Money-burning healthcare firms seeking to go public might flip to various strategies of funding to maintain their companies afloat amid a flagging marketplace for preliminary share gross sales, trade analysts say.
The IPO marketplace for healthcare tech firms is going through its worst 12 months in 20 years because the COVID-19 pandemic, Russia’s warfare in Ukraine, record-high inflation and rising rates of interest have squeezed public market valuations and despatched shares plunging.
Till this 12 months, healthcare know-how firms contemplating share gross sales had purpose to be giddy. The general public market soared in 2020 and 2021, spurred by low borrowing prices, pandemic reduction funds and an increase in particular goal acquisition firms, or SPACs. Final 12 months, 1,035 firms went public on U.S. exchanges, setting a document, in accordance with market watch listing Inventory Evaluation. Healthcare firms rode the general public market wave, elevating a record-breaking $56.36 billion in 403 IPOs.
Nonetheless, the market exuberance pale in 2022.
This 12 months, the variety of companies which have filed to go public has tumbled to 173. Healthcare firms are flagging too with solely 20 IPO filings as of October this 12 months, excluding SPACs, in accordance with Renaissance Capital.
The drop comes as shares fall throughout the general public markets. The vast majority of healthcare know-how shares have been buying and selling negatively as of September with a median efficiency of -58%, in accordance with funding and evaluation agency Silicon Valley Financial institution.
Specialists don’t count on the general public markets to get better anytime quickly.
“I believe 2023 is gonna be actually tough,” mentioned Jonathan Norris, managing director of life science and healthcare observe at Silicon Valley Financial institution. “I am hoping that the second half of 2023, you begin to see some brighter spots.”
“[There’s] a variety of erosion in public market caps from firms which are long-term public firms in addition to latest IPOs over the previous few years, and actually, that is forged a pall over the power to get out and IPO,” Norris mentioned. “So the query is … what are they doing now?”
Corporations ready out a poor public market might flip to non-public capital elevating rounds as IPO funds dry up and traders hand out capital extra cautiously, analysts mentioned.
Nonetheless, turning to the personal markets carries its personal dangers because the fundraising market faces its personal downturn. Funding for capital raises has dropped throughout the board this 12 months. In August, international enterprise funding declined to the bottom ranges in two years.
“Not solely are market situations lower than superb for public exits, however the mixture of market downturn, inflation, rate of interest hikes, and scrutiny following 2021’s bear market investments have made personal capital tougher to lift for IPO-stage startups in comparison with final 12 months,” mentioned Adriana Krasniansky, head of analysis at digital well being enterprise fund Rock Well being.
Healthcare firms particularly have raised much less capital in comparison with 2020 and 2021. The third quarter of 2022 was the bottom for digital well being funding for the previous 11 quarters, in accordance with Rock Well being.
“I’ve heard a variety of VCs saying that it is prudent to tighten the belt,” mentioned Stephanie Davis, senior analysis analyst at SVB. “So somewhat than investing purely for progress, I believe a variety of people are taking a extra balanced strategy to attend out the storm.”
And, as general funding has dropped, firms deciding to lift capital in at the moment’s market might even see a drop of their valuations, dubbed a “valuation adjustment — aka a down spherical,” Krasniansky mentioned.
That will lead firms to show to quieter fundraising rounds like inside, extension and bridge rounds, which may lend firms capital with out risking a success to their share worth, Krasniansky added.
“Quite a lot of these later-stage firms that thought they have been all going to IPO could not, primarily based in the marketplace situations, and ended up doing a little form of insider spherical with their present traders to attempt to push out the amount of money burn as far out as they may and to 2023 or past.” SVB’s Norris mentioned. “Mainly, that offers them respiratory room.”
Healthcare know-how firms specifically could also be feeling the consequences from a broader damaging tech trade outlook as giant know-how firms like Amazon and Meta lay off hundreds of staff amid financial pressures, mentioned Adam Sorensen, well being integration and divestiture chief at EY Americas and technique and transactions principal.
“The worth proposition for, particularly, technology-enabled firms in well being, is de facto getting strain examined,” Sorensen mentioned. “I believe it is simply going to be tougher for them to lift cash and not using a compelling worth proposition.”
Corporations may additionally pursue different avenues of elevating capital somewhat than purely fairness rounds — like debt and warrants, Davis added.
Nonetheless, due to the sturdy capital-raising setting in 2021, some firms might not want to lift extra capital in the event that they jumped to fundraise final 12 months.
“There was a variety of fundraising exercise that occurred on the finish of 2021, mentioned Davis. “I do not suppose you are actually going to see a ton of strain till after the final spherical of capital runs out.”
Nonetheless, these firms could also be among the many lucky few, in accordance with Norris.
“There’s some [companies] which are simply so nicely capitalized, they’ve money into 2024. However I believe that is a fairly small share,” Norris mentioned, including that well-capitalized later-stage firms might have to begin contemplating elevating capital within the second or third quarter of 2023.
Again to M&A
Firm capital constraints, depressed valuations and distasteful public market choices additionally may drive demand for M&A as firms search financing and exit choices, mentioned Nathan Ray, companion at administration consulting firm West Monroe.
“I believe the demand to carry issues to consumers is selecting again up,” Ray mentioned. “These which are consumers try to purchase and those who want capital are looking for it or making an attempt to come back to the market.”
Important quantities of funding raised in 2020 and 2021, mixed with an extra of capital held by personal fairness, generally known as dry powder, are additionally driving consumers, he mentioned.
Though healthcare quantity and deal totals have been trending down in 2022 in comparison with the 2 prior years, offers could also be returning to “new regular” pre-pandemic ranges, like 2019, Ray added.
From the sell-side, digital well being startups specifically could also be extra prone to welcome M&A gives that permit them to bolster product, preserve down prices and provide liquidity to “impatient traders,” Rock Well being’s Krasniansky mentioned.
And on the buy-side, decrease valuations could lead on strategic consumers, buoyed by capital raises in 2020 and 2021, to enter the market and pursue extra opportunistic acquisitions, mentioned EY’s Sorensen. Though they’re going through a “harder” setting in comparison with final 12 months, personal fairness corporations are also persevering with to hunt for offers, he added.
“I believe there was additionally only a broader degree of curiosity over the previous two years for healthcare applied sciences,” SVB’s Davis mentioned. “So this hole down in valuations provides some firms a possibility to enter at a extra engaging entry level.”
Healthcare know-how firms, the vast majority of which have but to turn out to be worthwhile, could also be hit the toughest by decrease valuations in the event that they go to the market, in accordance with Davis.
“I am unable to think about a world the place valuations keep at these ranges,” Davis mentioned. “It is just like the pendulum swung within the different course … I am beginning to see extraordinarily top quality names begin to commerce at head-scratching multiples.”
The downturn may result in extra firms conducting mergers of equals, which can make firms extra strong and unlock extra financing choices, Norris added.
“However the issue there may be, no person likes to be the acquiree,” Norris mentioned. “Everybody likes to be the acquirer.”
Correction: This story initially acknowledged incorrectly that Definitive Healthcare had been acquired.