Health tech companies weigh funding options amid weak IPO market

Cash-burning healthcare companies going public may be forced to turn to alternative methods of funding to keep their businesses afloat amid a weak market for initial share sales, industry analysts say.

The IPO market for healthcare tech companies is facing its worst year in two decades as the COVID-19 pandemic, Russia’s war in Ukraine, record-high inflation and rising interest rates have eroded public market valuations and Shares have been sent to sink.

Until this year, healthcare technology companies had reason to be confident considering share sales. Public markets soared in 2020 and 2021 due to lower borrowing costs and pandemic relief funds. The rise in special purpose acquisition companies, or SPACs, meanwhile, helped more private companies access the market.

According to Stock Analysis, 1,035 companies went public on US exchanges last year, setting a record. Healthcare companies rode the wave of public markets, raising a record-breaking $56.36 billion in 403 IPOs.

However, the enthusiasm for fundraising faded in 2022. This year, the number of businesses that have filed to go public has dropped to 173. Excluding SPACs, healthcare companies are flagging with only 20 IPO filings till October this year, according to Renaissance Capital.

Decline occurs because the stock remains down year after year. Most healthcare technology stocks were trading negatively as of September, with an average performance of -58%, according to investment and analysis firm Silicon Valley Bank.

SVB Global Healthtech IPO and D-SPAC Performance

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Experts do not expect a quick recovery for the public markets.

“I think 2023 is going to be really tough,” said Jonathan Norris, managing director of the life sciences and health care practice at Silicon Valley Bank. “I’m hoping you’ll start to see some bright spots in the second half of 2023.”

,[There’s] Public market caps from long-standing public companies as well as companies with recent IPOs have declined a lot over the years, and in fact, that has impacted their ability to exit and IPO,” Norris said. So the question is… what are they doing now?”

raise capital

Analysts said companies waiting for a bad public market may turn to private rounds as demand for IPOs has waned and investors are more cautious about funding.

Still, relying on private funds can have its own risks. Funding has fallen short of raising capital across the board this year. In August, global venture funding fell to the lowest level in two years.

“Not only are market conditions less than ideal for public exits, but a combination of market downturns, inflation, interest rate hikes, and the scrutiny post-2021 bear market investing has led to fewer IPO-stage startups than last year. making it difficult to raise private capital. said Adriana Krasniansky, head of research at digital health venture fund Rock Health.

Healthcare companies have raised less capital especially in 2020 and 2021. According to Rock Health, the third quarter of 2022 was the lowest for digital health funding for the past 11 quarters.

“I hear a lot of VCs saying that belt-tightening is prudent,” said Stephanie Davis, senior research analyst at SVB. “So instead of investing purely for growth, I think many people are taking a more balanced approach of waiting out the storm.”

As overall funding declines, companies that decide to raise capital in today’s market could see their valuations decline, “aka a down round,” Krasniansky said.

Krasniansky said this could lead companies to turn to internal, expansion and bridge funding rounds, which can lend capital to companies without affecting their valuations.

“Many of these latter companies all thought they were going to IPO, depending on market conditions, and with their existing investors to try to eliminate some sort of insider round and reduce the amount of cash terminated for As far as they could and till 2023 or beyond.” SVB’s Norris said. “Basically, it gives them breathing room.”

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