- Venture capital investment in medtech startups increased sequentially in the second quarter, in both volume and value, according to the financial database PitchBook.
- Activity remains down from last year, and well down from the highs hit in 2021, but the PitchBook analysts think funding bottomed out in the first quarter and will “inch upwards over the rest of the year.”
- The analysts also speculated that M&A activity could pick up now that large companies “have worked through their numerous spinoff and spinout plans.” On Wednesday, wound care device maker Sanuwave Health announced it plans to go public through a $127.5 million merger agreement with SEP Acquisition, a special purpose acquisition company, or SPAC.
VC investment in medtech fell across 2022, and the downward trend in deal value continued in the first quarter of 2023. The second quarter brought potential signs that a recovery is starting. Deal value ticked up from $2.5 billion to $2.8 billion between the first and second quarters, and the number of deals rose from 183 to 189.
The figures are well below the highs hit in the second quarter of 2021, when VC funds invested $5.9 billion across more than 200 deals, but the slight recovery “represents a return to a more normalized level of funding,” according to the analysts. That gradual recovery is forecast to continue across 2023.
“We hold the view that medtech funding bottomed out in Q1 2023, and we anticipate overall deal value to inch upwards over the rest of the year. Still, funding could come in moderately below 2022’s levels, which were already down significantly from the highs of $19.7 billion of total funding — and over 1,000 VC deals — seen in 2021,” the analysts wrote.
One challenge for investors is the lack of ways to sell their stakes in medtech companies for a profit. No medtech companies held initial public offerings over the first five months of 2023, and when a company, Xishan Science & Technology, did go public in June, it listed in China. The PitchBook analysts said the U.S. IPO market has “remained mostly closed for healthcare companies for the year so far.”
M&A offers investors another exit route, but “the number of deals has been unusually light in recent quarters due to economic uncertainty and a greater focus on cost-cutting over growth-related capital allocation,” the analysts wrote. Activity has picked up recently, with Quest Diagnostics and Medtronic striking deals worth hundreds of millions of dollars, but the outlook is mixed.
“It is likely that M&A could see greater momentum as incumbents use accumulated capital for growth plans. Still, antitrust remains a headwind for medtech M&A seeing a significant uptick, and the sector has recently seen two major deals scuttled due to regulatory concerns,” the analysts wrote. The two deals killed off by antitrust issues affected Boston Scientific and CooperCompanies.