Healthcare and Biotechnology VC Funding in 2020: Trends and Insights
How have bioscience startups fared amidst the pandemic?
Healthcare has long been labelled a “broken” sector in many countries — rife with complex models which result in high consumer costs, leaving many unable to access quality medical attention. But where there are challenges, some see opportunities. Indeed, the sector is equally rich in verticals to target: from biopharmaceuticals and medical devices to providers and clinical data analytics operations, venture capital firms have been investing heavily in firms which tackle the sector’s multifaceted issues the past few years. Indeed, 2018 was record-setting for health investing and saw continued gains in 2019. Post-pandemic, however, the picture is still positive in some healthcare verticals and regions, but this may be short-lived. Here, we explore the complex state of Q1 2020 VC funding for healthcare startups and their outlook for the year ahead.
Increasingly, the technological advancements apparent in other areas of our lives are making their way into the healthcare industry: from genomics, AI in healthcare and the rise of digital health, there are many innovative dynamics at play in the healthcare sector amidst a broader commentary about the need for value-based, patient-centric models. In Forbes’ recently released Next Billion-Dollar Startups 2020, healthcare companies were a notable mention with five spots, up from just two healthcare startups last year and as of today, there are 42 healthcare unicorns valued at $97.8 billion in the private market. To intensify the competition, the well-capitalised tech giants Facebook, Amazon, Microsoft, Google, & Apple have been entering the healthcare space, whether investing in startups themselves or leveraging their technology, user base, scale and brand to capture a piece of the $3.6 trillion U.S. healthcare market.
It would appear that startups in the healthcare sector have been bucking the global decline in VC funding this year: although deal volumes have fallen 6% globally on the last quarter, overall funding for healthcare startups has grown 4% in Q1’20 from Q4'19. According to the PwC / CB Insights MoneyTree™ Report Q1 2020, healthcare has been the second most active sector in the U.S. for VCs when factoring both investment size and deal volumes, with 211 deals valued at $6.0 billion by the end of Q1'20. However, when ranking by the size of raise in the top verticals, the healthcare sector ranks top. Further, healthcare companies have dominated the top 5 IPOs this year. Examples include One Medical Group, the San Francisco-based primary-care business valued at more than $1.5 billion, which raised $245 million to top the list of most valuable IPOs this quarter, when its parent firm 1Life Healthcare (NASDAQ: ONEM) listed.
But a closer analysis of the YTD investment landscape shows a more nuanced picture, in which certain regions and healthcare verticals have been more receptive to funding than others. Indeed, North America has largely been the source of the healthcare investment growth this year. Meanwhile, funding in China, which has seen consistently strong growth in the last few years, fell historically. Which healthcare and biotechnology verticals and their startups have performed this year — and what could be next for the sector?
Telehealth deals reached a record high in Q1'20
Amidst COVID-19, a remaining need for medical attention has accelerated the use of ‘telehealth’ services by both patients and providers, which are technology systems that remotely deliver clinical health services. Indeed, a range of providers have expanded their telehealth initiatives, such as Humana and even Medicare, which at the federal level now pays doctors and hospitals to deliver a range of telehealth services. Indeed, in the public markets, there has been much attention on companies with telemedicine business models. Wall Street has warmed towards Teladoc (NYSE: TDOC), a U.S. telemedicine and virtual healthcare company which has seen its share price rise more than 100% YTD. Teladoc has built a network of more than 50,000 clinicians worldwide over several years and offers its services in more than 40 languages. This growth has certainly paid off: today, patients have reported being able to secure quick online appointments with doctors, with transparency around consultation pricing and the ability for doctors to efficiently transmit pharmacy prescriptions.
VCs have been watching these trends closely: telehealth sector startups have seen deal volumes rise 50% on Q4'19, to close at an all-time record of 103 investment rounds. Use of such services is likely to remain above pre-pandemic levels as those without healthcare coverage may recognise more value in telehealth services owing to affordable out-of- pocket costs due to the cheaper infrastructure costs associated with telehealth models. As a result, a more entrenched adoption of virtual care, accelerated in utilisation by the pandemic, may be on the horizon and VC firms are embracing the potential.
Interestingly, telehealth startups have been offering a broader array of services: across mental, behavioural and physical health, in what has been a successful fundraising quarter for ‘teletherapy’ models. Lyra Health, previously valued at $241 million, has been a particular success story in raising $75 million in their Series C round on 11 March from an array of investors and is listed as one of the most promising startups according to Forbes’ Next Billion-Dollar Startups 2020 issue, which surveys 300 VC firms. More than 50 million people suffer from mental health issues in the U.S. yearly and Lyra aims to offer mental-health benefits to these employees. The firm has given more than a million people in the U.S. access to Lyra’s 3,000 therapists, coaches and physicians and anticipates $100 million in revenue based on the firm’s pipeline.
Alto Pharmacy, a San Fransico-based startup recently raised a $250 million in their Series D mega-round on 30 January, led by SoftBank Group’s second Vision Fund. Alto follows many other online pharmacy startups, including Amazon’s PillPack, in targeting the $335 billion U.S. prescription market, by providing more affordable and accessible prescriptions. Alto aims to deliver free, same-day deliveries for prescriptions amongst a broader full-service pharmacy integrated with in-app and phone support for doctors, insurance companies and patients. However, the pharmacy market is entrenched: retail pharmacies Walgreens, CVS, and Rite Aid control more than two-thirds of the U.S. pharmacy market. Alongside competition from Amazon’s well-funded PillPack and other cash-rich pharmacy startups such as Capsule and Truepill, this area will be among the most competitive to watch.
Mental health funding reached a record-high
Companies which aim to apply technology to problems of emotional, psychological, and social well-being have also seen significant upticks in investment this quarter. Indeed, Lyra Health is only one of several other startups which are offering employer-based mental health provision. This quarter, mental health startups raised a record $576 million, which has passed the last quarterly record by an astonishing 60%. This latest buzz of funding was spread across 44 deals and several startups closed $20M+ rounds, highlighting the positive sentiment from VCs. In particular, employer-based solutions have raised most plentifully: Modern Health and Spring Health are two such examples which have raised $31 million and $22 million, respectively. Interestingly, several reports also show that business models are adapting in the mental health space towards a value-based payment model.
Also interesting is the rise of digital health companies integrating virtual reality to help treat mental health conditions. Early-stage investments in firms such as the UK-based Oxford VR and France-based C2Care, reflect increasing investor sentiment towards this novel but clinically proven form of treatment. VCs anticipate the demand for mental and behavioural health services will grow as the pandemic ensues, with numerous studies reporting this trend amongst the public. Oxford VR, which raised $13 million in its Series A financing in mid-February, partnered with the National Mental Health Innovation Center (NMHIC) to conduct pilots. C2Care meanwhile, which raised $1.1 million in January aims to treat anxiety, addiction and eating disorders with its platform and plans to expand internationally.
Regenerative medicine funding rose by more than 70% since Q4’19
Regenerative medicine startups are companies which aim to research or commercialise gene therapies, cell therapies, and bio-engineered tissues. Indeed, three cell therapy startups are placed among the top 10 healthcare deals globally and cell-based immuno-oncology startups separately closed several of the largest fundraising rounds. Notably, Lyell Immunopharma, a San Francisco-based firm which aims to “master immune cell functionality” and develops cell-based immunotherapies for cancer, raised an impressive $493 million this March and was the most valuable healthcare deal this quarter. This brings Lyell’s total disclosed funding to $851 million, but investors remain undisclosed.
Another large investment round was for Elevate Bio, a Cambridge-based startup which operates a portfolio of cell and gene therapy companies and aims to develop, manufacture and commercialise their medicines. With lead investors including MPM Capital, Vertex Ventures and F2 Ventures, Elevate Bio raised $170 million this March in its Series B. In total, the firm has now raised over $300 million following an earlier round led by Swiss investment bank UBS and their Oncology Impact Fund. With an almost complete 140,000 square foot facility in Massachusetts focusing on R&D, the firm has been building rapidly.
Separately, Elevate Bio has launched a company called AlloVir, working on developing T-cell immunotherapy for combating viruses as well as HighPassBio, which further aims to treat stem cell-related diseases using T-cell therapies. Amidst the pandemic, the AlloVir subsidiary is developing a form of T-cell therapy that may protect COVID-19 patients with conditions that predispose their immune systems to attack from the virus. Separately, ALX Oncology, Xilio Therapeutics and China-based CANbridge Life Sciences have all raised $100+ million dollar rounds, reflecting the strong investor sentiment towards immuno-oncology startups.
M&A and IPO activity for cell and gene therapy companies has also been active in Q1'20. Passage Bio (NASDAQ: PASG), a Philadelphia-based genetic medicines company which develops therapies to treat rare monogenic central nervous system disorders, went public in February. Passage Bio raised $216 million in its IPO, priced at $18 per share, and although going public in one of the stock market’s worst weeks this year, shares are up more than 20% on 30 May. On the other hand, BioNTech acquired Neon for $67 million in an all-stock deal. With BioNTech’s growing CAR-T and TCR therapy pipeline, the onboarding of Neon’s neoantigen specific cell therapies will further develop BioNtech’s U.S. research hub and clinical development capabilities to accelerate the firm’s global expansion.
Funding declines for medical devices and AI
Companies selling AI SaaS to healthcare clients or those which use AI to develop products for the healthcare market, have seen declines in funding from the peak in Q3'19 but still moderately rose on the last quarter. In the medical devices vertical, deal volumes fell 15% from Q4’19, reaching a recent low. However, within medical devices, infectious disease and life-support devices have especially been popular amongst VCs. Infectious disease diagnostics startup Karius raised $165 million in its Series B round, ranking it among the top 10 healthcare deals globally. Other mega-rounds in the life-support segment, such as that of San Francisco-based medical device and digital health company Element Science, which raised $145.6 million this March. The firm aims to use machine learning algorithms to design clinical-grade wearables and is currently working on a wearable medical device to address the 325,000 lives lost every year to Sudden Cardiac Death (SCD) in the US.
Funding in China and North America suggest an opposing dynamic but which may reverse
Whilst North American healthcare VC funding grew 35% quarter-over-quarter, to reach an all-time high of $10.3 billion in Q1’20, this was largely driven by a record-high number of $250 million mega-rounds, at 25 closed deals. On the other hand, healthcare deal activity in China fell 40% from Q4'19. This fall was especially stark in the digital healthcare vertical, in which both volumes and investments fell by more than 50% in China, over the last quarter. Clearly, the impact of the pandemic in China at the start of 2020 has lead to significant changes in VC sentiment, but the outlook is optimistic: many investors still expect a rapid “V-shaped” recovery for China by the end of June. Indeed, in the latter half of 2020, further investment in health and wellness startups is likely and midway to Q2, the healthcare sector has shown a sharp investment increase of more than 55% year-on-year, with 197 closed deals at the end of April.
A possible scenario is a reverse in the above dynamic, with a prospective but delayed decline in overall U.S. healthcare VC funding owing to the lag in the spread of the pandemic and the resulting financial and economic stress, whilst China funding recovers, following a tough Q1. Nonetheless, it is important to assess by verticals and strong healthcare startups, which can further show their value in a post-pandemic world, may be able to maintain their appeal in the months ahead.
Outlook for Q2 and beyond
The immediate reaction for VC funds will be to ensure that their current portfolio companies have the balance sheets to weather the next 12- to 18-month slowdown in the global economy. This may result in increased reserve ratios and as a result, impacted overall VC deal activity for the rest of 2020. Indeed, estimates state that VCs currently have $120 billion in cash reserves and there is evidence that VCs are using these reserves for the ‘short-term financing’ of their companies at flat valuations. Conversely, funds which closed new capital rounds pre-pandemic and are not looking for new cash injections for their portfolio companies will hold attractively for buyouts. Either way, the pandemic will likely mean less money for early-stage companies: CB Insights’ Q1 2020 MoneyTree report noted that seed rounds were down 27% from Q4 2019 and 43% from Q1 2019.
More broadly for the VC industry, whilst Q1 numbers have been optimistic, some industry professionals have been keen to reiterate the fundraising process. Aziz Gilani, managing director of Mercury Fund, has issued a note of caution saying that since it takes between 30 and 90 days for a fund to raise funds for a new startup and that, “there is always a lag between a changing market and a change in funding behaviours. With that in mind, Q1 numbers shouldn’t be impacted by COVID, and the first impacts will be felt in the Q2 numbers,” he said. Interestingly, with regards to exits, nearly all U.S. IPOs in 2020 after the WHO’s Covid-19 emergency declaration were for biotechnology or healthcare companies. Overall, however, it is unlikely 2019 levels of VC-backed U.S. IPOs will occur, as long as public markets are dislocated. Indeed, 11 out of 12 healthcare investors surveyed by Rock Health say that the IPO window has now shut for this year.
With supply chain disruptions, potential future distress in the public markets and hiring slowdowns, startups will have a more difficult time raising capital in 2020, even after the worst of the pandemic. What will be interesting to observe is how “new normal” businesses will have performed by the end of Q2 and beyond. Although telehealth and related digital health startups have performed well in the pandemic, other “remote lifestyle” platforms, such as distance learning and fintech startups may also see higher inflows. The global VC landscape will be exciting to observe as these factors play out.
Solomon Pervez is the Vice President of the UCL Investment Fund. Previously, he served as Healthcare and Biotechnology Portfolio Manager at the Fund. He is also a final year BSc Biochemistry and an Incoming MSc Bioscience Entrepreneurship student at UCL.
