It has been a robust first half in 2018 within the life sciences sector for mergers and acquisition (M&A) and investment activities. Deal-tracking sources demonstrate M&A values witnessed meaningful increases in Q2 2018, with deal volumes in the quarter reminiscent of 2016 and 2017 levels . I and others  continue to witness companies and institutional investors reviewing their portfolios for opportunities to create value through acquisitions, divestitures or going deeper on investing in their current portfolio. The rise in activity is in line with expectations due to the need to refill pipelines and cash on hand that needs to be deployed.
Corporate divestitures continued to be active (e.g., Eli Lilly/Elanco), as companies continue to reassess their strategic visions and shed assets that are not deemed to be part of their core operations. Private equity buyers, with significant levels of dry powder to be deployed, are well positioned to acquire many of these carve-out divestments, even with more robust pricing for these assets relative to recent historical periods.
From the institutional investment side, at mid-year, U.S. healthcare venture fundraising reached $4.5 billion and is on pace to closely match the 2017 record of $9.1 billion .
Investments in VC-backed biopharma continued to surge, while devices remained stable. Investing in diagnostics/life science tools decreased. Investment in this subsector overall is lagging in 2018, dragged down by a large drop in Diagnostic Tests deals. It is expected that investment in venture life science companies in 2018 will reach a new high, surpassing the record $17.3 billion invested in 2017.
Series A investments in biotech/pharma seem to be on fire and have reached $2.6 billion, compared to the full-year total of $2.3 billion in 2017. Investor interest in certain therapeutic areas is driving platform companies in oncology, especially immune-oncology (I/O), and orphan disease/rare deals are making a comeback. Underscoring robust pre-IPO valuations, step-ups from Series A to B have seen 2x to 3x increases in the past 18 months. Non-invasive monitoring and imaging companies are driving investments in Series A device companies. While device pre-money valuations also have seen large step-ups from Series A to B, Series D valuations are flat or down rounds. Investments in synthetic biology building blocks, including computational design, CRISPR editing, DNA/RNA synthesis and organism engineering tools, have climbed in 2017 and 2018.
Large pharma experienced a significant increase in deal value in Q2 2018 driven by Takeda’s announced acquisition of Shire. Strategic fit and ability to create shareholder value given take-out premiums are the headwinds driving the current state of large pharma. Biotech deal value and volume decreased 50% and 12%, respectively, in Q2 2018 as the prior quarter had a large acquisition by Sanofi and two by Celgene, surrendering its lead from the prior quarter back to the pharma sub-sector.
Medical devices, including diagnostics, increased 92% in deal value in Q2 2018. The need for medical device companies to add scale and breadth to their product portfolios, while focusing on innovative, high-growth therapeutic areas and shedding lower-growth assets, still exists.
Specialty pharma and generics were slow this quarter as the generics subsector continued to examine pricing declines and whether the market had bottomed out.
Other/Services sub-sector (CRO, CMO, etc.) saw deal activity back down in Q2 2018 as deal flow in the subsector stalled out.
Overall, given the interest of Private Equity around the service businesses in the subsector, there may be active increases in volume while deal values will decline given the larger consolidations and flurry of CRO activity in 2017. The need to scale, coupled with the alignment of holding periods and potential exits for private equity portfolio companies, are key considerations in contract manufacturing.
Outlook for Remainder of 2018
The increase in deal activity in Q2 2018 sets the stage for a strong second half of the year. It is expected that in full-year 2018, U.S. healthcare venture fundraising will reach $9 billion, closely matching the record $9.1 billion set in 2017. While the pace of life sciences investments may slow in the second half of 2018, large round sizes may propel the annual investment total to a record high.
M&A in biotechnology and pharma sectors is likely to reach between 11 and 13 deals for the year. Most companies will push to the public markets to seek higher-value IPOs. Expect between 40 and 45 IPOs for 2018, absent unexpected market fluctuations . Later stage investments for Series C and D deals will drive investment in the device sector. Device M&A activity should pick up, with quick PMA/DeNovo exits and improving multiples for 510(k)exits. Investments in diagnostics and life science tools companies seem to be headed to fall short of their record year in 2017. Investment in 2H 2018 will continue to focus on R&D Tools companies.
 Standard & Poor’s (S&P) Capital IQ, 2018.
 Deloitte Corporate Finance LLC, Life Sciences & Health Care Quarterly update, Q2 2018
 EY 2018 M&A Firepower Report: Life Sciences Deals and Data
 PriceWaterHouseCoopers (PWC), Global Pharma & Life Sciences Deals Insights Report, Q2 2018
 Pitchbook 2018
 Renaissance Capital, 2018, https://www.renaissancecapital.com/
David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.