Life sciences industry 2023 market and transaction trends | Baker Tilly

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Life sciences industry 2023 market and transaction trends | Baker Tilly

Industry trends

Venture Capital Deal Activity

Venture Capital Median Deal

Venture Capital Pre-Money Valuation

Venture Capital Deal Value by Series

Venture Capital Deal Count by Series

Venture Capital Deal Value by Industry

Venture Capital Deal Count by Industry

Venture Capital Deal Exit Activity

Median Average Venture Capital Exit Size

Median Venture Capital Exit Size by Type

Average Venture Capital Exit Size

Median Revenue Multiple

The life sciences industry experienced windfall investment in response to the COVID-19 pandemic, further bolstered by a record year for VC activity across the board in 2021. Momentum slowed in 2022, but VCs still managed to close near-record deal value by year’s end. 2023 presented additional challenges for investors, including a prolonged high interest-rate environment, resulting in a further slowdown in dealmaking.

YTD VC activity in life sciences reached $41.0 billion, representing two thirds of the value closed in 2022. Deal volume held steadier than deal value with more than 1,000 deals closed each quarter since Q4 2019, but Q3 2023 narrowly missed that threshold with just 950 deals, ending a three-and-a-half year streak of elevated deal volume.

Start-ups

Many life sciences start-ups are adjusting budgets to smaller check sizes. The demand for lab real estate has declined, indicating a slower venture check-writing environment. Median deal sizes for the early- and late-stage buckets have declined 24.7% and 11.5%, respectively, since 2022.

Angel and seed companies

Median deal sizes for angel and seed companies continued to tick upward, reaching a record $2.0 million YTD. The venture-growth category, which represents the most mature and latest-stage companies, experienced the most volatility in deal sizes with these more mature companies on the front lines in a difficult exit market. The median valuation for the venture growth category has also declined slightly YTD. Valuations grew for all other company stages in 2023, including 30.1% growth in the median late-stage valuation, regaining some ground after declining by more than a quarter in 2022.

Global trends

North America still drives the majority of total life sciences VC deal value, but activity in Asia has grown steadily in total deals over the past decade. Two of the 10 largest life sciences VC deals in 2022 were secured by Chinese companies, but YTD the 10 largest deals have all closed in the United States.

Capital deployment has become more measured following extended macroeconomic concerns. 60 megadeals, defined as $100 million or more, have closed globally YTD compared to 87 such deals in the same period of 2022, with large deals having occurred within the promising gene therapy space.

Exit activity remained muted but steadier on a quarterly basis in 2023 compared with 2022 as game plans mostly adjust to accommodate a shifting macro environment. Total exit value reached $27.4 billion YTD, representing less than half of the total value in 2022. Drug discovery companies continue to drive a significant portion of exit value in life sciences, with five exits exceeding $1 billion each YTD, including two initial public offerings (IPO) and several acquisitions.

M&A

Median exit size declined 31.2% YTD, indicating continued caution. Acquisitions account for a greater share of total exit value compared with public listings, accelerating a trend seen in 2022.

More than 100 life sciences companies have gone public each year since 2018, but with just 51 companies listed through Nov. 20, 2023, 2023 may have bucked this trend as market conditions lead companies toward additional financing rounds or M&A.

Spotlight: Digital health investment slows, but excitement remains

Digital Heal Venture Capital Activity

Median Digital Heal Venture Capital Value

Median Digital Health Pre-Money Valuation

Digital Heal Venture Capital Activity

Preference for real-time provider access and consolidated platforms grew during the pandemic, while AI and ML applications are expanding. The digital health space addresses both critical areas through hardware and software solutions to track health and facilitate communication between providers and patients. A plethora of mobile applications and telehealth services have emerged, raising concerns about fragmentation in the market.

VCs maintain interest in the space with more than 1,000 deals closed globally each year since 2018. Digital health investment mirrors trends in the broader life sciences industry, with its 2021 peak and subsequent decline, but the total deal value closed in 2022 narrowly notched the segment’s second-highest level on record, according to PitchBook data. The surge of VC funding into digital health has slowed YTD, with 862 deals representing just under two thirds of the 2022 count.

However, a healthy level of investment activity remains, with the YTD deal value of $9.1 billion exceeding annual levels closed each year prior to 2017. Eight deals greater than $100 million have closed YTD compared with 24 such deals in the same period of 2022, highlighting greater caution from checkwriters since last year. It’s worth noting that significant levels of capital are still being deployed for the best-positioned companies. Among the companies that successfully raised rounds, median deal sizes grew materially for all categories except for the late stage, which saw its median deal size decline moderately. Valuations are trending downward for most companies in the space, with the median pre-money valuation declining for all stages YTD except angel and seed.

Exit activity

The fluctuating deal size trend exhibited by venture-growth companies mirrors volatility in public markets as these companies approach their exit windows. Deal size growth for angel and seed companies on the other hand has been slow and steady over the past five years.

Exit activity in digital health has stalled with 52 exits totaling $554.9 million, compared with $2.6 billion closed in 2022. The rise of interest in digital health services in recent years created a high volume of new entrants, and the exit pipeline has been smaller compared to more mature verticals.

Private equity (PE) investors have largely stepped back from the digital health space this year with just $88.6 million closed across 18 deals YTD, following an uncharacteristically high level of deal value in 2022 amid discounted valuations and large capital reserves. A notable percentage of PE digital health deals are minority stake growth deals as firms cautiously approach a relatively nascent investment area. The maturation of digital health companies will likely bolster PE activity over the next several years.