Life Science a VC Bright Spot in Q1, But Startups May Soon Struggle

Xconomy National — 

Even as the novel coronavirus has derailed daily life and business operations, the life sciences sector continues to see companies make public debuts and ink both financing and partnership deals.

In venture capital, US deal activity in the first quarter tallied 2,300 financings totaling $34.2 billion, according to the latest report by the National Venture Capital Association, which uses data from PitchBook. That’s roughly on track to match the total raised in the past two years, both record-setters in one way or another. But the likelihood of that pace continuing is slim, according to the report.

Last year there were nearly 12,000 deals in the US VC market totaling $136.1 billion; the year prior there were nearly 11,000, proceeds from which amounted to $140.8 billion the year prior.

In 2019 the life sciences sector last year accounted for $22.9 billion and 1,659 deals. In the first quarter of this year the sector saw 366 deals valued collectively at $7.1 billion, according to the report. More than 60 percent of the deals were late-stage agreements, and the average size spiked to $20.6 million.

However, “COVID-19 chaos” didn’t truly hit until March, when many of those deals were well underway, the report says—and although the latest numbers may appear heartening, “the global pandemic is having a massive impact on startups and VC investors, just as with the rest of the US economy.”

Likely IPO activity will drop “drastically” this year, narrowing VC-backed companies’ exit options. Ten companies went public in the first quarter; in each of the past two years, 80 VC-backed companies have joined the public markets. During the past recession, across 2008 and 2009, there were 24 total VC-backed IPOs, the report says. PitchBook data also show that from 2008 to 2009, early-stage deal value for the life sciences sector fell 24.2 percent.

Given the importance of in-person meetings between VCs and founding teams, shelter-in-place orders are likely to stymie the progress of fresh deals, Pitchbook analyst Joshua Chao said in a note published this month.

Early-stage biotechs, which typically have no revenue and a high burn rate given the expenses associated with R&D, may find their clinical development timeline lengthened by disruptions related to COVID-19 and end up having to raise money at a lower valuation than previously established. However, amid the disruptions caused by the outbreak, large healthcare companies and biotech incumbents could benefit by leveraging the opportunity to beef up their pipelines by tacking on private VC-backed companies at a relative discount, Chao said.

In the best position are companies with drug R&D activity and clinical trials in vaccines or infectious disease. Companies with “more lifestyle-focused medicines and treatments” may suffer from a decrease in investor attention, the NVCA predicts.

Still, venture capital fundraising has been on a tear in recent years, and some of that money still needs to be deployed. Since 2016, investors have pulled in more than $210 billion, according to the NVCA report.

Image: iStock/ Julia_Sudnitskaya