HEALTHCARE INVESTMENTS STABILIZE AS IPOS SURGE

The story of the healthcare venture industry in 2013 can be summed up in three words: initial public offerings. In a year in which the number of venture-capital backed healthcare IPOs tripled, public market enthusiasm helped stabilize venture investment and fundraising overall. It also led to increased valuations of big exit mergers and acquisitions.

Venture investment in healthcare saw the biggest returns since SVB started tracking the data in 2005, reaching double the next best year. As we note in this report, the climate for IPOs is cooling. However, we see the current balanced financing ecosystem continuing to prime the innovation pump and encourage smooth capital flow to keep the industry humming.

WRITTEN BY

Jonathan NorrisManaging DirectorSilicon Valley Bankt 650 926 0126jnorris@svb.com

Trends in Healthcare Investments and Exits2014

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 2

Table of Contents

3 KEY FINDINGS AND FORECASTS

4 VENTURE FUNDRAISING AND INVESTMENT DRIVE INNOVATION 4 Healthcare Drops as a Percentage of Total Venture Investment 5 Venture Fundraising and Investment Stay Strong 6 Trends in New Company Formation 7 Where Is the New Money Going?

10 HEALTHCARE BIG EXIT M&A DIPS AS IPOS SURGE 10 IPOs Triple and Potential Returns Soar 11 Biopharma: Big Exit M&A Activity Reaches Record Valuations 13 Device: Big Exit M&A Activity Declines but Values Increase

14 BIOPHARMA ANALYSIS: WHAT’S HOT, WHAT’S NOT 14 Oncology Is the Darling of Big Exits 14 Big Exit M&A Activity Shifts to Later-Stage 16 Companies Choose IPO Route Instead of M&A 17 Large Corporates Increase Acquisitions

18 DEVICE ANALYSIS: WHAT’S HOT, WHAT’S NOT 18 Imaging/Diagnostics Pushes Up Big Exit M&A Values 19 Bucking Convention, FDA Approval Not Necessary for Exit 21 Angel Investors and Smaller Funds Fill Device Funding Gap 22 More Capital Flow Is Needed But Tide May Be Turning

23 CONCLUSION

SILICON VALLEY BANK PRODUCES THIS ANNUAL REPORT TO GUIDE OUR CLIENTS IN DECISION-MAKING AND TO CONTRIBUTE VALUABLE INSIGHT INTO THE TOP TRENDS IN THE HEALTHCARE VENTURE INDUSTRY. WE ANALYZED PROPRIETARY AND PUBLIC DATA AND FORECASTS TO DETERMINE TRENDS AT BOTH ENDS OF THE PIPELINE: ON THE CAPITAL SIDE THROUGH VENTURE INVESTMENT INTO COMPANIES AND VENTURE FUNDRAISING, AND ON THE LIQUIDITY SIDE THROUGH BIG EXITS AND IPO ACTIVITY.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 3

2013 KEY FINDINGS ‣ Venture fundraising stabilizes at the $3.5-$4 billion level.

‣ Venture investment remains at $6.7 billion, buoyed by the hot IPO market.

‣ Healthcare IPOs triple, leading to record potential IPO/big exit returns of $12.5 billion.

‣ Corporate venture activity in biopharma bolsters healthy financing ecosystem.

‣ Biopharma big exit M&A deals reach record valuations.

‣ Biopharma structured deals continue with higher upfront payments.

‣ Medical device big exits stay relatively stable, deal values increase.

‣ Device M&A analysis finds FDA approval not a necessity for big exits.

KEY FORECASTS

‣ Healthcare fundraising will see continued stability.

‣ Venture investment into companies will slowly drop, then level off.

‣ Series A investments in biopharma will remain level.

‣ Investment will lag in Series A device, but corporate venture signals more active role.

‣ As the IPO market cools in second half of 2014, M&A activity will pick up.

‣ Acquirers will show continued strong interest in oncology and diagnostics.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 4

HEALTHCARE DROPS AS A PERCENTAGE OF TOTAL VENTURE INVESTMENTHealthcare venture investment in biopharma and device companies accounted for 22 percent of all venture dollars invested in 2013. This is down from the eight-year average of about 27 percent. Still, healthcare remains a major driver of investment in the venture industry (Exhibit 1).

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total VC Dollars ($B) $99 $38 $21 $19 $22 $23 $27 $31 $30 $20 $23 $28 $27 $30

% Biopharma 4% 9% 15% 19% 19% 16% 17% 17% 15% 19% 17% 17% 16% 15%

% Device 2% 5% 9% 8% 8% 10% 11% 12% 11% 13% 10% 10% 9% 7%

Source: PricewaterhouseCoopers and Silicon Valley Bank% Device% BiopharmaTotal VC $

$50$45$40$35$30$25$20$15$10

$5$0

20%18%16%14%12%10%8%6%4%2%0%

$ Bi

llion

s

20052004

20032002

20012000

20062007

20082009

20102011

20122013

$99

Exhibit 1: Healthcare as Percentage of Total Venture Investment

VENTURE FUNDRAISING AND INVESTMENT DRIVE INNOVATION

Healthcare as a percentage of total venture investment declined in 2013, but fundraising and investing are stabilizing to drive innovation.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 5

Many mezzanine and public funds provided equity financings for later-stage, venture-backed companies to bolster the balance sheet of companies preparing to go public. We think many of these companies would have secured partnerships or accepted M&A deals in the absence of readily available capital influenced by the open IPO window. Those financings led to the lofty company investment number in 2013.

We forecast slightly declining investments into venture-backed healthcare companies in 2014 — specifically in the second half of the year. The predicted drop is due to fundraising and declining mezzanine financing. The substantial venture funds raised between 2006 and 2008 are now fully invested and will not be available to support existing portfolio companies. The current funding environment is leading to less available venture capital in the market. As long as the IPO window is open, it will influence larger mezzanine financings in the private market. However, the IPO climate is cyclical, and already we have seen the market grow more discriminating, leading to our forecast of fewer mezzanine financings.

We believe that some public investors and other momentum-based investors will begin to withdraw as the IPO cycle runs its course in late 2014 into 2015. We forecast that venture investment will drop from the current $6.7 billion and level off at $5-$5.5 billion in the next two to three years.

VENTURE FUNDRAISING AND INVESTMENT STAY STRONG

As higher returns from M&A and IPOs flow back to investors, and then to limited partners, healthcare venture fundraising has rebounded since dismal 2010. Buoyed by more confident limited partners and corporate venture, fundraising has reached or exceeded $3.5 billion in each of the past three years. A significant number of healthcare funds are raising money in 2014, leading us to predict that fundraising levels will stay the same or slightly increase over the next year.

As a result, the fear of a lack of venture dollars to support healthcare innovation has abated for this cycle. Clearly, it is much lower than the top of the previous cycle ($5-$8 billion), but in our opinion, $3.5-$4 billion annually represents a healthy level to support innovation. In fact, higher amounts risk flooding the market with capital and creating too many companies, which happened in the last cycle.

We think a key measure of ongoing sustainability is the ratio of capital invested to capital raised. The ratio peaked at three times in 2010, reflecting continued investment into companies from existing funds, but underscoring the venture fundraising drought of that year. In 2013, the ratio stood at

1.7 times, signaling a more balanced ecosystem that should lead to sustainable flows of investment in the future (Exhibit 2).

We believe a healthy ratio is between 1.3

and 1.6 times, although ratios can be slightly higher during hot IPO markets such as we are experiencing. The fundraising part of the ratio includes healthcare venture fundraising, but does not track crossover and public investor capital, as well as most corporate venture funds. These sources of capital have increased over the past few years and help make up the difference between venture fundraising and capital invested into healthcare companies.

Investment into healthcare companies totaled $6.7 billion in 2013, about equal to the previous year. We predicted a drop in investment, but had not accounted for such a strong IPO environment in 2013.

HC $ InvestedHC $ FundraisedYear refers to Vintage Year of Fund. Source: PricewaterhouseCoopers, Thompson Reuters and SVB proprietary data

% OverfundedGap in Funding$

Billi

ons

$10

$9

$8

$7

$6

$5

$4

$3

$2

$1

$0

20052006

20072008

20092010

20112012

2013

500%

400%

300%

200%

100%

0%

Exhibit 2: Healthcare Funding Gap:Venture Dollars Invested and Raised

HEALTHCARE VENTURE FUNDRAISING HAS EXCEEDED $3.5 BILLION IN EACH OF THE PAST 3 YEARS, A HEALTHY LEVEL FOR INNOVATION.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 6

TRENDS IN NEW COMPANY FORMATIONBIOPHARMA: CORPORATE VENTURE BOLSTERS EARLY-STAGE INNOVATION

Strong corporate venture interest in Series A deals is bolstering early-stage innovation — a trend that began in 2012 — and is leading to stabilized Series A investment. Corporate venture investors participated in 35 percent of Series A biopharma financings in 2013 (Exhibit 3). Large biopharma companies are essentially outsourcing early-stage R&D by investing heavily in young venture-backed companies. We predict that in 2014 corporate venture will continue to participate in at least 30 percent of Series A equity rounds.

Corporate acquirers are feeding both ends of the innovation equity spectrum — participating in Series A investment through their corporate arms and also aggressively entering the limited partner realm as key anchors for healthcare venture funds. This signals that partnership and big exit M&A with venture-backed companies will continue to fill the deal pipeline for the foreseeable future.

Source: CB Insights, Pitchbook, VentureSource and SVB proprietary data

120

100

80

60

40

20

0

$1200

$1000

$800

$600

$400

$200

$0

# of

Dea

ls

Tota

l $ In

vest

ed (M

)2005

20062008

20102011

20122013

20092007

VCCorporate VC in Syndicate Dollars Invested

Exhibit 3: Biopharma Company Creation: Deals and Investment in Series A

2005 2006 2007 2008 2009 2010 2011 2012 2013

CVC % 8% 14% 13% 18% 17% 12% 11% 30% 35%

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 7

DEVICE: MORE RISK MAKES INVESTMENT LESS ATTRACTIVE

Investment in device Series A continues to lag significantly compared to biopharma (Exhibit 4). However, 2013 saw a slight increase in deals, a positive development compared to the double-dip declines of 2009 and 2012.

There are several factors leading to the low number of early-stage device investments: overall decline in device venture investment, big exit M&A focus in later-stage device companies and lack of corporate investment.

Less capital is going into this sector overall. In 2013, device company investment represented only 7 percent of all venture investment, the lowest percentage since 2001. However, for those investors with capital to invest, later-stage device companies, not Series A, are capturing attention. It is difficult to attract capital to early-stage device opportunities when the exit is likely further away and development and regulatory risks are typically greater than in FDA-approved, later-stage companies. (“FDA-approved” refers to a company with FDA-approved product.) Big exits in device are concentrated around FDA-approved, commercial-stage companies. As a result, there is less capital available for new startup companies. In stark contrast to corporate venture support in early-stage biopharma, there has been limited corporate capital available in device to build syndicates for Series A.

We believe this reluctance of venture and corporate venture to support early- stage device investment is shortsighted and will impede innovation. Later in the paper, we discuss the emergence of angel investor syndicates (and anecdotal stories of corporate support) stepping in to help fill the Series A gap in device.

Source: CB Insights, Pitchbook, VentureSource and SVB proprietary data

100

80

60

40

20

0

$1000

$800

$600

$400

$200

$0

# of

Dea

ls

Tota

l $ In

vest

ed (M

)

Exhibit 4: Device Company Creation:Deals and Investment in Series A

20052006

20082010

20112012

20132009

2007

VCCorporate VC in Syndicate Dollars Invested

2005 2006 2007 2008 2009 2010 2011 2012 2013

CVC % 8% 5% 8% 7% 5% 6% 4% 0% 10%

Early (Series A-B): 84% Late (Series C+): 16%Source: CB Insights, PitchBook, VentureSource and SVB proprietary data

Novo A/S

1210

86420

Third Rock

OrbiM

ed

CanaanMPM

NEA

Sofinnova

Novarti

s

S.R. One

Pfizer

5AMAlta

Astella

sOsa

ge

# of

Dea

ls

Exhibit 5: Biopharma Top Investors:New Money Investment (2012-2013)

WHERE IS THE NEW MONEY GOING?We examined new venture equity investments (regardless of round) into biopharma companies in 2012 and 2013. Data from other sources show annual deployment of capital by investors, but does not distinguish between ongoing support of an existing portfolio company versus new equity investments into a new portfolio company. Based on available information, however, we created a unique dataset that shows which firms are the most active new money investors over the last two years (Exhibit 5).

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 8

BIOPHARMA: TOP INVESTORS ARE GETTING IN EARLY

Measuring the activity of the top new money investors in the past two years, 84 percent of their investments were in Series A or B financings. This should not be surprising. Series A company creation has remained stable with venture and corporate venture support. With the open IPO window, we have seen crossover and public market investors, not venture funds, come in to lead later-stage private rounds.

Oncology is the leading indication, attracting double the number of new money investments compared to other indications. The other top indications include target generating platform (TGP), metabolic and ophthalmology. New money deals in later-stage companies are focused on oncology and metabolic (Exhibit 6).

The leading corporate venture investors in new money biopharma investments include Novartis, Astellas, Pfizer, SR One, Amgen and JJDC (Exhibit 7).

Nearly 90 percent of top corporate investments are Series A or B. In fact, more than half of these new investments were in pre-clinical or Phase I companies (Exhibit 8).

Early (Series A-B): 84% Late (Series C+): 16%*See investors in Exhibit 5Source: CB Insights, PitchBook, VentureSource and SVB proprietary data

Oncology

3025201510

50

Target Gen

eratin

g

Platform

Metabolic

Ophthalmology

Cardiova

scular

CNS

Dermatology GI

Infla

mmation

# of

Dea

ls

Exhibit 6: Biopharma Top Investors*: New MoneyInvestment by Indication and Stage (2012-2013)

Early (Series A-B): 89% Late (Series C+): 11%Source: CB Insights, PitchBook, VentureSource and SVB proprietary data

Novarti

s

76543210

S.R. One

Pfizer

Astella

s

Amgen JJDC

Baxter

Roche

Celgen

e

MedIm

muneSanofi

Shire

Exhibit 7: Biopharma Top Corporate Investors:New Money Investors by Stage (2012-2013)

# of

Dea

ls

Early (Series A-B): 90% Late (Series C+): 10%Data includes investments by investors with at least 3 dealsSource: CB Insights, PitchBook, VentureSource and SVB proprietary data

30

25

20

15

10

5

0

Pre-cli

nical

Phase I

Phase II

Phase II

I

Exhibit 8: Biopharma Top Corporate Investors:New Money Investment by Stage (2012-2013)

# of

Dea

ls

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 9

DEVICE: NEW MONEY INVESTORS LAG

New money investors in device in the past two years have been much less active than those in biopharma. The top 10 biopharma investors have made double the number of investments of their counterparts in device.

In contrast to biopharma, which has seen an influx of new, early-stage investments, device new money investments are more evenly spread between early-stage (Series A and B) and later-stage companies (Series C and later). Device corporate support also lagged considerably. While eight different biopharma corporates have invested in four or more new deals in the previous two years, only one corporate (Boston Scientific) has made a significant number of investments in new device companies (Exhibit 9).

Top device indications include orthopedic, ophthalmology, imaging/diagnostics, cardiovascular and surgical. Top 10 investors made early investments in ophthalmology and cardiovascular, and later-stage investments in orthopedics, surgical, neuro, aesthetics and uro/gyn (Exhibit 10). It is interesting to note that cardiovascular attracted significant early-stage investment, and the indication also had the largest number of early-stage big exits among device companies. (See page 20 for further discussion.)

Early (Series A-B): 56% Late (Series C+): 44%Source: CB Insights, PitchBook, VentureSource and SVB proprietary data

NEA

Versant

Boston Scie

ntific

Fletch

er Spaght

Delphi V

entures

OrbiM

ed

Abingworth

Vivo Ven

tures

Hatteras V

entures

Longitu

de

8

6

4

2

0

# of

Dea

ls

ment (2012-2013)Exhibit 9: Device Top Investors: New Money Investment (2012-2013)

Early (Series A-B): 56% Late (Series C+): 44%*See investors in Exhibit 9Source: CB Insights, PitchBook, VentureSource and SVB proprietary data

Ophthalmology

6543210

Orthoped

ic

Surgical

Cardiova

scular

Imaging/

Diagnostics

Vascular

Aestheti

cNeu

ro

Uro/Gyn

# of

Dea

ls

Exhibit 10: Device Top Investors*: New Money Investment by Indication and Stage (2012-2013)

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 10

HEALTHCARE BIG EXIT M&A DIPS AS IPOS SURGE

The decline in Big Exit M&A is a function of the red-hot IPO market, as companies spurn M&A offers and instead head to the public markets.

IPOS TRIPLE AND POTENTIAL RETURNS SOARBig exit M&A transactions in both biopharma and device sectors are down (Exhibit 11). All told in 2013, there were 27 biopharma and device exits compared to 35 in 2012. Overall, big exit total deal value declined in 2013 to about $7.1 billion, down from $8.9 billion in 2012 and $9.0 billion in 2011.

In 2013, there were 37 venture-backed IPOs, up from 12 in 2012 and six in 2011. An IPO is not traditionally a full “liquidity event” in venture-backed healthcare public offerings, as most investors keep IPO shares until there is a substantial value inflection point, and often these companies must continue to raise capital in the public market.

However, based on the large number of IPOs and a significant amount of distributions back to limited partners from the

liquidation of recent IPO shares, we believe these potential returns should be used in our liquidity analysis to provide a more

accurate picture for the industry. Thus, we have adjusted our methodology this year when calculating liquidity to reflect potential value creation being generated from IPOs.

2005 2006 2007 2008 2009 2010 2011 2012 2013

Biopharma: Big Exits 12 8 13 9 13 13 18 18 13

Biopharma: VC-Backed IPOs 25 20 17 1 3 9 4 12 33

Device: Big Exits 7 12 11 8 9 15 17 17 14

Device: VC-Backed IPOs 7 9 4 1 0 3 3 1 4

Biopharma Big Exits Biopharma IPOs Device Big Exits Device IPOsSource: VentureSource, investment bank reports, press releases and SVB proprietary data

20062005 2007 2008 2009 2010 2011 2012 2013

35

30

25

20

15

10

5

0

# of

Big

Exi

ts

Exhibit 11: Biopharma and Device:Big Exit M&A and VC-Backed IPOs

2013 HAD 37 HEALTHCARE IPOS, COMPARED TO 12 IN 2012.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 11

*See Potential Distribution sidebar for methodologySource: VentureSource, investment bank reports, press releases and SVB proprietary data

Big Exit Upfront Payments Big Exit Milestones to be Earned Pre-Money IPO Value

20052006

20082010

20112012

20132009

2007

$14

$12

$10

$8

$6

$4

$2

$0

Tota

l Val

ue ($

Bill

ion)

Exhibit 12: Biopharma and Device: Potential Distribution* from Big Exit M&A and VC-Backed IPOs

Using this new conservative calculation, we found that in 2013 IPOs provided a potential $8.5 billion in returns to investors. (See Potential Distribution sidebar for methodology.) Combined with big exit M&A liquidity of $4 billion, the 2013 total deal valuation reached $12.5 billion, double the best performing year since we started tracking this data in 2005 (Exhibit 12). This is one reason for the resurgence of venture fundraising since 2012 — real returns are coming back to limited partners, and write-ups in public liquidity help TVPI, or Total Value to Paid-In Capital, a key performance measure used by limited partners and venture funds.

BIOPHARMA: BIG EXIT M&A ACTIVITY REACHES RECORD VALUATIONS The average total deal value from the 13 biopharma big exits reached $549 million in 2013, the highest dollar amount since we started keeping records of big exits in 2005. This marks the third consecutive year that total average deal values reached $490 million or higher.

The number of biopharma big exits declined from 18 each in 2011 and 2012 to 13 in 2013. We predicted this drop in last year’s report. The lower number of exits is a function of the strong IPO market in 2013 when 33 venture-backed biopharma companies went public. A number of other biopharma companies raised mezzanine rounds in anticipation of going public in 2014. Some companies that completed IPOs or raised mezzanine rounds could have accepted viable M&A offers, but instead opted to leverage the public markets and continue development.

HOW WE CALCULATE POTENTIAL DISTRIBUTION TO INVESTORS

We focused specifically on returns back to venture investors, assuming that these investors own about 75 percent of companies that exit or go public. We calculated big exit upfront payments assuming 75 percent venture ownership at the time of sale and discounted all milestone payments to 25 percent. For IPOs, we calculated the last private valuation before raising money in the public market (pre-money IPO value) and based potential returns on 75 percent venture ownership. We think this is a conservative calculation, as IPOs raise significant capital that is not factored into this equation, and many IPO shares have traded up substantially after going public.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 12

Once trading in the public market, access to capital is much easier, allowing a company to develop its assets and ideally create additional value. Risk, of course, lies in determining whether going public will provide better returns than private M&A. Regardless, the strong IPO market presents financing alternatives to many venture-backed biopharma companies.

BIOPHARMA: STRUCTURED DEALS CONTINUE WITH HIGHER UPFRONT PAYMENTS

The impact of an open IPO window was also reflected in big exit upfront deal value. In our analysis last year, we noted that upfront deal size and percentage in structured transactions would rebound based on a strong IPO market. That prediction proved correct. The average upfront deal size in 2013 was $349 million, the highest level since the structured deal era began five years ago (Exhibit 13). (See Structured Deal sidebar.)

In 2012, the upfront percentage of a structured deal had dropped to 37 percent from 52 percent in 2011. But 2013 saw a rebound to 50 percent. The more lucrative upfront deals meant that the 13 exits recorded in 2013 returned more upfront money to investors than the 18 exits did in 2012.

The number of venture-backed biopharma IPOs in 2014 has exceeded the total for 2013, but will decline over the second half of the year. In turn, that will lead to an increase in big exit M&A activity, as fewer companies will be able to go public.

Source: VentureSource, investment bank reports, press releases and SVB proprietary data

2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Number of Exits 12 8 13 9 13 13 18 18 13

Average Deal All-In + Upfront ($M) 222 380 442 209 222 173 311 216 349

Average Deal All-In + Upfront w/ Milestones ($M)

226 405 459 290 442 374 499 493 549

No. of Structured Deals 1 2 2 3 11 10 13 14 10

% Upfront in Structured Deals 80% 71% 78% 33% 45% 42% 52% 37% 50%

Exhibit 13: Biopharma: Big Exit M&A Overview

THE LEGACY OF THE STRUCTURED DEAL

In response to the sluggish venture capital environment in 2008-2009, the structured deal became a popular form of M&A, particularly for biopharma. Acquirers had seen some very large, early-stage M&A deals fail in subsequent clinical stages. Finding no appetite for IPOs and flagging venture support, companies struggled for financing. Acquirers were in a strong position to set deal terms and they often required a pay-for-performance system that paid some of the consideration upfront, but set milestones in development that must be achieved before the full value of the transaction would be realized.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 13

DEVICE: BIG EXIT M&A ACTIVITY DECLINES BUT VALUES INCREASE The number of device big exits dropped from 17 to 14 in 2013, the lowest number in four years. Still, that number is higher than any exit year between 2005 and 2009. Although the number of exits decreased, values actually went up compared to the previous two years (Exhibit 14).

In contrast to biopharma, the trend of fewer structured deals continued, with 10 of 14 deals paying the total value at the close of the transaction (no milestones). Of the structured deals with milestones, a much higher percentage is paid upfront in device (63 percent). The upfront big exit dollar average was $189 million, with a total average deal value of $231 million — both marking three-year highs.

The IPO market remains difficult to navigate for device as a successful IPO requires substantial revenues and profitability in sight. That leaves M&A as essentially the only alternative for liquidity. There is no optionality driving deal value. So why did device big exit values go up in 2013? We believe that the emergence of diagnostics as a major exit category is one reason, as explained later in the device sector analysis.

Generally, device activity has been difficult to predict. However, we think deal values in 2014 should be similar to 2013, with the number of big exits expected to be 14 or higher.

Source: VentureSource, investment bank reports, press releases and SVB proprietary data

2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Number of Exits 7 12 11 8 9 15 17 17 14

Average Deal All-In + Upfront ($M) 85 144 194 169 351 207 186 123 189

Average Deal All-In + Upfront w/ Milestones ($M)

107 153 234 190 434 334 212 163 231

No. of Structured Deals 3 2 4 1 5 9 3 8 5

% Upfront in Structured Deals 61% 64% 56% 46% 66% 61% 59% 70% 63%

Exhibit 14: Device: Big Exit M&A Overview

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 14

BIG EXIT M&A ACTIVITY SHIFTS TO LATER-STAGESince 2009, Phase II has led all big exits, followed closely by commercial-stage and Phase I (Exhibit 16). In the last few years, there has been a noticeable shift in the direction of big exit M&A activity from early-stage to the later-stage. Phase I and pre-clinical exits have declined, while Phase III and commercial-stage have risen. In 2013, the trend toward later-stage continued, with six of 13 exits occurring at Phase III or commercial-stage. Those two stages accounted for about half of all big exits over the last two years.

BIOPHARMA ANALYSIS: WHAT’S HOT, WHAT’S NOT

The hot IPO market for early-stage biopharma companies shifts M&A activity to later-stage companies.

ONCOLOGY IS THE DARLING OF BIG EXITSIn line with current venture and corporate venture investment focus, oncology continues to be the darling of biopharma big exits (Exhibit 15). In 2013, oncology netted five out of 13 big exits, the highest percentage (38 percent) in any single indication since we started tracking this data in 2005.

Since the beginning of the structured deal era in 2009, oncology has led big exits every year but 2012.

Source: Investment bank reports, press releases and SVB proprietary data

25

20

15

10

5

0

Pre-cli

nical

Phase I

Phase II

Phase II

I

Commercial

# of

Big

Exi

ts

Exhibit 16: Biopharma:Big Exit M&A by Stage (2009-2013)

Source: Investment bank reports, press releases and SVB proprietary dataPre-clinical Phase I Phase II Phase III Commercial

Oncology

5

4

3

2

1

0

Anti-infec

tives

Respira

tory

Cardiova

scular

Ophthalmology

Renal

Uro/Gyn

Exhibit 15: Biopharma:2013 Big Exit M&A by Indication and Stage

# of

Big

Exi

ts

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 15

Pre-clinical Phase I Phase II Phase III CommercialSource: Investment bank reports, press releases and SVB proprietary data

Represents 1 IPO

2009

1816141210

86420

2010 2011 2012 2013

# of

Big

Exi

ts

Exhibit 18: Biopharma: Big Exit M&A and VC-Backed IPOs by Stage and Year

What is driving this shift?

‣ Early-stage venture financing became more difficult as a result of the economic downturn. From 2008-2011, many venture investors switched their focus to invest in later-stage companies with less development risk. Today, these later clinical stage spin-outs and/or specialty pharma companies are transacting.

‣ Not all investors shifted away from early-stage investing. A number of players continued to support pre-clinical assets. However, instead of generating big exits, a number of early-stage companies are leveraging the healthy appetite of public investors by completing IPOs. In 2013, we saw a significant number of early-stage IPOs. In nine of these IPOs, the most advanced asset had only reached pre-clinical or Phase I.

‣ These early-stage IPOs are in their traditional big exit zone. Big exits average about five to six years from the close of their Series A round. The pre-clinical and Phase I IPOs averaged just 5.4 years from the close of their Series A round. In comparison, other venture-backed IPOs in later stages averaged nine years.

‣ The take-away is that pre-clinical and Phase I companies are going public at very attractive valuations instead of accepting M&A bids. Thus, acquirers are not ignoring early-stage companies, instead these companies are spurning big exits and opting for the public market.

COMPANIES CHOOSE IPO ROUTE INSTEAD OF M&AWe identified several interesting trends when factoring in IPO activity (Exhibit 18).

From 2009 to 2011, six of the 11 oncology exits were early-stage, having completed Phase I trials at the time of exit. In the last two years, just three of eight were pre-clinical or Phase I.

Oncology acquirer activity might appear to be shifting to later-stage companies, but we know from the IPO data that early-stage companies continue to attract high interest. Of 14 oncology IPOs over the last two years, eight of those were pre-clinical or Phase I. The IPO window has allowed early-stage oncology companies to reject acquirer interest and instead enter the public market.

Source: Investment bank reports, press releases and SVB proprietary dataPre-clinical Phase I Phase II Phase III Commercial

9876543210

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Big

Exi

ts

2005

2007

2009

2011

2013

2005

2007

2009

2011

2013

2005

2007

2009

2011

2013

2005

2007

2009

2011

2013

2005

2007

2009

2011

2013

Exhibit 17: Biopharma:Big Exit M&A by Stage and Year

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 16

Source: Investment bank reports and press releases

Pre-Clinical Phase I Phase II Phase III Commercial

Big Exit IPO Big Exit IPO Big Exit IPO Big Exit IPO Big Exit IPO

ONCOLOGY

2009 3 1

2010 1 1

2011 2 3 1 1

2012 1 1 1 2 1

2013 1 1 1 6 2 4 1

Total 1 2 8 6 6 5 2 3 2 0

RESPIRATORY

2009 1

2010 1 2

2011 1

2012 1 1

2013 1 1 1

Total 0 0 3 0 4 1 0 0 2 0

ANTI-INFECTIVES

2009 1 2

2010

2011

2012 2

2013 1 1 3

Total 0 0 2 0 3 0 0 5 0 0

CNS

2009

2010 2 2

2011 1 2 1

2012 1 1 1 2

2013 1

Total 1 0 0 0 1 2 3 2 3 2

CARDIOVASCULAR

2009 1

2010 1

2011 1

2012 1 2

2013 1 2 1

Total 0 0 1 0 2 1 0 2 4 0

Exhibit 19: Biopharma: Big Exit M&A and IPOs by Top Indication

TRENDS EMERGE AMONG OTHER TOP INDICATIONS

The other top indications show interesting trends (Exhibit 19):

‣ Respiratory has had a big exit every year, and trended later-stage in 2013.

‣ CNS had substantial IPO and big exit activity between 2010 and 2012, with more deals focused later-stage. It is odd that with a wide open IPO window, not a single CNS company had a big exit in 2013, and only one IPO. We think that is an aberration, as CNS continues to have strong public and M&A acquirer interest.

‣ Cardiovascular has had an exit in every year since 2009, and those tend to be later-stage. Cardiovascular activity has accelerated in 2012 and in 2013 we saw significant IPO activity.

‣ Anti-infectives had three big exits in 2009, then not a single one until 2013. However, there has been significant IPO activity in anti-infectives in the past two years, trailing only oncology in total number of IPOs.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 17

Onco

logy

CNS

Targ

et

Gene

ratin

g Pl

atfo

rm

Resp

irat

ory

Anti-

Infe

ctiv

es

Opht

halm

olog

y

Derm

atol

ogy

Auto

-imm

une

Othe

r

Card

iova

scul

ar

Met

abol

ic

Rena

l

Aest

hetic

s

AstraZeneca/MedImmune 2 1 1 4

Gilead Sciences, Inc. 1 2 1 4

Amgen Inc. 1 1 1 3

GlaxoSmithKline 1 1 1 3

Johnson & Johnson 1 1 1 3

Pfizer, Inc. 2 1 3

Sanofi 2 1 3

Shire US, Inc. 1 1 1 3

The Medicines Company 1 1 1 3

Alexion Pharmaceuticals 1 1 2

Allergan 1 1 1 3

Celgene Corp. 2 2

Cephalon, Inc. 1 1 2

Eli Lilly and Company 1 1 2

Takeda Pharmaceutical 1 1 2

12 5 5 3 4 2 2 2 2 1 2 1 1 42

*Companies with a minimum of two big exitsSource: Press releases and SVB proprietary data

Exhibit 20: Biopharma: Top Big Exit M&A Acquirers (2009-2013)

LARGE CORPORATES INCREASE ACQUISITIONSBig biopharma as a group has become more acquisitive over time. Since 2009, nine out of the top 15 acquirers have bought at least three venture-backed companies (Exhibit 20).

Not surprisingly, acquirers use different strategies for these big exits. Though the structured deal era continues, some acquirers still make full payment at the close of the deal, known as all-in deals. For example, GlaxoSmithKline (GSK) paid all-in for its three big exit acquisitions, and Amgen paid all-in for two of its three deals.

Acquiring companies that paid the least for big exit acquisitions (total deal value) were GSK, Takeda, The Medicines Co. and Gilead. Acquirers who paid the most were Celgene, AZ, Alexion and Lilly.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 18

DEVICE ANALYSIS: WHAT’S HOT, WHAT’S NOT

A funding drought threatens company creation, but a glimmer of new investor interest in early-stage innovation appears.

IMAGING/DIAGNOSTICS PUSHES UP BIG EXIT M&A VALUESIn 2013, imaging/diagnostics and vascular led with four exits each (Exhibit 21). Imaging/diagnostics is primarily responsible for the uptick in deal value, as the four big exits averaged $250 million upfront and $276 million including milestones — both figures well above the sector average (Exhibit 22).

Source: Press releases and SVB proprietary dataFDA-approved CE Mark Non-approved

2009

201510

50

20102011

20122013

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Exhibit 22: Device: Big Exit M&A (2009-2013)

Source: Press releases and SVB proprietary dataFDA-approved CE Mark Non-approved

Imaging/

Diagnostics

43210

Vascular

Cardiova

scular

Surgical

Orthoped

ics

Ophthalmology

Exhibit 21: Device: 2013 Big Exit M&A

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ts

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 19

Source: Press releases and SVB proprietary dataFDA-approved CE Mark Non-approved

Top 3 Acquirers All Other Acquirers

Non-approved

21%

Non-approved

13%

FDA-approved47%

FDA-approved76%CE Mark

32%

CE Mark11%

Exhibit 23: Device:Big Exit M&A by Stage and Acquirer (2009-2013)

BUCKING CONVENTION, FDA APPROVAL NOT NECESSARY FOR EXITThe common perception is that companies need to have FDA-approved product and be at the commercialization stage before they can attract an acquirer. Since 2009, this generally has been the case, with about 70 percent of all big exits FDA-approved. CE Mark (a designation less difficult to obtain than FDA approval) and development-stage companies typically yield far fewer exits. However, we find that the most active acquirers don’t necessarily follow this trend.

Since 2009, the top three device acquirers (Boston Scientific, Medtronic and Bard) have acquired FDA-approved companies nearly 50 percent of the time. The rest of their transactions were split between CE Mark (32 percent) and development-stage (21 percent). This analysis upends conventional thinking, and means earlier-stage companies without FDA-approved product in some cases can successfully reach a big exit (Exhibit 23).

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 20

Digging deeper, we find:

‣ Early-stage cardiovascular and vascular companies tend to fall in this category. Of 11 cardiovascular big exits since 2009, seven have been CE Mark, two development-stage and only two FDA-approved acquisitions (Exhibit 24).

‣ Vascular, however, tends to be later-stage overall. Of 12 big exits, four had CE Mark products, one was in development-stage and seven were FDA-approved. However, three of the four vascular companies bought by the big three acquirers were CE Mark, not FDA-approved.

‣ Among other indications — imaging/diagnostics, tools and surgical — the acquired companies were primarily at FDA-approved/commercial-stage, though the sample size is small.

*Upfront Multiples on Invested Venture CapitalSource: Venture Source, Press releases and SVB proprietary data

0-1.0x 1.1-2.0x 2.1-4.0x 4.1-7.0x 7.1-10.0x >10.1x Grand Total

IMAGING/DIAGNOSTICS

FDA-Approved 1 2 3 2 1 1 10

CE Mark

Non-Approved 1 1 2

Total 1 2 4 3 1 1 12

CARDIOVASCULAR

FDA-Approved 2 2

CE Mark 1 2 2 1 1 7

Non-Approved 1 1 2

Total 1 4 3 1 1 1 11

SURGICAL

FDA-Approved 1 1 4 1 7

CE Mark

Non-Approved 1 1

Total 1 1 5 1 0 0 8

VASCULAR

FDA-Approved 1 2 2 1 1 7

CE Mark 3 1 4

Non-Approved 1 1

Total 1 2 5 1 2 1 12

TOOLS

FDA-Approved 3 1 1 1 6

CE Mark

Non-Approved 1 1

Total 0 3 1 1 1 1 7

Exhibit 24: Device: Big Exit M&A Deal Value by Top Indication and Stage (2009-2013)

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 21

ANGEL INVESTORS AND SMALLER FUNDS FILL DEVICE FUNDING GAPSince 2009, the data has shown a decrease in Series A deals and dollars around early-stage device companies. Still, our feeling is that innovation finds a way. There are still large markets left for both iterative products and big market innovation.

The early-stage funding gap will be made up partly through surviving early-stage device venture investors, but even more significantly through individual angel investment, family offices and small funds.

These investments are not just small bridge amounts to reach a true venture financing. Rather they are substantial amounts of $2-$5 million, or more, that will allow the company to reach a significant value creation milestone, with the goal

of yielding either a strategic transaction or a substantial venture financing. These companies are learning how to operate lean. True development-

stage companies operate virtually, staffed with a general manager and vice president of research and development and then leveraging skilled consultants for other roles. We have seen very early-stage device companies significantly decreasing their cash burn rate over the last few years.

MORE CAPITAL FLOW IS NEEDED BUT TIDE MAY BE TURNINGThe drop in Series A funding is also impacting professional development of a new generation of device entrepreneurs. Potential entrepreneurs remain at top later-stage companies instead of going out on their own and raising money for new ventures. Retaining these leaders is beneficial to the top companies, as they develop very strong and deeply talented executive teams. But without development of a new crop of risk-takers, innovation is stifled. For a healthy ecosystem, more capital is necessary for early-stage device to create a pipeline for the next generation of talented entrepreneurs.

There are signs that device is starting to mimic what occurred in biopharma venture a few years ago. We have noticed an increase in venture fund syndication around early-stage device investments. This draws investment into new ideas for big markets, as larger syndicates help diminish financing risk.

In 2010, we saw a similar trend in biopharma venture investing, which foreshadowed the shift by corporate venture investors to support early-stage biopharma companies. In that scenario, corporate ventures feared the best deals would be snapped up quickly by larger syndicates, shutting them out of funding opportunities in later rounds. To prevent that, corporate venture started to invest much earlier, joining large syndicates in early-stage innovation. Certainly this would be a welcome turn of events for device companies. Anecdotally, we have seen new corporate interest in Series A device rounds, although a number of these financings have not yet been made public.

RECENTLY THERE IS MORE CORPORATE INTEREST IN SERIES A DEVICE ROUNDS.

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 22

2013 was a wild ride. Built on solid healthcare M&A activity over the last few years, the venture industry continued to see momentum in this up-cycle. A burst of IPO activity drew significant global interest to the sector and provided a spectacular year for investors. Potential returns from big exits and IPOs were double any year since we started to track this data in 2005. Across the board, big exit M&A deal values were up, although the number of transactions dipped slightly.

We predict healthy access to capital in 2014 and into 2015.The number of venture-backed healthcare IPOs in 2014 has exceeded the total for 2013, but will decline over the second half of the year. The cooling interest in IPOs will lead to an increase in big exit M&A activity, as fewer companies will be able to go public. Corporate venture interest in investing in early-stage venture-backed companies will remain strong in biopharma and start to emerge in the device sector. While predictions are difficult in fast-changing marketplaces, the next few years should continue to provide solid returns to venture healthcare investors.

HEALTHCARE VENTURE WILL CONTINUE TO SEE STRONG RETURNS

HEALTHCARE: TRENDS IN HEALTHCARE INVESTMENTS AND EXITS 23

GLOSSARYBig ExitBig exits are defined as private, venture-backed merger and acquisition transactions in which the upfront payment is $75 million or higher for biopharma deals and $50 million or higher for device deals.

Initial Public OfferingIPOs include venture-capital backed IPOs only.

Deal Descriptions: — All-in This is a deal in which the total value is paid at the close of the transaction.

— Structured Deal This is a-pay-for-performance system that pays some of the consideration upfront, but sets milestones in development that must be achieved before the full value of the transaction will be realized.

— M&A Upfront Payment The upfront payment refers to payments in a structured deal that are made at the close of the deal – it does not include milestones.

— M&A Milestones to be Earned The milestones to be earned refer to payments in a structured deal that are made after pre-determined goals are met.

— Total Deal Value The total deal value of a structured deal includes both the upfront payment and the milestones to be earned.

New Money InvestorNew money investor is a new investor into a particular company.

Regulatory Definitions: — Non-approved Non-approved refers to a company that has no regulatory approval for its product.

— CE Mark CE Mark refers to a company that has a CE Mark-only product. CE Mark is a European Union designation that is less difficult to obtain than FDA approval, and the approval process typically has a faster time line.

— FDA-approved FDA-approved refers to a company that has an FDA-approved product, and typically is in commercial stage.

Series A Series A companies are defined as those raising at least $2 million in equity.

ABOUT SILICON VALLEY BANKSilicon Valley Bank is the premier bank for technology, life science, cleantech, venture capital, private equity and premium wine businesses. SVB provides industry knowledge and connections, financing, treasury management, corporate investment and international banking services to its clients worldwide through 28 U.S. offices and seven international operations. (Nasdaq: SIVB) www.svb.com

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