Medtech Funding Plummets Amid Headwinds

Equity financing in medtech plunged 27% in 2022 and continued in 2023, declining to its lowest level in seven years, according to an Ernst & Young (EY) report on the pulse of the industry.

“This current dip in fundraising will likely have a ripple effect on the wider ecosystem of smaller medtechs, which are instrumental in driving innovation, but heavily dependent on funding from investors as well as larger industry players,” said John Babitt, BBA, MBA, CPA, who is EY Americas medtech transactions leader and coauthor of the report. “With diminishing financial support, these firms will face mounting pressure to seek acquisition as an exit strategy.”

Among the multiple factors impacting the current funding environment are P&L pressures driven by inflation that is impacting input costs for raw materials and labor, negative foreign exchange headwinds, and the disproportionate negative response of investors to clinical data about weight-loss drugs (GLP-1 antagonists).

“On the other hand, the departure of generalist investors is leading to the normalization of funding compared to the past couple of years,” Babitt told MD+DI. “Many companies secured funding during the COVID boom, when non-traditional VCs and investors entered the medtech space. Now that they have migrated out of medtech and traditional VCs have pulled back, we are seeing a noticeable uptick in shutdowns/bankruptcies and corporate restructurings.”

Equity financing in medtech declined to $13.8 billion last year, with a 21% decrease in venture financing compared to 2021. Overall, only 106 venture rounds of $5 million or higher occurred in the 12 months preceding June 2023.

“Venture deals are still getting done, albeit many at a lower valuations,” Babitt said. “However, we did see a slight bump in Q3’23 funding, $1.9 billion, which is the highest quarterly output over the past year.”

Babitt cited Elon Musk's brain chip startup Neuralink, which raised $280 million in August, as the largest round thus far in 2023.

M&A activity is still slow, with most OEMs looking for tuck-in acquisitions. Buyers continuing to be focused and concerned on internal operational issues such as profitability and higher interest rates also represent an additional headwind to M&A, according to Babitt.

“Likewise, the IPO market for medtech has essentially ground to a halt since the end of 2021, with the lowest amount of activity in at least a decade,” he said.

Compared to 2020 and 2021, when there were 24 IPOs for $4.5 billion and 53 IPOs for $8 billion, respectively, there have been only 19 IPOs since 2022, totally roughly $1.1 billion.

A few recent IPOs have been led by $850 million for Schott Pharma — medical glassware, injectables, viles — in September 2023 and $100 million for Allurion, an artificial intelligence-powered weight-loss program, via a SPAC in August 2023.

“Excluding Schott and Allurion, the average deal is $9 million, so not a robust situation,” Babitt said.

Venture capitalists are still able to raise funds, although how much will target medtech is unclear, according to Babitt. “Private equity has a lot of capital in their war chests,” he said. “But challenges like GLP-1 are likely keeping some investors on the side lines.”

Babitt noted that new technologies, like those featured at the TCT MedTech Innovation Forum, could open new markets, because there is nothing systemically wrong with the industry, which is fundamentally strong.

“We expect funding to eventually rebound,” he told MD+DI. “Generative artificial intelligence (AI) and technology-enabled ecosystems represent future growth opportunities for medtech, thus we expect additional investment and dealmaking in those spaces.”