank

raised more than $2bn in 1H 2020, leading all healthtech subsectors.

Haque said the key question around virtual care technologies was how much of it would stick as

the pandemic eased. But he is optimistic. “Over the last few years, a lot of these companies have had the opportunity to test their platforms on early adopters. They have been able to iron out a lot of the wrinkles. So, it is almost perfect timing because the platforms are resilient, and they work quite well.”

He added that the non-early adopters had been pushed to engage with digital health technologies because of COVID-19. “I think, on the whole, the experience has been positive. If companies can get the economic model right, I think a lot of patients it will stick to digital experiences. Clearly some people will go back to wanting to physically see their GP if they can, but there will continue to be restrictions for some time.”

Haque also said, “I can’t imagine going back anytime soon to the days of crowded GP waiting rooms full of people infecting each other whilst they’re waiting to see someone to help them get better.”

Looking ahead at the rest of 2020, he noted, “I think we could all be surprised by financing activity as we try to understand the effect of companies’ accelerated plans. A lot of companies now have two to three years of cash, which suggests they won’t need to come to the market again for quite some time.”

Haque said over the next six months he would be keeping an eye on a few key metrics: clinical updates and plans for follow-on funding rounds from later-stage companies, as well as start-ups and the sentiment for new business ventures in light of the pandemic. These metrics will give clues to the future health of the biotech and healthtech sectors.