Positive Medtech Revenues Into H2, But M&A And IPOs May Wait
Medtechs Count On Path To Greater Stability And Revenue Growth in H2 2022
EY’s John Babitt provided a mid-year 2022 update on medtech investment trends, and the outlook for the industry going into 2023 in this commentary for In Vivo.
The M&A market got off to a very solid start in Q1 2022, and started to soften in Q2 2022. From what we’re hearing, a lot of companies are still interested in M&A plays going into the second half, but a lot of private companies seem a little reluctant to launch formal processes. Maybe they are looking at the early part of 2023 to start some of those processes. The lack of a viable medtech IPO market has added to the exit duality uncertainty and incremental trepidation.
We still see good receptivity on the private equity capital markets, and funding has continued to be pretty robust. The recent $192m round in the cardiovascular space [Cleerly, artificial intelligence-powered imaging to analyze heart scans] bears this out.
The debt markets have been fairly active as well, especially on the private side. For companies that do want to do deals, I would say we are seeing a stabilization of some of the credit markets. We saw a couple of deals get refinanced at unfavorable rates, but a large part of what we’ve been seeing and hearing is that there is pretty good availability on the credit side in the private markets as well.
Looking back at the numbers, coming off 2020, 2021 was a really good year for medtech revenue growth, and we saw double digits across the industry. We’ll get a fuller picture of the H2 results when we launch our Pulse of the Industry 2022 report [in October], but we’re probably looking now at high-single digits revenue increases, so overall there is generally a positive momentum.
It’s interesting to see the increase in public companies, the number of which has grown pretty dramatically in the past couple of years. The reasons are two-fold: we’ve seen a lot of spins – Becton, Dickinson and Company (Embecta); Zimmer Biomet Holdings, Inc. (ZimVie); Colfax (Enovis) all had spins ̶ and we will see more spins at Johnson & Johnson Consumer Inc., GE Healthcare, Labcorp’s Clinical Development business and 3M Healthcare; and in terms of IPOs, we’ve seen a pretty big second half of 2020 going into 2021. In 2021, we posted a record number of IPOs in medtech. We haven’t seen that level of activity for quite some time.
In 2022, it is not quite a desert for medtech IPOs ̶ but there’s certainly not a lot of water! We’re not expecting to see real robustness of medtech IPOs coming into the second half of 2022. Without the IPO market, most of the companies we talk to are thinking about raising more private capital. And thereafter proving out their business for another six months, getting a good growth trajectory that they can tell a story around, and looking towards 2023 for public offerings.
Lastly, given the muted performance of SPACs, investors behind SPACs are losing or have lost confidence. Right now, that is not an attractive pathway for late-stage companies looking to raise capital.
In supply chain, there is still a shortage of microchips for the industry. The situation is supposedly improving according to Q2 conference calls, but chip shortages remain a prevalent issue. Medtech executives made their feelings known during recent debates around the passage of the CHIPS [Creating Helpful Incentives to Produce Semiconductors] and Science Act of 2022 in the US. [President Biden on 9 August signed the landmark bill, which will provide $52.7bn in subsidies for onshoring US semiconductor production and research.]
Inputs like electricity, especially relating to manufactured goods coming out of Europe, where the inputs have been dramatically impacted, are increasing. The costs of getting products to the hospital have also increased in the past year. For example, we’ve seen data showing that freight inflation is up over 60% over last year. These higher shipping costs generally disproportionately impact capital equipment over consumables, as well as companies that directly ship products to and from the end patient.
Medtech has not been immune, and we’re seeing the impacts as companies file their second quarter results.
But things like airspace restrictions with the additional transport costs entailed are a factor, as the industry has a responsibility under international humanitarian law to continue supplying products in Russia and Ukraine.
In addition, a lot of the big companies are considering evaluating how they allocate capital to China. Value-based procurement currently being rolled out in China has had a big impact. Companies are examining how they can become local manufacturers in China. They want to know how to compete effectively when revenues are going up, but margins are going down.
Companies are having to address long-term strategies, but there are still more questions than answers right now. They are wondering how to put investment capital to work. I think we’re probably experiencing a wait-and-see attitude until companies have the clarity on which to base long-term decisions.
The private market remains active, and investments are being made now for down-the-road exits, whether IPOs or M&As. Right now, companies are putting many of their execution wins on the board, putting their capital to work and focusing on core business.
Medtech is a space fueled by innovation. R&D from a US dollar perspective is up year-on-year. I get the impression when we talk to medtech executives that they feel the worst is behind them. Many of them feel positive about the rest of the year, and certainly the future ahead.