Healthcare technology companies weigh finance options to prevent cash burn as IPO market sags

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Industry analysts say cash-burning healthcare companies may turn to alternative methods of funding to keep their businesses afloat.

IPO market facing its worst year ever for healthcare tech companies Two decades on as the COVID-19 pandemic, Russia’s war in Ukraine, record-high inflation and rising interest rates have eroded public market valuations and sent stocks plunging.

Until this year, healthcare technology companies were considering share sales. The public market soared in 2020 and 2021, driven by lower borrowing costs, pandemic relief funds and an increase in special purpose acquisition companies, or SPACs. Last year, 1,035 companies went public on US exchanges, setting a record, according to Market Watch List stock analysis. Healthcare companies rode the wave of public markets, raising a record-breaking $56.36 billion in 403 IPOs.

However, the enthusiasm of the market faded in 2022.

This year, the number of businesses that have filed to go public has dropped to 173. Healthcare companies are also flagging this year with only 20 IPO filings till October., Excluding SPACs, according to Renaissance Capital.

Decline occurs when stocks fall in the public markets. 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.

A graph showing the decline of Healthcare Public Stock

SVB Global Healthtech IPO and D-SPAC Performance

Permission granted by Silicon Valley Bank

Experts do not expect the public markets to recover anytime soon.

“I think 2023 is going to be really tough,” said Jonathan Norris, managing director of the life sciences and healthcare practice 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 subdued public market could turn to private capital raising as IPO funds dry up and investors turn more cautious.

Still, turning to the private markets comes with its own risks as the fundraising market faces its own downturn. 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.”

And, as overall funding has fallen, companies that decide to raise capital in today’s market may see their valuations decline, which is called a “valuation adjustment — aka a downtrend,” Krasniansky said. Told.

This can calm companies down Fundraising rounds, such as internal, expansion and bridge rounds, can lend capital to companies without taking a hit to their share price, Krasniansky said.

“A lot of these later companies thought they were all going The IPO could not, depending on market conditions, and sought to eliminate any kind of insider round with its existing investors and increase the amount of cash burn until 2023 or beyond. SVB’s Norris said. “Basically, it gives them breathing room.”

Healthcare technology companies in particular could feel the impact from the broader negative tech industry outlook as large technology companies like Amazon and Meta laid off thousands of workers amid economic pressures, said EY Americas and health integration and divestment leader in strategy and transactions. Adam Sorensen said Principal.

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