Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors11.09.22
As healthcare M&A advisors, we are naturally the go-to source for medtech merger and acquisition insight.
In order to provide the best expertise, however, it is necessary to fully understand the trends affecting healthcare investments. A quick glimpse at J.P. Morgan data seems to indicate that current medtech industry investment is down, and technically it is compared with 2021. But it is important to note that last year set a healthcare financing record, thanks mainly to the continued convergence of consumer health and medical technologies. (Alphabet has partnered with Novartis on smart contact lenses, Dexcom on miniature and disposable glucose monitors, and Johnson & Johnson on surgical robots).
Compared to past years, though, 2022 investments are at historically average levels—meaning medtech industry financing remains strong. In fact, given worldwide population demographics and the market opportunities being created by the consumer health sector, the macro future appears brighter than ever.
But that doesn’t mean all companies will benefit from the robust financing environment. There will certainly be “winners” and “losers,” with a few heritors becoming the next health technology unicorn and some companies dropping out completely from the market (similar to a “survival of the fittest” tenet).
Many companies will survive through consolidation because the market is not large enough to accommodate every new telemedicine upgrade, patient engagement app, electronic health record breakthrough, or wearable monitor. While the industry needs such minor incremental innovation in order to grow, the influx of these seemingly minor technologies create an investment imbalance—resulting in a glut of new players with more market opportunity in their investor decks than the market can support. Consolidation is an inevitable consequence in this set of circumstances, steering the commercial middle class to M&A (the rare unicorns and near bankrupt firms are exempt from this phenomena).
Whether or not this investment imbalance drives medtech M&A in 2023 remains to be seen. To determine the market’s path forward next year, it is crucial to examine the trends that have impacted healthcare financing in 2022.
Similar to overall healthcare industry investments, healthcare M&A remains historically strong in 2022. Information from Pitchbook’s Quality of Healthcare M&A Report (based on data through June 30) reveals a similar superficial dichotomy in year-over-year financing totals. Not surprisingly, this year’s sums are lower than 2021’s record highs, but investments are not down compared to historical levels.
So, if investments this year are not diving off a cliff, does that mean M&A will continue to blossom in the next 12 months? Well, our crystal ball is as cloudy as everyone else’s; there are many factors to consider, including the still-knotted supply chain, runaway inflation, geopolitical unrest, and pricing pressures. Nevertheless, we predict M&A will remain relatively strong in 2023 for two reasons—industry consolidation and the amount of available cash for investing. Let’s take a look at both of these market drivers in more depth.
The companies able to obtain a piece of the market pie will cut their own path forward either on their own, through an initial public offering, and/or by acquiring other firms to fulfill their industry and stakeholder objectives.
However, some companies will forge a path to future success via strategic partnerships or acquisitions (becoming the M&A target rather than orchestrating a deal).
What drives our confidence? Simple cash economics and market segmentation.
There are huge amounts of capital available for M&A. According to S&P Capital IQ, there is $3.7 trillion in cash and equivalents held by S&P 500 companies (as of December 2021). Additionally, there was $948 billion in cash in private equity funds as of June 2022, according to Prequin.
The good news for potential sellers is the fact the medtech market is a highly sought-after sector by both industry strategics and private equity firms. Periods of macro uncertainty or recession have traditionally been good for healthcare investments, because of the market’s resiliency. As unfortunate as it may sound, medical conditions—particularly among the aged—are profitable for companies (cancer, for example, never bows to recession). Some sectors may lose value in a downturn but the medtech industry usually experiences a “cut in growth” of investments rather than an actual market value reduction.
So what markets will be primed for growth in 2023? Our prediction is manufacturing, supply chain, digital health technology (especially artificial intelligence machine learning), home care, telemedicine (thanks to COVID-19), robotics, and healthcare staffing.
Conversely, the U.S. hospital market will likely continue to struggle due to some specific revenue challenges during the transition from in-hospital care to outpatient treatment. We’ve noticed that investors are shying away from hospitals at the moment.
Next year should produce consistent M&A activity levels due to:
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
In order to provide the best expertise, however, it is necessary to fully understand the trends affecting healthcare investments. A quick glimpse at J.P. Morgan data seems to indicate that current medtech industry investment is down, and technically it is compared with 2021. But it is important to note that last year set a healthcare financing record, thanks mainly to the continued convergence of consumer health and medical technologies. (Alphabet has partnered with Novartis on smart contact lenses, Dexcom on miniature and disposable glucose monitors, and Johnson & Johnson on surgical robots).
Compared to past years, though, 2022 investments are at historically average levels—meaning medtech industry financing remains strong. In fact, given worldwide population demographics and the market opportunities being created by the consumer health sector, the macro future appears brighter than ever.
But that doesn’t mean all companies will benefit from the robust financing environment. There will certainly be “winners” and “losers,” with a few heritors becoming the next health technology unicorn and some companies dropping out completely from the market (similar to a “survival of the fittest” tenet).
Many companies will survive through consolidation because the market is not large enough to accommodate every new telemedicine upgrade, patient engagement app, electronic health record breakthrough, or wearable monitor. While the industry needs such minor incremental innovation in order to grow, the influx of these seemingly minor technologies create an investment imbalance—resulting in a glut of new players with more market opportunity in their investor decks than the market can support. Consolidation is an inevitable consequence in this set of circumstances, steering the commercial middle class to M&A (the rare unicorns and near bankrupt firms are exempt from this phenomena).
Whether or not this investment imbalance drives medtech M&A in 2023 remains to be seen. To determine the market’s path forward next year, it is crucial to examine the trends that have impacted healthcare financing in 2022.
Similar to overall healthcare industry investments, healthcare M&A remains historically strong in 2022. Information from Pitchbook’s Quality of Healthcare M&A Report (based on data through June 30) reveals a similar superficial dichotomy in year-over-year financing totals. Not surprisingly, this year’s sums are lower than 2021’s record highs, but investments are not down compared to historical levels.
So, if investments this year are not diving off a cliff, does that mean M&A will continue to blossom in the next 12 months? Well, our crystal ball is as cloudy as everyone else’s; there are many factors to consider, including the still-knotted supply chain, runaway inflation, geopolitical unrest, and pricing pressures. Nevertheless, we predict M&A will remain relatively strong in 2023 for two reasons—industry consolidation and the amount of available cash for investing. Let’s take a look at both of these market drivers in more depth.
Industry Consolidation
As previously mentioned, significant investments over the last decade in digital and consumer health technologies have left too many players vying for the same proverbial pot of gold at the end of the market opportunity rainbow. Although the overall market is expanding, there are only a limited number of pie shares up for grabs and too many hungry stakeholders.The companies able to obtain a piece of the market pie will cut their own path forward either on their own, through an initial public offering, and/or by acquiring other firms to fulfill their industry and stakeholder objectives.
However, some companies will forge a path to future success via strategic partnerships or acquisitions (becoming the M&A target rather than orchestrating a deal).
Dry Powder (Cash Available for Investment)
Besides emerging technology growth companies driving M&A, traditional deals for established medtech companies will remain strong in 2023. The mom and pop medical companies that have been an ongoing concern for the past 30 or 40 years are still highly sought-after assets. Those shop owners ready to sell in the next 12 months will find plenty of takers for their business.What drives our confidence? Simple cash economics and market segmentation.
There are huge amounts of capital available for M&A. According to S&P Capital IQ, there is $3.7 trillion in cash and equivalents held by S&P 500 companies (as of December 2021). Additionally, there was $948 billion in cash in private equity funds as of June 2022, according to Prequin.
The good news for potential sellers is the fact the medtech market is a highly sought-after sector by both industry strategics and private equity firms. Periods of macro uncertainty or recession have traditionally been good for healthcare investments, because of the market’s resiliency. As unfortunate as it may sound, medical conditions—particularly among the aged—are profitable for companies (cancer, for example, never bows to recession). Some sectors may lose value in a downturn but the medtech industry usually experiences a “cut in growth” of investments rather than an actual market value reduction.
So what markets will be primed for growth in 2023? Our prediction is manufacturing, supply chain, digital health technology (especially artificial intelligence machine learning), home care, telemedicine (thanks to COVID-19), robotics, and healthcare staffing.
Conversely, the U.S. hospital market will likely continue to struggle due to some specific revenue challenges during the transition from in-hospital care to outpatient treatment. We’ve noticed that investors are shying away from hospitals at the moment.
Next year should produce consistent M&A activity levels due to:
- Buyers/investors moving to more stable industries, like medtech
- Earlier stage companies moving from fundraise mode to M&A
- More Strategic partnerships and/or distribution deals
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
