Author: Simon Meier

Review of Digital Health & Life Sciences Investing, with a focus on Europe.

While we all enjoy the summer which has finally arrived we get time to look back and reflect on the first half of 2024. It is great to reflect back on 6 months where the ecosystem has not been in the limelight, except for the segment of AI. The market is showing its resilience and has stabilized. The investors still involved continue to invest, but at a slower pace and with more caution. Lower interest rates and inflation numbers will be a tailwind while the rest of 2024 is likely to be cautious given the political and economic uncertainties.

Venture Funding overall in the US and Europe

Half Year 2024: review

Based on CB Insights the Global Funding number came in at 126.6bln still a bit down from the 135.6bln in first half of 2023. Overall the funding volume is stabilizing over the last 7 quarters at 55-70bln per quarter.

Looking into the split between Us and Europe we see the second quarter picking up on the US side. Based on the pitchbook reports the four of the five last quarters came in at the 40bln level and the last (2Q24) achieved around 60bln. The European report does not break out quarters but looks stable at EUR 28.6bln for 1H24. We will have to see how the European Market will react going forward. In the past time to recovery in Europe took longer than in the Us. The reports show the US in the early stage of a new normal market while Europe is still not yet there.

The Silicon Valley Bank report for the first half year does make a compelling argument on the recovery of the US markets with interest rates and public market development providing strong tail winds for the VC ecosystem. They also speculate on the comparison to the post dot com or the post GFC recovery. Projecting form these past experiences the next two years would be moving higher from the current basis. Further below we will look at the progress about our own forward looking statements from the 2023 full year review published on vipartners.ch – see here)

To have a specific look at our home market, the Swiss market in the first half of 2024 raised CHF 1.08 bln. This is a slight drop still from first half of 2023 at CHF 1.20 bln. Overall it does look like the market is stabilizing as well with volumes comparable to the pre-peak and with large rounds of >75mln coming back. Vi Partners portfolio company iOnctura was the second largest round at 76.5mln.

Digital Healthcare and Life Sciences

Half Year 2024: Review

Looking at the Healthcare segment in more detail. The US achieved 13.9 bln in Biopharma (up from 9.9bln in 1H23) and 10.2bln in non-Pharma HC investments (up from 9.9bln in 1H23) based on Pitchbook. Thanks to Rock health we can break out Digital Healthtech investments specifically. 1st half volume came in at 5.7bln (down from 6.1bln in 1H23).

In Europe the Biopharma raised EUR 3.1bln (up from EUR 2.2 bln) while the non pharma HC segment brought in EUR 1.7bln (down from EUR 2.3 bln). With these volumes the biotech market share returns to its longer term level while the non pharma remains very much below its long term level.

Looking at the top10 funding round charts we see them dominated by Software and in particular AI companies. A few biotech companies are making the charts as well which is different from the last several years where software dominated completely.

Given the renewed interest and increased funding volumes for Life Sciences we should keep a close eye on the further development in this space. The most recent quarters seem to indicate a renewed interest and a rediscovery of Life sciences as a sector of attractive returns. It might be driven by renewed interest from strategic buyers as we will look at below. But let’s look at the performance of the sector on the public side.

The Swiss market in particular showed a strong resurgence of Life Sciences and health investing. The biotech subsegment went from 282.8mln to 405.3mln between the years.

Overall sector investments went from 560mln (47% of all investments) in 1H2023 to 605mln (56% of all investments) in 1H2024. The Swiss market has been strong in its healthcare investment percentage. The current level it does far exceed the investment share of health and life sciences in the US (25.8% in 2024) or Europe (16.9%).

Half Year 2024: Public sector performance

Given the limited real time pricing of private investments we can have a look at the public markets to understand the current value perception of the sector and its component subsegments. I like the S&P Dow Jones index family. The indices on Digital Health, Select Biotech and Select Pharma are a good proxy for the development of the public health and life sciences markets overall.

The year 2021 does show a clear peaking on the digital health side and the drop back down to more realistic level is tracked well in that index. The last 18 months has seen a sidewise development of this subsegment.

The select biotech index has shown a strong peak in 2021 as well followed by a very steep correction into 2022. Since the lows of that it has gradually moved upwards again and shows a positive development.

The select pharma index on the other hand has shown a very conservative reaction to the peak in 2021 (almost no impact) and has been moving sidewise with a slow trend down since then.

If we want to assess the interest in the sector we would have to draw the conclusion that it is quite limited at this stage. In particular when comparing the performance of any of these indices to the broad S&P500 or NASDAQ index we see a clear underperformance. If we consider the high weight of the Magnificent 7 and NVDA in particular in the larger indices we can conclude that HC is not considered as attractive as AI at this stage. Nevertheless the performance uptick in biotech and the renewed volumes of VC investing into Healthcare and life sciences is an indication that investors still believe in the upside of innovation investments in the sector.

Exits

Let’s have a look at exits and how this side of the market is evolving.

M&A and IPOs have maintained its reduced level from 2023. On the different reports the overall volume is stable with IPOs coming back a bit.

In the Health and Life Sciences segment we have had both a high profile IPO with Tempus and several sizable M&A transactions with Pharma buying biotech companies. These transactions are highlights in an otherwise still moderate pace of transactions but it is a good signal indicating a more normal pace.

Secondaries have been an important way to generate liquidity for GPs or LPs where needed.

The last 24 months have seen a strong overhang of sellers. Secondaries have been trading at a discount since mid 2022 and have achieved a low of -45% (median) in mid 2023. In the last 6 months the discounts have reduced to -25% (median) but the market continues to be oversupplied.

Given the low pace of exits through all channels the distributions to LPs have dried up and are at a low level last seen after the great recession (in 2009). The low cash yield of maturing funds is further intensifying the illiquidity problem of VC allocations and intensifying the fundraising and denominator issue for LPs. Let’s have a look at the fundraising constraints next.

VC Fundraising

Fundraising has stabilized at the level of 2017-2019 with a run rate of about 70bln per year in the US and about 20bln in Europe. The first half of 2024 came in about the same size as the equivalent period in 2023. US came in at 37.4bln (vs. 33.3bln) while Europe was shows 9.4bln (vs. 8.9bln). low by comparison to the long term level. The funding goes to mostly established GPs in the US (~ 80%) while the European picture looks a bit more balanced (~50:50).

The dry powder overview in the US report of Pitchbook shows a stable level to last year at $296bln (down slightly form $303bln). Most of the powder is in funds from the last 3 vintage years. At current levels the funding is equivalent to 4-5 quarters. With fundraising of funds falling behind deployments this level is likely to come down over the near future.

The Fundraising environment is highly challenged by the imbalance of capital calls vs capital distributions. The overview in the US report from pitchbook expresses this very well. The net cash flow turned negative in 2023 at the level of $50bln for the year. 2024 so far has achieved a negative $50bln cash flow in its first half year already. We will have to keep track of this development. Without a return to positive cash flows the LP base will continue to be hesitant to provide funding to the asset class.

To wrap up let’s have a look at how we are doing with respect to the expectations expressed in January:

1. Denominator effect: Private assets valuation correcting slowly compared to public equity leading to excessive asset allocation to private assets. Playing out like predicted. While the pricing of private assets might have reached its trough the asset allocation is still possible out of order due to the slow distributions from VC funds. The denominator effect has been reduced a bit given the performance of public markets, but the overallocation to private remains a challenge. We need to continue to observe this projection over the next 2 years to see this resolve.

2. Low return of peak vintage funds: Money invested at the peak and corresponding low drives less experienced investors with overallocation to peak vintages out of the asset class for an extended period

Playing out in the background. Too early to see the results of this effect. Lowered

IRR numbers and suffering portfolios are already visible. Burnt investor effect too early to tell.

3. Portfolio salvaging: VC funds and GPs salvaging portfolios through agile deployment of reserves and proactive shareholder behaviour.

Playing out in the background, data still limited on how it is playing out. Early signs of reduced survival and lower founding activity visible in the US data. This data is not available on the European side. GPs disappearing from the market is not visible yet.

4. Post peak vintage funds: Funds raised now and portfolio built in this new normal will be performing very well. The VCs will be able to benefit from low valuations and lower competition for deals in the next two years. Expertise in their sectors and proven track record to support their companies in difficult times will be winner traits in this competition. GPs with great track records are built in these environments.

Too early to tell. Fundraising is favoring established GPs in particular in the US. GPs with expertise in their sectors and proven track record to support their companies in difficult times will win.

5. Extended closed exit window: Exits will be difficult, in particular IPO will be off for 12-24 months. M&A activity will come back more quickly as companies are maturing and demonstrating value to a strategic acquirer. Many strategic buyers have been waiting for better pricing of assets for the last 2-3 years. They are ready to deploy their war chests.

Playing out like predicted. M&A strategic partnering pace increasing, in particular in Health and Life sciences driven by established industry players in need of innovation and product portfolio additions.

IPO’s happening, but many at down round pricing. Post IPO performance mixed.

Interest by companies to go public is still low. Overhang of private unicorns in limited private funding environment might put pressure on unicorns to tap public markets instead.

Conclusion

The first 6 months of 2024 show the ecosystem adapting to the new normal. Funding levels stabilizing at pre peak levels. Exits are still an issue and survival of portfolios remains a large focus of the ecosystem. Limited distributions lead to a deaöyed capital cycle further constraining the funding available to the ecosystem. At this stage it is too early to tell if the constraint has longer term ecosystem attrition consequences. GP consolidation is an expectation by many LPs, in particular in the emerging managers cohort.

Beyond the new hype segment of AI the innovation ecosystem is continue to build the winners of tomorrow. The funding levels are consistent with pre-peak environments and we can expect this to continue to lead to great successes across the segments. The current class of these winners will take a bit longer to get to the stage and present itself in the spotlight of attention. There is no reason to believe it will not happen, but patients is the virtue of the moment.

Acknowledgements/Sources:

I would like to acknowledge the following source and the publishing organizations for the very valuable contribution to the market overview by their persistence observation and reporting from the market.

I have consulted the following reports and referenced insights contained therein. I recommend these reports to the reader to get further insights beyond my market evolution report.

CBInsights:

CB-Insights-Venture-Report-Q2-2024

Pitchbook:

Q2_2024_European_Venture_Report

Q2_2024_PitchBook-NVCA_Venture_Monitor

Q2_2024_Global_MA_Report

Rock Health:

H1 2024 digital health funding_ Resilience leads to brilliance

SECA (Swiss private equity and corporate finance association):

VC-Report-2024-UPDATE

Silicon Valley Bank (svb):

State of the markets H1-2024

future-of-healthtech-report-2023 (october 2023)

S&P Dow Jones:

biotechnology-select-industry-index fact sheet as of june 2024

kensho-digital-health-index-usd fact sheet as of june 2024

pharmaceuticals-select-industry-index fact sheet as of june 2024