Money-burning healthcare firms trying to go public could flip to different strategies of funding to maintain their companies afloat amid a flagging marketplace for preliminary share gross sales, business analysts say.
The IPO marketplace for healthcare tech firms is going through its worst yr in 20 years because the COVID-19 pandemic, Russia’s struggle in Ukraine, record-high inflation and rising rates of interest have squeezed public market valuations and despatched shares plunging.
Till this yr, healthcare know-how firms contemplating share gross sales had cause 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 function acquisition firms, or SPACs. Final yr, 1,035 firms went public on U.S. exchanges, setting a file, in line 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 yr, 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 yr, excluding SPACs, in line with Renaissance Capital.
The drop comes as shares fall throughout the general public markets. Nearly all of healthcare know-how shares have been buying and selling negatively as of September with a median efficiency of -58%, in line with funding and evaluation agency Silicon Valley Financial institution.
SVB International Healthtech IPO and De-SPAC Efficiency
Permission granted by Silicon Valley Financial institution
Specialists don’t count on the general public markets to recuperate anytime quickly.
“I believe 2023 is gonna be actually tough,” stated Jonathan Norris, managing director of life science and healthcare follow at Silicon Valley Financial institution. “I am hoping that the second half of 2023, you begin to see some brighter spots.”
“[There’s] plenty of erosion in public market caps from firms which are long-term public firms in addition to current IPOs over the previous couple of years, and actually, that is solid a pall over the power to get out and IPO,” Norris stated. “So the query is … what are they doing now?”
Capital elevating
Corporations ready out a poor public market could flip to non-public capital elevating rounds as IPO funds dry up and traders hand out capital extra cautiously, analysts stated.
Nonetheless, turning to the non-public markets carries its personal dangers because the fundraising market faces its personal downturn. Funding for capital raises has dropped throughout the board this yr. In August, world enterprise funding declined to the bottom ranges in two years.
“Not solely are market situations lower than ideally suited for public exits, however the mixture of market downturn, inflation, rate of interest hikes, and scrutiny following 2021’s bear market investments have made non-public capital tougher to lift for IPO-stage startups in comparison with final yr,” stated 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 line with Rock Well being.
“I’ve heard plenty of VCs saying that it is prudent to tighten the belt,” stated Stephanie Davis, senior analysis analyst at SVB. “So somewhat than investing purely for development, I believe plenty of people are taking a extra balanced method to attend out the storm.”
And, as general funding has dropped, firms deciding to lift capital in right now’s market may even see a drop of their valuations, dubbed a “valuation adjustment — aka a down spherical,” Krasniansky stated.
Which 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 value, Krasniansky added.
“A variety of these later-stage firms that thought they have been all going to IPO could not, primarily based available on the market situations, and ended up doing a little kind of insider spherical with their current traders to try to push out the amount of money burn as far out as they might and to 2023 or past.” SVB’s Norris stated. “Mainly, that provides them respiration room.”
Healthcare know-how firms specifically could also be feeling the consequences from a broader destructive tech business outlook as massive know-how firms like Amazon and Meta lay off 1000’s of employees amid financial pressures, stated 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 actually getting stress examined,” Sorensen stated. “I believe it is simply going to be tougher for them to lift cash with out 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 surroundings in 2021, some firms could not want to lift extra capital in the event that they jumped to fundraise final yr.
“There was plenty of fundraising exercise that occurred on the finish of 2021, stated Davis. “I do not assume you are actually going to see a ton of stress till after the final spherical of capital runs out.”
Nonetheless, these firms could also be among the many lucky few, in line 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 stated, including that well-capitalized later-stage firms could have to start out 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, stated Nathan Ray, companion at administration consulting firm West Monroe.
“I believe the demand to carry issues to consumers is choosing again up,” Ray stated. “These which are consumers try to purchase and those who want capital are looking for it or making an attempt to return to the market.”
Important quantities of funding raised in 2020 and 2021, mixed with an extra of capital held by non-public fairness, generally known as dry powder, are additionally driving consumers, he stated.
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 presents that permit them to bolster product, maintain down prices and supply liquidity to “impatient traders,” Rock Well being’s Krasniansky stated.
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, stated EY’s Sorensen. Though they’re going through a “harder” surroundings in comparison with final yr, non-public fairness companies 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 stated. “So this hole down in valuations offers some firms a possibility to enter at a extra engaging entry level.”
Healthcare know-how firms, nearly all of which have but to grow to be worthwhile, could also be hit the toughest by decrease valuations in the event that they go to the market, in line with Davis.
“I can not think about a world the place valuations keep at these ranges,” Davis stated. “It is just like the pendulum swung within the different course … I am beginning to see extraordinarily prime 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 one likes to be the acquiree,” Norris stated. “Everybody likes to be the acquirer.”
Correction: This story initially said incorrectly that Definitive Healthcare had been acquired.
