Pharma, Biotech & Medtech Half- Year Review 2018

Amy Brown, Elizabeth Cairns, Edwin Elmhirst – July 2018 Vantage Pharma, Biotech and Medtech Half-Year Review 2018

As 2018 has unfolded for the biopharma sector, several trends of 2017 have strengthened. New issues have floated at an even faster rate. Venture capital has been raised in even larger amounts. And, outside Takeda’s $62bn swoop on Shire, deal making dimmed further.

Meanwhile, the US regulator has continued to embrace industry’s efforts to bring novel medicines to market, while clinical and regulatory success with cutting-edge techniques has encouraged bigger players to move into fields like gene and cell therapies.

Pockets of the sector are still overheated, however, and companies in highly competitive areas like immuno- oncology continue to sport eye-watering valuations – which is partly a function of the substantial pools of money available to fledgling drug makers. Whether this is already acting as a drag on deal making is arguable, but concern is growing that investors could start to struggle to achieve premiums in follow-on financing rounds.

Neither of these issues has dented investor enthusiasm for smaller biopharma companies so far this year – though it is a different story at the larger end of the sector. Shareholders remain out of love with big cap biotech, while big pharma stocks also failed to outperform wider indices in the first half of the year.

The picture is reversed somewhat in medtech, where some of the world’s biggest device makers put on substantial share price gains in the first half, adding to huge advances in 2017 and throwing shade on their big pharma cousins.

A wave of megamergers has shrunk the pool of big cap device players in the past couple of years, which is affecting life for smaller medtechs. Fewer potential buyers mean that trade sales are becoming harder to execute which, on top of a worsening reimbursement climate, has made the sector less attractive to investors.

In the first half of 2018 the volume of venture financings and M&A deals declined in the device sector.

In biopharma, however, it is the small drug developers that hold all the power. Funding is readily available, and these companies are fully aware that many big beasts of the sector are desperate for new growth stories. Buying innovation will not come cheap while this climate prevails, a quandary that should concern the biopharma sector as 2018 progresses.

Report authors | Amy Brown, Elizabeth Cairns and Edwin Elmhirst – July 2018

Unless stated, all data are sourced to Evaluate and were compiled in July 2018.

Introduction 2

Pharma and Biotech in review 4

Big biopharma shunned as investors look elsewhere for growth 4

Peak IPO for biotech? 7

Venture money keeps flowing 10

Shikeda masks a slow second quarter for buyouts 12

US regulators on track for another strong year 14

Medtech in review 16

Five-year low for medical device mergers 16

$100m venture rounds become standard for device makers 18

Floating device companies stay at home 20

Looking ahead 22

Big biopharma shunned as investors look elsewhere for growth

The first half of 2018 was a good period for investors to stay away from the world’s biggest pharma and biotech companies. Former darlings of the sector have received some comeuppance, while one positive surprise has emerged in the guise of Glaxosmithkline.

Unloved for a few years now, the UK giant led big cap groups with a healthy 16% gain in the first six months of 2018, with Merck & Co also putting on a respectable jump on the back of its win in oncology.

Elsewhere the picture was at best unremarkable, and at worst woeful. The sector can take cold comfort from the fact that broad indicators show pharma and biotech performing as poorly as broader markets.

Share price indices

Stock index 3 month % change

NASDAQ Biotechnology (US) 0%

S&P Pharmaceuticals (US) -3%

Dow Jones Pharma and Biotech (US) -3%

S&P 500 (US) -1%

DJIA (US) -2%

Dow Jones STOXX Healthcare (EU) -6%

Thomson Reuters Europe Healthcare (EU) -5%

Euro STOXX 50 (EU) -4%

FTSE-100 (UK) -8%

TOPIX Pharmaceutical Index (Japan) 1%

The talk of a global trade war instigated by the US cannot be helping any multinational company. On top of this pharma groups are still haunted by the sector-specific risk of Trump administration action to limit drug price increases, an issue that is likely to attract mounting rhetoric as the November mid-term elections approach.

With all this as a backdrop, Glaxo’s 16% gain looks impressive. The company’s relatively new chief executive, Emma Walmsley, took full control of a consumer health joint venture with Novartis in March; this along with a relaunched oncology strategy seems to have perked up investors.

Merck’s gains are also thanks to its cancer activities – a nearly uninterrupted string of wins with its immuno-oncology star Keytruda has served it well. Roche provides the opposite picture here: the usually steady Swiss pharma giant has been punished as it has become increasingly apparent that Tecentriq has lost out in the all-important first-line lung cancer setting.

4 Big biopharma shunned as investors look elsewhere for growth Copyright © 2018 Evaluate Ltd. All rights reserved. Also on the losing side, Johnson & Johnson is gradually seeing the strong gains of last year eroded as concerns over its drug pipeline grow.

Big pharma: top risers and fallers in H1 2018 Source: EvaluatePharma®, July 2018

Share price (local currency) Market capitalisation ($bn) H1’18 6-mth chg H1’18 6-mth chg

Top 3 risers

Glaxosmithkline £15.30 16% 106.8 18.9

Merck & Co $60.70 8% 163.3 11.6

Astrazeneca $35.11 1% 88.9 1.2

Top 3 fallers

J&J $121.34 (13%) 325.5 (49.4)

Roche SFr220.55 (11%) 197.0 (18.3)

Novartis $75.54 (10%) 192.7 (1.9)

Beyond traditional big pharma names, the dominant topic of conversation in the big cap space is Celgene’s fall from grace. A series of clinical and business development missteps have put a big dent in the biotech’s credibility.

Novo Nordisk continues to be punished for its focus on the highly competitive diabetes space, where payer attitudes have hardened. And M&A posed a problem for Takeda, the biggest faller of the first half in this group. Its move on Shire has not been well received, though long-suffering shareholders in the UK company have finally seen some relief.

Meanwhile Vertex continues to prevail in cystic fibrosis, expanding its armoury of doublets and triplets.

Other big drug stocks ($25bn+): top risers and fallers in H1 2018 Source: EvaluatePharma®, July 2018

Share price (local currency) Market capitalisation ($bn) H1’18 6-mth chg H1’18 6-mth chg

Top 3 risers

Vertex $169.96 13% 43.3 5.4

Shire $168.80 9% 51.4 4.0

Amgen $184.59 6% 122.1 (3.4)

Top 3 fallers

Takeda ¥4,678.00 (27%) 34.5 (11.3)

Celgene $79.42 (24%) 57.6 (21.7)

Novo Nordisk DKr296.00 (12%) 119.5 (10.5)

Among the mid and small caps the ride was much rockier, as is frequently the case, with a strong performance from Asia a dominant theme.

The Japanese group Daiichi Sankyo led the mid-cap climbers, buoyed by progress with its FLT3 inhibitor quizartinib in acute myeloid leukaemia, while Sumitomo Dainippon Pharma’s full pipeline proved tempting for investors. South Korea-based Celltrion benefited from progress with its suite of biosimilars.

5 Big biopharma shunned as investors look elsewhere for growth Copyright © 2018 Evaluate Ltd. All rights reserved. The lone entrant from Western markets, Lundbeck, has bounced back from the loss of its chief executive, Kåre Schultz, to Teva, appointing the Millennium veteran Deborah Dunsire to that post in July.

Among the fallers, Incyte’s collapse over bad news for IDO inhibition was one of the big stories of early 2018, and the group ended up the second-biggest decliner. The mid-cap wooden spoon went to South Korea’s Hanmi, which has seen investor support diminish after several deals with Western drug makers unravelled.

Mid cap ($5-25bn): top risers and fallers in H1 2018 Source: EvaluatePharma®, July 2018

Share price (local currency) Market capitalisation ($bn) H1’18 6-mth chg H1’18 6-mth chg

Top 5 risers

Daiichi Sankyo ¥4,237 44% 27.9 9.1

Taisho Pharmaceutical ¥12,970 44% 10.9 3.5

Lundbeck DKr448.40 42% 14.7 4.7

Sumitomo Dainippon Pharma ¥2,345 40% 8.7 2.7

Celltrion KRW303,500 37% 35.6 10.6

Top 5 fallers

Hanmi Pharmaceutical KRW64,600 (42%) 3.8 (2.7)

Incyte $67.00 (29%) 14.2 (5.8)

Exelixis $21.52 (29%) 6.4 (2.6)

Alkermes $41.16 (25%) 6.4 (2.2)

United Therapeutics $113.15 (25%) 4.9 (1.5)

Small cap companies are where the biggest gains and losses can be seen in any year, testing investors’ tolerance for risk. To make the top-three risers so far in 2018 a company had at least to triple in valuation, while the biggest fallers faced all-out annihilation.

Leading the gainers is a reinvigorated Arrowhead, whose new RNAi delivery technology is seen as holding great potential. Oncology player Mirati benefited from well-received data at this year’s Asco conference, while investors generally continue to believe in the gene-editing revolution promised by the likes of Crispr Therapeutics and its rivals, even if future wobbles are unavoidable.

As for the losers, most can blame clinical failure. Faron’s sole clinical asset was Traumakine, so when this failed in acute respiratory distress syndrome it was not surprising to see the group’s value collapse. Edge Therapeutics was hit by the halt for futility of its phase III study of EG-1962 in adults with aneurysmal subarachnoid haemorrhage, while a similar fate befell Protagonist’s ulcerative colitis project PTG-100.

The risk of pipeline blow-up is ever-present in biotech. Despite this, nascent drug developers have been hugely successful at attracting investors over the past 12 months – much more so than the big caps, where convincing growth stories are hard to find.

There are few signs that this situation is going to change in the coming months, particularly while small companies, both private and public, remain able to raise money.

If the state of the IPO market is a key signal of investor sentiment, the rate of flotations seen so far in 2018 needs little interpretation.

This was driven by a huge second quarter, when both the number of listings and amount raised almost set new records: developers of human therapeutics raised a huge $2.3bn on Western stock exchanges.

The data in the biopharma section of this report – so IPOs, venture financing and M&A – encompass only companies working on drug-based treatments, and exclude medtech or diagnostics.

Biotech initial public oerings by quarter on Western exchanges Source: EvaluatePharma®, July 2018 (excludes medtech)

2,500 50

2,268 2,250 2,250

2,000 40 1,837 1,798 1,750 33 1,548 1,500 1,478 30 1,381 1,263 26 1,234 1,250 25 941

1,051 IPO Count 22 1,026 955 1,000 940 21 20 19 20 677 18 802 17 Total Amount Raised ($m) 17 16 16 750 704 15 541 594 14 14 12 12 12 500 10 464 449 10 338 332 237 8 142 250 6 155 6 6 6 4 3 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 2017 2018

Total Amount Raised ($m) IPO Count

Signs that advanced technologies like CAR-T and gene therapy can succeed both in the clinic and with regulators have prompted huge enthusiasm for high-risk drug developers. The US FDA’s approvals of cell and gene therapies like Kymriah and Luxturna have paved the way for investors to view these sciences as reality rather than science fiction, allowing subsequent players like Autolus and Avrobio to get away.

Meanwhile, the woes of big biotechs like Celgene have driven investment dollars into earlier-stage opportunities.

Timing has also probably played a hand; avoiding the late-summer doldrums is always crucial, but this time around a hard-fought US mid-term election is also approaching, in November. Bankers have no doubt been advising companies looking to float to act now or wait until 2019.

Year No. of IPOs Amount raised ($bn) Avg. amount raised ($m) No. raising >$100m

H1 2018 35 3.48 99 17

2017 50 3.85 77 15

2016 45 2.28 51 3

2015 78 5.09 65 17

2014 97 6.52 67 18

2013 54 3.26 60 7

2012 19 0.97 51 2

Whatever the reasons, in the first half of the year the numbers were huge. The total raised across the past six months easily surpasses any other six-month period of the last three years, while a bumper crop of $100m-plus IPOs pushed the average amount raised way higher than anything seen in at least the last six years.

The second quarter also saw several groups substantially upsize their offerings, including Avrobio, Tricida and Forty Seven, each of which ranked among the 10 largest IPOs of the year so far.

And “taking a haircut” seems to be a thing of the past – on average, floats came in 2% above the mean of the proposed range. This suggests that competition for these offerings is intense, forcing investors to accept the valuations on the table.

Premium (discount) to IPO price range – Nasdaq IPOs only Source: EvaluatePharma®, July 2018

10%

-5%

-10%

-15%

-20%

Premium/(discount) to IPO price range -25%

-30%

-35% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 2017 2018

8 Peak IPO for biotech? Copyright © 2018 Evaluate Ltd. All rights reserved. Of course this only heightens the pressure on these fledgling public companies to perform, and not all will. Investors were reminded of the risk of disaster in June when a late 2017 float, Arsanis, discontinued its sole clinical project, causing its shares to crater 73%.

Sustaining the second quarter’s IPO pace throughout the rest of 2018 would be a difficult and surprising feat. How long this run can continue will depend on these new companies delivering – or at least not failing shortly after coming out of the gate.

Another reason for the strong IPO flow is that the venture world is also flush with cash, and is able to offer well-capitalised companies to public investors. A strong balance sheet always makes for a more attractive opportunity.

The past four quarters have been huge for the venture world, and the last three all surpassed $4bn – an incredible run for this sector. The first six months of 2018 showed no signs of a slowdown, as private drug developers raised $8.5bn globally, a figure that before 2015 would have been a record-breaking annual haul.

Global quarterly biopharma venture investments Source: EvaluatePharma®, July 2018

5.0 150

139 136 138 135 134 133 132 4.3 4.2 127 128 125 4.0 125 4.0 121 116 115 110 106 3.4 104 101 101 100 96 3.0 90 2.9 2.8 2.8 89 2.7 2.7 2.7 2.7 88 75 2.2 2.0 2.1 2.0 2.1 2.0

VC Investment ($bn) 1.7

1.6 1.6 Number of Investments 1.5 50

1.1 1.0 0.7 25

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018

VC Investment ($bn) Number of Investments

Venture capital is booming across all sectors, and over the past few years a new normal has emerged. Huge funding rounds of $100m are no longer unique – Vantage counts 19 so far this year among biopharma groups, more than across the whole of last year – while the number of companies receiving funds continues to shrink.

Presumably this means that there are start-ups out there starved of cash, though venture capitalists argue that the diminishing number of funding rounds reflects stricter investment criteria and the fact that smarter choices are being made.

It will be a few years yet before these funds and their own investors, known as limited partners (LPs), can examine the returns from the years of plenty. Determining whether this asset class is delivering on the huge influx of cash that it has been handed will help dictate whether the good times continue.

Date Investment ($bn) Financing count Avg per financing ($m) No. of rounds ≥$50m No. of rounds ≥$100m

H1 2018 8.5 189 44.8 66 19

2017 12.1 442 29.9 72 16

2016 9.7 442 23.4 48 13

2015 11.0 514 22.5 56 13

2014 7.3 512 15.4 35 4

2013 5.1 457 12.6 12 3

Until an answer emerges investors and portfolio companies will continue to make hay, and drug developers have been not been shy in this regard.

Notably, three of the top 10 rounds of the first half were bagged by China-based drug developers, and the huge flow of cash into Asian companies is another emerging trend. Growing competition among US venture investors for prime opportunities has forced many to look offshore, while many Far East investors are similarly flush with cash.

This deep pool of funds has emerged as several scientific breakthroughs like cell therapy and CAR-T have become reality. So hope and hype have been met with intense competition for assets, pushing valuations ever higher in areas perceived to be holding the most potential.

One downside to this valuation arms race is that, when these private entities look to move into the hands of either public investors or acquirers, disagreements over price tags can occur. For now, the healthy state of the IPO market suggests that equity investors are accepting the situation. But M&A deal volumes have been disappointing this year; this should not escape the venture world’s notice.

Top-line figures suggest that after a quiet 2017, biopharma M&A is back with a bang. With $115bn in announced deals across the first six months of 2018 the money committed to takeouts already surpasses last year’s total.

However, a look behind this figure shows that hopes for a buyout boom should be tempered: the number of deals being struck has remained stubbornly low for the past five quarters.

Pharma and biotech M&A transactions announced each quarter Source: EvaluatePharma®, July 2018

96.1 Abbvie-Pharmacyclics: $21bn Takeda-Shire: Allergan-Actavis: $64bn $71bn 81.7 81 Teva-Allergan Generics: GSK Novartis asset swap: 70.0 77 $41bn $23bn 74 71 68 Shire-Baxalta: J&J-Actelion: 64 65 64 62.0 $32bn 65 $30bn 61 58 54 50.8 55 54 51 52 47 44.6 46 47 41.2 44 41 43 Allergan-Forest: 40.3 42 $28bn 40 33.7 38 31.2 29.3 29.5 30.9 27.4 31 24.3 22.8 22.0 22.7 19.9

10.2 9.1 8.9 9.1 9.7 4.7 5.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 2017 2018

Total Deal Value ($bn) Deal Count

Without Takeda’s acquisition of Shire the total spent on M&A in the second quarter would have come to just $17.5bn – those believing that the conclusion of US tax reforms would prompt an uptick in deal making must surely be losing hope.

Likewise, many had predicted the return of the megamerger this year, but with the exception of the Shire-Takeda takeout no acquisitions broke the $10bn barrier during the second quarter.

The next biggest deal was Novartis’s bolt-on of the gene therapy player Avexis, an intriguing but high-risk bet on a new technology. This was followed by CVC’s purchase of a majority stake in the Italian speciality pharma player Recordati.

Date announced Acquirer Target Status Value ($bn)

May Takeda Shire Open 64.2

January Sanofi Bioverativ Closed 11.6

May Novartis Avexis Closed 8.7

January Celgene Juno Therapeutics Closed 9.0

January Sanofi Ablynx Closed 4.8

These were not exactly the types of transactions that were expected at the start of 2018, when a rash of deals fuelled hopes of a blockbuster year for biopharma M&A. The first-quarter acquisitions of Bioverativ by Sanofi and Juno by Celgene, for example, were seen as hors d’oeuvres by those looking forward to a main course of a Pfizer swoop for Bristol-Myers Squibb.

This might have been a long shot, but the dearth of $10bn-plus deals, especially in a year that began with such high expectations, could be cause for alarm.

Valuations in many cases are rich even for the big players, and with plenty of venture cash sloshing around smaller players are not desperate to sell – meaning that the acquisition stand-off will probably continue.

A nurturing regulatory environment is one of biopharma’s strongest tailwinds, and there are few signs of this petering out. The FDA greenlit 21 novel drugs in the first half of 2018, approving groundbreaking medicines like the marijuana-derived Epidiolex, and Aimovig, a migraine prophylactic with a new mechanism of action.

With a packed pipeline of projects awaiting a verdict in the second half of the year the outlook for 2018 as a whole is bright. Still, US agency staff will need to pick up the pace if this year’s tally is to match the records set in recent years.

If the first-half run rate is repeated, making 42 novel approvals for 2018, the year’s tally would fall below three of the past five years. Positive sentiment around the FDA means that, should this scenario unfold, any apparent dip would probably be put down to timing issues rather than a sign of growing conservatism from the agency.

Overt attempts by the FDA to foster a collaborative relationship with industry, as well as some controversially lenient decisions, mean that drug developers and investors are ever more optimistic about US regulatory outcomes.

Annual FDA Novel Drug Approvals Source: fda.gov; EvaluatePharma®, July 2018

70 2018 potential total: 43

60 56 57 51 50

40 15 35

30 27

Novel drug approvals 20

0 2013 2014 2015 2016 2017 2018 Year

Conventional Drugs Biotechnologies (CDER +CBER) Potential 2018

The long queue of assets awaiting approval makes it unlikely that 2018 will disappoint. Vantage has identified 42 novel projects that could receive a decision later this year – though the ever-present risks of setback and delay mean that the final number is far from certain.

14 US regulators on track for another strong year Copyright © 2018 Evaluate Ltd. All rights reserved. One of the biggest approvals on the horizon is lanadelumab, Shire’s latest contender in the crowded hereditary angioedema space. Analysts reckon this could become the company’s third-biggest seller by 2024 – consensus sits at $1.6bn, according to EvaluatePharma – and this asset was no doubt a major draw for Takeda.

Meanwhile, approval of elagolix would come as a huge relief for Abbvie, which has struggled for years to get the endometriosis project to this stage. It was hit by another delay in April when the FDA pushed its decision back to the third quarter.

Also facing scrutiny will be the competing amyloidosis therapies from Alnylam and Akcea/Ionis, patisiran and Tegsedi; the projects are among the first RNAi therapies to be submitted to the FDA, and their progress will be watched with interest.

As always, the regulatory year will deliver some unexpected wins and some unforeseen setbacks. The climate is favourable, but biopharma and the FDA will still need a fair wind to deliver such a long list of hopefuls.

Notable FDA approvals still to come Source: EvaluatePharma®, July 2018

Product Company 5th-year US sales ($m) PDUFA date

Lanadelumab Shire 940 24-Aug

Tibsovo Agios 539 21 - A u g

Fremanezumab Teva 522 14-Sep

Patisiran Alnylam 449 18-Aug

Emgality Eli Lilly 437 End-Sep

Larotrectinib Bayer/Loxo Oncology 396 26-Nov

Talazoparib Pfizer 254 December

Cemiplimab Regeneron 223 26-Oct

Waylivra Akcea Therapeutics 173 30-Aug

Damoctocog Alfa Pegol Bayer 130 31-Aug

Five-year low for medical device mergers

At the half-year point 2018 is shaping up to have the lowest spend on medical device M&A since 2013. With only two billion-dollar deals closed in the past six months the total disclosed spend is less than $12bn, compared with $48.8bn a year ago – though admittedly that figure was swollen by the closure of Abbott’s purchase of St. Jude Medical.

One of the interesting trends is private equity’s continued interest in buying up medtech assets. Seven medtechs have been snapped up by private equity or other investors, including two of the top 10 deals. Private equity has grown much more comfortable with highly technical industries, while the lack of growth capital available to young and mid-stage device makers has allowed these investors to fill a gap – suggesting that more such deals are likely in future.

Medtech acquisitions of last decade Source: EvaluateMedTech™ July 2018

Completion date Value ($bn) No of deals No of deals with Average deal known value size ($m)

H1 2018 11.9 67 36 329

2017 98.4 192 92 1,070

2017 excluding Abbott-St. Jude and 49.4 190 91 543 Becton Dickinson-C. R. Bard

2016 48.1 244 105 458

2015 128.0 236 111 1,153

2015 excluding Medtronic-Covidien 78.1 235 110 710

2014 41.7 225 113 369

2013 23.3 237 104 224

2012 44.9 247 123 365

2011 59.6 275 133 448

2010 24.1 271 131 184

2009 13.9 180 85 164

Altaris Capital, for example, grabbed itself a bargain when it bought Analogic for less than its market worth. The target company was in difficulty, needing to build scale to invest in R&D and defend its market position, but had no way of getting a deal done. It ended up at Altaris’s mercy.

“The private equity world sees medtech as a real opportunity,” says Tim Haines, a managing partner at the VC group Abingworth. “If you go back 15 or 20 years many private equity firms were more about balance sheet engineering – putting debt in, etc – but their world has changed, and they’re now much more operating-focused.”

On the flip side, he says, there is no question that there is a shortage of late-stage capital available to medtech businesses. Private equity groups are increasingly stepping in to help grow these companies, until they are ripe for acquisition or have sufficient revenues to go public.

Completion date Acquirer Target Value ($bn) Target focus

April 6 Roche Flatiron Health 1,900 Healthcare IT

June 22 Altaris Capital Partners Analogic 1,070 Diagnostic imaging

January 23 Weigao Group Argon Medical Devices 844 Anaesthesia & respiratory; blood; cardiology; drug delivery; endoscopy; gastroenterology; general & plastic surgery; obstetrics & gynaecology; orthopaedics; patient monitoring; radiology; urology; wound management

February 14 TPG Capital Exactech 737 Orthopaedics

April 30 Owens & Minor Surgical and Infection Prevention 710 General & plastic surgery business of Halyard Health

February 28 Stryker Entellus Medical 662 Anaesthesia & respiratory; ear, nose & throat; endoscopy; general hospital & healthcare supply

April 30 Boston Scientific NxThera 325 Endoscopy; urology

April 16 Boston Scientific nVision Medical 275 Endoscopy; obstetrics & gynaecology

April 6 Allergan Elastagen 261 General & plastic surgery; wound management

April 4 LivaNova TandemLife 250 Cardiology

The only bona fide medtech megamerger was Roche’s purchase of Flatiron Health for $1.9bn in April. The dearth of large deals means that the average size of first-half acquisitions was just $329m, much smaller than in recent years even when correcting for the megamergers that warp the figures for 2015 and 2017.

Whether this actually represents a return to the kind of tuck-in acquisitions that smaller medtechs tend to rely on is a different matter. For a start, in the first half of 2018 the fewest deals – just 67 – have been closed than at any half-year point since Vantage started tracking them in mid-2013. In 2017 the half-year total was 76, and the average since 2013 is around 84.

No of deals closed by size bracket Source: EvaluateMedTech™ July 2018

Completion date $0-10m $10-100m $100m-1bn $1bn+

H1 2013 11 27 11 1

H1 2014 10 22 30 5

H1 2015 8 21 9 6

H1 2016 8 24 14 6

H1 2017 8 15 11 10

H1 2018 4 9 21 2

Note: only includes deals with known value.

And the number of deals in the smallest size brackets is still falling. In the first half of this year just 13 deals of less than $100m were closed, compared with 23 in the first six months of last year. It is deals in the $100m to $1bn bracket that are on the up – not exactly tuck-ins.

First, the good news: the first quarter of this year saw more venture funding raised by medical device groups than any other period since 2010 – with the exception of the record-breaking first quarter last year. If the remainder of this year keeps up this pace, 2018 will see more VC cash raised than ever before.

The downside is that the number of deals has fallen yet again – and this process could continue. “There is an increasing trend to having larger syndicates with large amounts of money going in up front to give the company the opportunity to execute on the strategy,” says Abingworth’s Mr Haines. “Having a significant quantum of capital is important.”

Venture funds pumped $3.3bn into private medtech groups in the first six months of 2018, across 90 rounds. This means that the average deal size was $37m – knocking the previous record, the average of $25m per deal in the second half of last year, into a cocked hat.

Quarterly Medtech VC Investments Source: EvaluateMedTech™ July 2018

3,000 139 139 140 134 2,782 128 126 125 123 121 120 2,500 118 112 113 114 109 108 104 105 104 99 100 2,000 1,970 89 90 85 1,352 81 80 1,433

72 74 1,523

1,500 1,429 71 70 1,399 1,328 1,296 1,248 1,244 60 1,181 1,175 1,127 1,127 1,103 1,095 1,095 54 1,050 1,023 1,001 1,005 981 VC Investment ($m) 967

1,000 911

45 45 Number of investments 867 851 40 750 71 7 624 28 500 20

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 2016 2017 2018

VC Investment ($m) Number of investments

Indeed, where the full years 2016 and 2017 each saw four rounds worth more than $100m, 2018 has already yielded no fewer than 11 nine-figure VC rounds.

“Medtech over the last 10 years, in a venture sense, has got relatively harder,” says Mr Haines. “Reimbursement has become much more of a challenge than it was historically, but particularly there are fewer acquirers and they tend to wait to acquire until the acquisition is ... accretive.”

18 $100m venture rounds become standard for device makers Copyright © 2018 Evaluate Ltd. All rights reserved. IPOs are also a tougher prospect for device makers than biotechs, he says. If a medtech company wants to float successfully it has to already have around $30-50m in revenue; biotechs need not be commercial at all.

All of which means that the average time to exit a medtech group is nearly twice as long as for a biotech company. Those venture investors willing to risk a punt are under no illusions about what is required: they must fund clinical trials, navigate regulatory processes and reimbursement, and build a sales force. They must therefore choose their portfolio companies with great care.

As Vantage’s analysis shows, the number of acquisitions in the medtech sphere has dropped markedly this year. Mr Haines says this is not too great a worry for VCs, since “enough high-quality M&As” still get done. Acquirers, like VCs, are trying to pick the winners.

Top 10 deals closed in H1 2018 Source: EvaluateMedTech™ July 2018

Date Round Company Investment ($m) MedTech Focus

January 11 Series B (second close)* Grail 314.7 In vitro diagnostics

May 21 Series C Grail 300.0 In vitro diagnostics

February 14 Series E Heartflow 240.0 Cardiology

March 1 Series B Helix 200.0 In vitro diagnostics

January 31 Series E Insightec 150.0 Diagnostic imaging

June 14 Undisclosed Mevion Medical Systems 150.0 Radiology

March 26 Undisclosed Oxford Nanopore Technologies 140.0 In vitro diagnostics

February 21 Series E Procept Biorobotics 118.0 General & plastic surgery; urology

A p r i l 11 Series E Livongo 105.0 Diabetic care; patient monitoring

April 4 Series C Reflexion Medical 100.0 Radiology

* Grail’s series B raised $1.2bn in total. Source: EvaluateMedTech.

Diagnostics companies, particularly those employing next-generation DNA sequencing, are often appealing for VCs, their products being linked closely to computing power and thus relatively cheap to develop. Three of the companies in the top 10 table are sequencing players.

And at least three of the companies in the table are thought to be unicorns. Grail and Heartflow’s recent rounds put their reported valuations at $3.2bn and $1.5bn respectively, according to Forbes, and Jefferies analysts confirmed Oxford Nanopore Technologies’ valuation of $1.5bn to Vantage earlier this year.

The most notable aspect of the medtech IPO market over the first six months of 2018 is the sheer variety in the size of the offerings. Naturally the largest was the spin-out of Siemens Healthineers, which raised $5.1bn on the Frankfurt exchange in March. But the first deal of the year was Swedish group Obstecare’s debut on Stockholm’s Aktietorget, which raised the equivalent of just $20,000.

There was great geographical variety, too: five European offerings – none of them on the Euronext – three US deals and two Korean. To help get their flotation away, device companies are staying close to their home market.

With 10 medical device companies having floated at the half-year point, 2018 is already close to the full-year totals for both 2017 and 2016. The uptick in IPOs is partly a consequence of the drop in acquisitions this year. Fewer companies are buying, many of the very largest companies having already closed gigantic mergers. Consolidation means that mid-stage groups have no choice but to turn to the public markets for growth capital.

H1 2018’s medtech IPOs Source: EvaluateMedTech™ July 2018

Date Company Focus Amount Exchange Offering Discount/ Change raised ($m) price premium since float

January 4 Obstecare Obstetrics & gynaecology 0.02 Aktietorget SEK3.8 - (33%)

February 14 Motus GI Medical Ear, nose & throat; endoscopy 18 Nasdaq $5 (17%) 44% Technologies

February 28 BBS-Bioactive Orthopaedics 4.3 Nasdaq First North €5.50 0% (30%) Bone Substitutes

March 16 Siemens Diagnostic imaging; healthcare IT; 5,125 Frankfurt Stock €28 (2%) 27% Healthineers in vitro diagnostics Exchange

March 23 Medartis Dental; general & plastic surgery; 130 SIX Swiss Exchange CHF48 (2%) 36% orthopaedics

April 6 Iconovo Anaesthesia & respiratory; 5 Nasdaq First North SEK38.5 - (14%) drug delivery

May 3 Inspire Medical Anaesthesia & Respiratory 124 NYSE $16 7% 106% Systems

May 28 Genoray Dental; diagnostic imaging 13 Kosdaq KRW23000 21% 2%

May 29 Sejong Medical Endoscopy; general & plastic 28 Kosdaq KRW15000 22% 15% surgery

June 22 Electrocore Neurology 78 Nasdaq $15 0% 10%

The creation of the independent Siemens Healthineers business is not, perhaps, an IPO in the classical sense, being the separate listing of a long-established unit rather than the next step on a mid-stage company’s path to growth.

In listing in Frankfurt Healthineers has tapped into another trend: moving away from the US. The second largest IPO so far this year, that of bone fixation device maker Medartis, was a rare Swiss deal, and Nasdaq First North saw two deals with fellow Scandinavian exchange Aktietorget hosting another.

20 Floating device companies stay at home Copyright © 2018 Evaluate Ltd. All rights reserved. It might be that the large venture financings seen over the past few years, particularly of certain US companies, are inflating valuations to the point where a listing would be difficult to get off the ground.

Grail, for example, which has scored a succession of vast funding rounds, is rumoured to be considering Hong Kong for a $500m IPO, despite being based in Silicon Valley. Nasdaq seems to be losing its dominance.

The following graph analyses the data on a quarterly basis – excluding the two megadeals of recent years, Healthineers and Convatec’s $1.9bn float in 2016, to give a better idea of the underlying health of the market. It suggests that companies’ chances of floating are improving, albeit slowly. With M&A activity down sharply in the first half of the year, the ability of companies to access growth capital on the public markets will only become more important.

Medtech IPOs 2013-18 Source: EvaluatePharma®, July 2018

700 12 12 652

600 10

500 480 88 8 8 418 400 7 384

6 6 306 249 293 300 278 5 5 5 5 5 5 Number of IPOs

Amount raised ($m) 208 208 4 4 4 172 200 93 3 3 152 126 123 111 2 2 2 2 2 100 86 58 57 48 1 1 25 7 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018

Amount raised ($m) Number of IPOs

Ample evidence of investor enthusiasm for early-stage drug developers makes for a pretty optimistic outlook for those at the smaller end of the biopharma sector. This is not the case for all, however, and growing disillusionment with several bellwether big caps could start to act as a drag on the sector in the final months of 2018.

Those larger biotech and pharma companies with an image problem need to work on their growth plans – but at least none of them has a money problem. True, buying innovation might be expensive, but it is not beyond reach, and many investors would prefer to see cash put to use in deal making rather than financial engineering schemes like share buybacks.

Maybe the big beasts are not quite desperate enough yet to trigger an uptick in deal making. Justifying some of the valuations out there takes some bold assumptions, particularly when it comes to certain publicly traded US small and mid-cap firms. Perhaps investors need to witness a deeper deal drought to come to the same conclusion, and start to push price tags down.

In the device space, though, the second half of the year probably will see a faster pace of dealmaking: six multibillion-dollar mergers are still open. And two of the six are private equity buys. This trend is not going away.

Another development in the device industry might alter the landscape: the splitting up of conglomerates. With Siemens Healthineers already independent from its parent and GE Healthcare and Alcon to follow, these groups will be freed to buy in the technologies they need to stay competitive in their more specialised niches. And more M&A brings more VC deals – theoretically, at least.

Biopharma is more vulnerable than medtech to the risk of a big technology blow-up shaking faith in progress. That said, the unequivocal collapse of Incyte’s epacadostat in a trial considered one of the biggest readouts of 2018 failed to hit sentiment seriously. Investors have arguably yet to acknowledge fully just how slowly the immuno-oncology space might progress over the next few years.

The limited fall-out from epacadostat shows how a fully funded sector can shrug off big surprises. At the same time, the encroachment of digital technologies and artificial intelligence into healthcare is helping to attract new investors and inventors into the space.

Both the biopharma and medtech sectors have external factors to consider. President Trump’s trade war could become a bigger issue for all multinational companies, while in Europe Brexit remains a huge unknown with complex logistical implications. US mid-term elections in November could also turn the water choppy for a while.

Investors no longer seem too perturbed by the risk of US government intervention on drug prices, though the arrival of new players like Amazon will be closely watched.

And while valuations in certain pockets have run away from themselves, this is not true across the sectors, or all geographies. All else being equal, investors will continue to hunt enthusiastically for opportunities in biopharma and medtech in the second half of 2018. Bigger groups must ensure they do not get left behind.

22 Vantage Pharma, Biotech and Medtech Half-Year Review 2018 Copyright © 2018 Evaluate Ltd. All rights reserved. Additional complimentary copies of this report can be downloaded at: www.evaluate.com/2018HalfYearReview

Evaluate provides trusted commercial intelligence for the pharmaceutical industry. We help our clients to refine and transform their understanding of the past, present and future of the global pharmaceutical market to drive better decisions. When you partner with Evaluate, our constantly expanding solutions and our transparent methodologies and datasets are instantly at your disposal, along with personalised, expert support. Evaluate gives you the time and confidence to turn understanding into insight, and insight into action.

offers a global view of the pharmaceutical market’s past, present and future performance with consensus forecasts to 2024, company financials, pipelines and deals. @EvaluatePharma

provides the first single view of the risk and reward of the R&D landscape with consensus forecasts, R&D costs at drug and trial level, success rates, predictive timelines and trial outcomes.

tracks, benchmarks, and forecasts global performance for the medical device and diagnostic industry with consensus forecasts to 2024, company financials and more. @EvaluateMedTech

improves your strategic decision-making with customised solutions and deep insights that draw on our industry expertise and trusted commercial intelligence.

provides award-winning, thought-provoking news and insights into current and future developments in the industry, and is the only pharmaceutical news service underpinned by Evaluate’s commercial intelligence. @Vantageanalysis

www.evaluate.com

Evaluate Headquarters Evaluate Americas Evaluate Asia Pacific Evaluate Ltd. EvaluatePharma USA Inc. Evaluate Japan KK 11-29 Fashion Street 60 State Street, Suite 1910 Akasaka Garden City 4F London E1 6PX Boston, MA 02109 4-15-1 Akasaka, Minato-ku United Kingdom USA Tokyo 107-0052, Japan

T +44 (0)20 7377 0800 T +1 617 573 9450 T +81 (0)80 1164 4754 JULY 2018