Tech Disruptions and Market Decline Runs Rampant
Following research conducted in 3Q22, market activity has rebounded in comparison to somewhat negative outlooks, decreased funding opportunities and consumer sentiment amid a looming recession. While 2Q23 was forecast to drop into a recessionary period, the Fed is currently looking to increase interest rates into 3Q23 as consumer sentiment showed a YoY increase of 39.4% from 51.5 to 71.6 index points¹. This uptick marks the second straight month of consumer sentiment illustrating favorable market activity despite current economic conditions.
Index of Consumer Sentiment by Income¹
Despite this positive growth, M&A activity and funding opportunities remained low as forecast for 2022. The Inflation Reduction Act took effect on January 1, 2023, and is reflecting the side effects prescribed before its release. Though it has the potential to lower energy costs and contribute to lower inflation, among other benefits, the short-term rise in interest rates has become commonplace with another increase to take effect by the Fed as mentioned previously. Due to the short-term side effects, Vanguard economists reported the “odds have risen that a recession could be delayed from 2023 to 2024” in tandem with JP Morgan’s mid-year report noting the likelihood of “a synchronized downturn in 2024².”
What does this mean for retirees, homeowners, healthcare workers, and businesses operating within the healthcare industry? M&A activity will continue at a renewed pace with the acquisition of smaller industry players by big name businesses to increase scope and scale amid a forecasted economic downturn. Similarly, a rise in Medtech, Digital Health, and Healthcare IT investments will likely continue to disrupt traditional forms of medical care on a global scale.
Venture Capital Trends Among Healthcare Conglomerates
Digital Health
Businesses operating in this sector cover one or more areas of personal health including telehealth, digital therapeutics & digital treatments, health coaching & wellness, and digital care management. VC funding saw a decline starting in 2Q22 and has remained low with consistent funding hovering between $1 and $2 billion. A YoY comparison of funding from 1Q22 to 1Q23 illustrated significantly lower rates by about 68.5% — down to $1.1 billion from $3.5 billion. In the same category, 1Q23 VC deals totaled 71, a 42.3% YoY decline with a median deal size of $7.3 million – down from $9.3 million in 1Q22 early-stage digital health³.
While total values have remained at a lower level, early-stage funding has performed favorably in comparison to late-stage due to contributing factors including uncertain exit opportunities for late-stage start-ups and early-stage deals requiring less funding.
It’s worth noting that VC funds may have an easier time committing to smaller deal sizes in the current market. Exits were almost non-existent, with only three being reported — the most notable being Weight Watchers’ $132 million acquisition of Sequence. As reported by Pitchbook, analysts don’t see any indication of immediate exit activity turnaround, however, it is possible the market will see an uptick in digital health’s available capital and exit activity in late 2023 and early 2024³.
Medtech
Opposite to Digital Health, the Medtech industry is quite mature with several massive incumbents that have the capital to buy and build their way to innovation. The Medtech environment encompasses services and technology including remote monitoring & portable care, diagnostics & life sciences, surgical devices & tools, nonsurgical medical treatments, and medical imaging. The market has traction within higher rates of coverage by government payers, an aging population demanding increasingly complex care and the industry’s dominant pricing power.
While start-ups may find it difficult to gain traction within the industry, future exit opportunities are abundant among existing networks and quickly scaling technology.
The market has reported lower VC deals and median deal sizes since 2021 as it falls in line with the overall deterioration of the VC funding landscape. As noted above, early-stage deals have received the heaviest decline in activity at about 30% YoY since July 2022. 1Q23 reported 122 deals overall with a combined value of $1.8 billion due to compounding contributing factors including inflation, higher interest rates and a frozen IPO market³.
Long-term market sustainability will require patent protections by start-ups as larger Medtech companies have relied heavily on mergers and acquisitions to remain on top of their markets, historically.
Healthcare IT
Lack-luster deal flow was reported in 1Q23 at a staggering 70 total for a value of $1.3 billion. However, this is a bump up from 4Q22’s low over the last three years. Healthcare IT is expected to rebound following increased acceptance of generative AI within the field and an overall acceptance of new technologies. New federal regulatory policies have pushed for the integration of data silos between competing businesses for a more holistic approach to value-based care and data collection from patients.
The value-based care approach to medicine has meaningfully boosted 1Q23 figures and illustrated the push for quality VC investors. Pearl, Vytalize and Wellvana catalyzed start-up activity that’s forecast to bleed into 2024. IPO activity has remained stagnant in tandem with like healthcare verticals and are unlikely to generate any movement until 2024.
EHRs, clinical information, revenue cycle management, operations, analytics and infrastructure and compliance software comprise the Healthcare IT vertical. Advances in interoperability between healthcare systems and the emergence of artificial intelligence capabilities are expected to bring rise to new activity within the Healthcare IT VC ecosystem³.
Private Equity Activity Variance Remains High
Digital Health, Medtech & Healthcare IT
Private Equity buy-in across verticals remains varied, though all previously discussed include some form of technological innovation and market shift. Less emphasis on physical healthcare services has created a spike in these applications and cloud-based health services. As of 1Q23, healthcare services investment declined in line with previous forecasts for the fifth straight quarter. Some categories of health services, including skilled care and ambulatory services, are landing a couple of turns lower than where they sat in 2021.
Volatility within the VC ecosystem is a stark contrast to the reported activity within the previously mentioned tech-focused healthcare verticals. Though PE activity remains elevated across the board, Medtech reported less deal volume than Healthcare IT and Digital Health, with the focus of investing in late-stage startups. This activity reflects the continued push for PE investments in “upstream” businesses that began a few years ago. One defining factor affecting the issuance of investments from Private Equity firms is price agreements between buyers and sellers. The lack of exits has reduced the flow of capital that can be recycled into new deals, causing further constraint for future exit or investment opportunities³.
Moving into H2 2023, Medtech areas including surgical devices, dermatology, and precision medicine are forecast to generate greater PE investments due to their long-term business models. In a similar fashion, Healthcare IT services deal activity is forecast to increase as the capital required to fund late-stage start-ups will bare less weight and require no leverage when buying out a mature company.