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March 14, 2023

The SVB collapse — and what it means for healthcare

Daily Briefing

    Silicon Valley Bank (SVB), which provided financial services to many digital health and biotech startups, failed on Friday, leaving many companies scrambling to protect their funds and on much shakier grounds when it comes to future developments.

    What happened to SVB?

    According to Modern Healthcare, SVB was the country's 16th largest bank and primarily served tech companies, startups, and venture capital (VC) firms. In 2022, the bank served 44% of all venture-back technology and life sciences companies, and as of December, it had $78.8 billion in healthcare deposits and investments.

    Some notable SVB clients include home healthcare provider Dispatch Health; primary care company Oak Street Health, which is currently being acquired by CVS Health; and physician enablement company Privia Health.

    However, SVB failed on Friday after rising interest rates caused its significant investments in U.S. Treasury bonds to tank. It represents the second-largest U.S. bank failure in history.

    Soon after, the Federal Deposit Insurance Corporation (FDIC) took over, and the agency is currently presiding over a sale of the bank's assets to cover clients' deposits. Although deposits up to $250,000 are federally insured, it is still unclear what will happen to deposits over that amount.

    At the time of failure, SVB had $209 billion total assets, and a report from S&P Market Intelligence said that 97.3% of the bank's deposits were uninsured. According to FDIC, those with uninsured deposits will receive a "receivership certificate" for the remaining amount of their funds, and future payments may be made as the agency sells off SVB's assets.

    The end of SVB is a "big loss," said Bob Nelson, co-founder and managing partner at Arch Ventures. "They were a great bank serving fast-growing companies."

    How healthcare companies will be impacted

    Although some healthcare startups kept their money in SVB to see how the situation would play out, others had already begun to move their funds out of SVB ahead of the collapse on Friday.

    "Most of us in biotech, we don't do fancy banking," said Alexis Borisy, an entrepreneur who runs the venture fund Curie.Bio. "Our risk is in our drugs. The money we put in a bank, we want to be safe."

    Michelle Longmire, CEO of clinical trial tech company Medable, said that she was "sad but also deeply relieved to report, [she] successfully navigated a run on" SVB.

    On the other hand, companies that could not get their assets out of SVB before its failure may lose hundreds of thousands of dollars from uninsured accounts.

    "None of my reps will call me back," said Ashley Tyrner, CEO of FarmboxRx, which delivers food to Medicare and Medicaid participants. "It's the worst 24 hours of my life." On Friday, Tyrner said she had funds totaling eight figures that she was unable to withdraw from SVB.

    According to experts, companies that were unable to withdraw their money from SVB will likely struggle to pay suppliers and employees. It could lead to significant disruption in the biotech industry, especially for companies running clinical trials or developing drugs.

    "This could really slow down the biotech market, which needs debt capacity more than ever given equity is frozen," said Bijan Salehizadeh, managing director of NaviMed Capital. "It's very sad to watch this. They are quality people and the loan book there was solid."

    Experts have also noted that SVB's collapse may be another sign that funding for digital ventures is now declining. Compared to the highs of 2021, funding has slowed down significantly, with the fourth quarter of 2022 having the lowest quarterly funding total in five years. And in 2023, experts say that funding is expected to slump even further.

    "We had a prolonged period of very low interest rates, essentially free money, and we're unlikely to return to that type of environment," said Matt Wolf, a director and senior healthcare analyst at consulting firm RSM. "This is the environment that digital health operators need to be accustomed to." (Feuerstein et al., STAT+ [subscription required], 3/10; Reed, Axios, 3/13; Vedantam, Crunchbase News, 3/10; Turner, Modern Healthcare, 3/13)

     

     

    Advisory Board's take

    The 3 realities of SVB's failure

    By Vidal Seegobin and John League

    Let's be clear, we didn't think we'd ever be writing about the collapse of VC's favorite bank in the Daily Briefing — but that is the reality of this moment in healthcare. Following three years of robust investment in healthcare, the systemic problems impacting VC investors and startups matter to this industry in ways they never have before. However, recent shocks to VC and technology have garnered a lot of media attention, potentially overinflating the impact on the wider industry and economy.

    Now, the healthcare industry is facing three realities in the wake of SVB's collapse:

    1. We are in a back-to-basics economy. The collapse of SVB is not an early warning that something is wrong with the economy. Instead, it is a lagging indicator that the economy has shifted from fast-growth and low-cost borrowing to slower growth and rising interest rates. It also points to the inescapable reality that there are losers when the Federal Reserve raises interest rates.

    In this environment, risk management, due diligence, and slow cash burn matter far more than they did two years ago. These strategies apply equally to startups and incumbent healthcare players in this economy.

    2. The financial institution that acquires SVB will likely receive a discount on valuable healthcare relationships. SVB was uniquely positioned in the Silicon Valley investment scene. It was the only publicly traded bank focused on Silicon Valley and built a reputation as the "bank of choice" with tech startups, including those in healthcare, with 12% of the bank's deposits coming from healthcare and life sciences firms.

    As SVB's assets are sold, so too are a raft of key relationships with future successful ventures. While many healthcare leaders are dismissive of VC-backed healthcare companies, especially digital health, there are likely future winners looking for new financing relationships. This presents a unique opportunity rarely associated with a discount.

    3. The federal government moved resolutely to preserve the status quo. The collective steps taken by FDIC, the Federal Reserve, and the Treasury Department are intended to keep depositors whole and to reassure capital markets. Before the start of business on Monday, the federal government said it would guarantee all deposits, not just those insured by FDIC. Regulators kept cool and took the necessary steps to defuse the situation.

    This kind of financial fragility is something that healthcare has largely not had to contend with directly. Now that so much investment has come into the industry (and will probably continue to come, albeit at a slower pace), healthcare leaders need to monitor the disposition of the Federal Reserve the way they monitor agencies like CMS and FDA. (Wei, Mercury News, 3/10; Treasury Department press release, 3/12; Stein et al., Washington Post, 3/12)

     

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