Purchase the report: Emerging Biotech Investment Report - Strategic Trends in Private Equity and Venture Capital Funding


The importance of capital, particularly for emerging biotechnology firms, cannot be overemphasized. For these companies, many of which are spun out of university laboratories and their technology transfer offices, being able to attract sufficient capital in a highly competitive and fast-paced investment climate is crucial to their survival and success. Indeed, private equity (PE) and venture capital (VC) firms play an important role in driving entrepreneurship in the economy. These firms ensure a healthy economy by providing an avenue for the evolution of innovative ideas (which might otherwise have been extinguished due to a lack of funds), into products and services. In many cases, these products and services are then expected to contribute significantly to the nation’s Gross Domestic Product (GDP).


However, before this can be achieved, it is the responsibility of investors to raise capital and strategically invest in companies with innovative ideas capable of solving unmet needs, as well as identifying enterprises with an attractive future outlook in terms of return on investment.


The Global Investment Market Continues its Recovery from the 2008 Financial Crisis


Capital commitments to PE funds totaled $272.6 billion in 2007, with VC funds accounting for 11% ($29.4 billion). However, the financial market crisis of 2008 resulted in a 24.3% decline in the value of capital commitments to PE funds ($206.5 billion) for the year. Despite this, the noteworthy portion of the impact of the financial crisis was felt after 2008. In 2009, capital commitments to PE funds totaled only $66.1 billion – 75.8% less than in 2007. However, the market has been more receptive to PE commitments since then, with $126.3 billion and $93.7 billion raised in 2012 and 2013, respectively.


Healthcare Reform and Pricing Pressures Drive down Average Deal Values as Private Equity Firms Increase Focus on Service Providers


Various factors, including ongoing healthcare reform in parts of Western Europe and North America as well as pricing pressures caused by budget deficits, high healthcare expenditures, and growing national debt, have resulted in a reduction in the average value of completed PE-backed deals over the past three years. In the US for instance, 2014 is expected to be a crucial year in the healthcare sector because most of the provisions of the Affordable Care Act (ACA), commonly regarded as “Obamacare,” will become effective. Therefore, investors are being cautious in investing significantly in the US healthcare sector. For firms that choose to invest, healthcare service providers such as clinics and managed care facilities, as well as outsourcing companies such as contract manufacturing organizations (CMOs) and contract research organizations (CROs), have emerged as relatively safer risk options.


The most of the significant PE buyouts in the healthcare sector in 2013 were in services. In fact, the largest PE buyout in the sector for the year was Kohlberg Kravis Roberts’ (KKR) $1.3 billion purchase of PRA International, a CRO, from Genstar Capital in June of 2013.


The total value of the global healthcare PE deals completed in 2007 was $57.7 billion. This was reduced by 87.3% to $7.3 billion in 2008 due to the reasons given earlier. Although consistent growth in 2009 (to $16.9 billion) and 2010 (to $48 billion) point to improved investor confidence in the market, global healthcare PE deal activity has since tailed off. In 2013, the total value of completed global healthcare PE deals was $19.8 billion, 42.8% more than the $13.9 billion in 2012. In addition, the average value of completed global healthcare deals in 2007 was $582.9m. However, this reduced by 83.2% to only approximately $98m in 2013, with PE firms embracing a more cautious approach in their investment. Indeed, PE and VC firms have been diversifying their assets to minimize the risk element of their investments.


Completed Private Equity Backed Deals: Growth in Asia-Pacific Region Outpaces North America and Europe


In 2013, deal activity decreased in Europe by 30.5% to 41 deals, down from 59 deals in 2012 while North America witnessed only a 2.5% growth to 82 deals in 2013, up from 80 deals in 2012. This trend is attributable to the various healthcare cost containment measures being used by governments in Europe and the US, as well as the ongoing healthcare reform as mentioned earlier. As a result, cost pressures are creating uncertainty among investors in terms of the volume of government funding that will be available for healthcare in the future. The situation is particularly worse in countries in the Eurozone such as Spain, Portugal, Italy, and Greece, which are all dealing with significant debt and budget deficits.


However, there is a growing level of PE interest in emerging markets, such as India and China, as PE firms aim to potentially cash-in on the significant potential in the healthcare sectors of these economies – the same markets being targeted by large pharmaceutical companies seeking to recover from loss of marketing exclusivity due to patent expirations and slowed growth in the developed markets of Western Europe and the US. Consequently, the volume of healthcare PE investment in the Asia-Pacific region has increased steadily between 2011 and 2013, growing by a noteworthy 125.8% during the period. It is noteworthy that the Asia-Pacific region is the only one to record such a significant, consistent, positive performance over the past three years.


California, Massachusetts, and New York Continue to Attract Noteworthy Venture Capital Investment


Certain states, including California, Massachusetts, and New York have historically accounted for a significant percentage of biotech PE and VC investment in the US. According to the National Venture Capital Association (NVCA), the firms in the top five states – California, Massachusetts, Connecticut, New York, and North Carolina contributed 88.2% (111 funds worth $17.7 billion) of the total VC committed (183 funds worth $20.1 billion) in 2012, while 53% of all the investment made during the year went to California-based portfolio companies. In the same year, California, Massachusetts, New York, Washington, and Texas collectively received 78% of all the dollars invested in the US (NVCA, 2013a). As of the end of Q3 2013, the top five states in terms of VC investment were California, Massachusetts, New York, Texas, and Maryland. These states collectively accounted for 77.8% (by value) of all VC investments made in the US for the first three quarters of 2013. California alone accounted for 51.5% (1,190 deals worth $10.7 billion) of all VC investments made from Q1 2013 through Q3 2013, while Massachusetts and New York made up 10.6% (259 deals worth $2.2 billion) and 8.1% (277 deals worth $1.7 billion), respectively (NVCA, 2013b).


GlobalData expects initial public offering (IPO) activity to continue its upward trend from where it left off in 2013, bearing in mind that the number of VC-backed IPOs increased by 67.3% during the year. This signifies increased investor confidence in the stock market after the global financial market crash of 2008. Furthermore, emerging markets such as the Asia-Pacific market are expected to outpace the developed markets of North America and Europe in terms of growth in the volume and value of funds being invested by PE and VC firms.


Purchase the report: Emerging Biotech Investment Report - Strategic Trends in Private Equity and Venture Capital Funding