Trends in Pharma Tech Investing

Venture capitalists invested over $7 billion in pharmaceutical technology startups as part of a record year in 2020

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When the stock market crashed toward the beginning of the Covid pandemic in April of 2020, many of us anticipated that funding activity would slow down amidst the uncertainty of lockdowns, social distancing, and strains on the healthcare system. However, 2020 proved to be a record year for venture capital in the U.S., with $156 billion invested in startups and $74 billion raised by VC funds. Also contrary to what pundits might expect in a downturn, corporate VCs (CVCs) nearly matched their 2018 high water mark, investing $68 billion.

Pharmaceutical technology startups also received a record amount of venture capital in 2020, with $7.7B invested across 348 companies, up nearly 125% over 2019’s total. We define pharmaceutical technology (“Pharma Tech”) as technologies that improve or enhance the pharmaceutical industry’s value chain. This includes A.I. for drug discovery platforms, software applications that enable virtual clinical trials, innovations progressing the industry towards continuous manufacturing, software or hardware that reduces drug counterfeiting, and so on. We exclude therapeutics, medical devices, and diagnostics from this data set. Drivers of this funding and overall trends in the Pharma Tech market included:

• Sea Change in Sentiment — Pharma Tech investment has historically suffered from the industry’s low appetite for risk — as the pandemic exposed vulnerabilities, pharma companies and VCs alike accelerated investment in remote and digital solutions
• Internal R&D Hedge — The continued decline of internal pharmaceutical R&D productivity drove significant investments into AI for drug discovery and, to a lesser extent, digital clinical trials
• Data Arms Race — The increasing availability of real-world patient data has triggered investments in solutions that boost pharma’s value proposition for doctors, patients, and regulators

Including data from PitchBook and NVCA’s quarterly Venture Monitor report, this analysis shares highlights from the U.S. VC industry as a whole, as well as statistics and observations specific to the Pharma Tech startup market, based on Touchdown’s work with Colorcon Ventures.

Pharma Tech & VC Funding Highlights

As noted, 2020 was a record year for VC activity in the U.S., with $156B invested. Capital allocations to Pharma Tech grew 125%, versus 13% for the U.S. venture market as a whole. This outperformance was likely due to the factors mentioned above, and the fact that the pandemic itself is a healthcare crisis. Most Americans may not have previously considered what it takes to develop and manufacture a new drug until they were reading about it daily. And the pandemic initially halted two-thirds of clinical trials when the world was desperate for pharmaceutical solutions, which may have contributed to investment activity.

While Pharma Tech outgrew other sectors by dollar volume, total deal count for Pharma Tech generally mirrored the overall market. A slight decrease was noted from 2019; potentially to manage the economic risk of the pandemic, VCs favored later-stage companies.

CVC Highlights

In corporate venture, CVC funds deployed 48% by dollar value and participated in 26% of deals overall in the U.S. in 2020. As shown in the chart below, the $68B invested by corporations was nearly $10B more than 2019, which suggests CVCs stayed in the market despite economic uncertainty, as Touchdown co-founder Scott Lenet forecasted in this post from 2019.

CVCs are an important source of capital for Pharma Tech startups, providing industry validation. Traditional pharma companies are frequent CVC participants in the Pharma Tech space. These organizations are accustomed to working on long time horizons, but they also see the need to innovate and speed up drug-to-market timelines. Investing in Pharma Tech startups is one way to achieve these goals.

The following CVCs were the most active in 2020:

• McKesson Ventures, the CVC arm of drug distributor McKesson, participated in five deals, focused heavily on clinical trial and data solutions.
• Novartis Venture Fund participated in three Pharma Tech deals in 2020 to advance the pharmaceutical company’s objectives in life science and digital health.
• Amgen Ventures completed three Pharma Tech investments, focused on data, clinical trials, and drug discovery.
• In addition to its enterprise and consumer focus, GV, the venture arm of Alphabet, participated in three investments that leverage the company’s interest in Pharma Tech.

Notable Pharma Tech Deals and Exits

• Synthetic biology startups Ginkgo Bioworks (NYSE: DNA) and Zymergen (NASDAQ: ZY) closed two of the largest rounds of 2020. Ginkgo closed a $1.1B debt financing round from U.S. International Development Finance Corporation, in addition to a $70M Series E earlier in the year. Zymergen closed a $350M Series D in October. Each company completed an initial public offering in 2021.
• 2020 was also a busy year for drug discovery. In February, Schrodinger (NASDAQ: SDGR) raised $232M in an IPO. In May, Insitro raised $143M. In July, Relay Therapeutics (NASDAQ: RLAY) went public, raising $400M. In August, Atomwise (a company Touchdown’s corporate partner Colorcon Ventures has funded) raised $123M. To end the year, Recursion Pharma (NASDAQ: RXRX) raised $245M, before eventually going public in April 2021.
• Alternative pharmacy company Alto raised a $250M Series D round in January 2020. The company offers a telehealth pharmacy platform to improve the prescription experience.

Pharma Tech Innovation In the News

• 3D printed pharmaceuticals could lead to customizable medicine — 3D printing may be suited to create medications for rare diseases because it’s geared for customized pills made in small batches.
• Can augmented and virtual reality be applied to pharma and not just entertainment? — Apprentice.io’s remote collaboration tool connects pharma manufacturing teams for troubleshooting operations over a secure virtual platform amid Covid-19.

Please contact us directly at PharmaTech@touchdownvc.com for any ideas or investment opportunities related to this sector. Thank you for reading!

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Kathy Quigley is an Analyst at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs. Touchdown Ventures Principal Brian Laegeler and Senior Associate Louie Luong contributed to this article.

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