By Jim Welch and John Babitt, EY
In January, San Francisco once again became the center of the life sciences and medtech universe during the 41st Annual J.P. Morgan Healthcare Conference (JPM). It was a treat to see so many familiar faces at the first in-person JPM gathering since 2020, and despite the persistent gloomy weather, there was a collective feeling that medtech sees sunny skies on the horizon. We anticipate that 2023 will be a year of rapid transformation across medtech, following the disruptions caused by the pandemic, supply chain backlogs, and geopolitical challenges.
Here, we’ve outlined a few takeaways from various discussions at JPM, as well as the medtech trends that we’ll be watching this year.
Looking Back: Medtech In 2022
In 2022, public medtech company revenues passed $500 billion for the first time and continued to rise at about 6%. As industry leaders and other stakeholders navigate the evolving landscape, the talent retention crisis has had an acute impact on procedure volumes, and therefore led to financial challenges across health systems. After mixed results for medtech in 2022, we are seeing cautious optimism looking ahead to 2023, with some industry-leading companies now seeing encouraging developments and raising their forecasts and expectations above 2022 levels.
Meanwhile, other medtechs continue to experience operational challenges that have led to uncertainty for 2023 revenue. Additionally, several companies noted that earnings challenges fueled by foreign exchange headwinds and inflation have put pressure on the bottom line. As such, there are both success stories and underperformers across medtech, with some companies impacted positively by sector trends and others feeling the brunt of the current economic environment.
Given the dips in stock prices, slow pace of M&A, closed IPO window, and decreases in total financing we’re seeing across the industry, these diverging paths may be a sign of things to come over the next year and potentially present M&A opportunities in the second half of 2023. In addition, pent-up demand for inorganic growth is building across the life sciences ecosystem.
What’s In Store For 2023
In 2023, as new medtech innovations continue to emerge with dazzling speed, technology-enabled ecosystems that both unlock better outcomes and improve hospitals’ operational efficiency are beginning to take center stage. One example we heard about at JPM includes a large medtech that is developing customizable spinal implants with EMR-derived 3D-printed technology to enable precise implantation using a robot and other devices for navigation. In another instance, a multinational medtech is leveraging its recent acquisition of a communications company to develop their own clinical communication and workflow solutions that help protect and connect team members, boost operational efficiency, enhance the quality of care and safety, and humanize the healthcare experience.
While strong margins and high growth around earnings per share are compelling, top-line revenue growth generates higher total shareholder return and thus is more valued. As medtechs seek to rebalance their portfolios, we can expect to see more spinouts and sales of medtech assets, which typically are geared toward a strategy to drive faster, higher growth. Some of this activity has already been announced, and we expect to see it continue in 2023.
While medtech M&A activity decreased in 2022 to its lowest levels in a decade, valuations for high-growth medtechs hit an all-time high of about 9.9x for the top quartile, compared to the median M&A multiple of 5.5x. This demonstrates that the demand for premium medtechs with high cash flow and low technology risk is still commanding higher valuations. All of this illustrates that despite today’s macroeconomic challenges around supply chains, inflation, and exchange rates, medtech companies and other acquirors remain willing to pay up for innovation and growth.
Today’s conditions are expected to continue through the first half of the year. In addition, some predict that if the headwinds discussed above abate, the second half of 2023 could see a rebound in deal activity. In the meantime, although the middle market debt market is still open for business, the market for large deals that require syndicated debt is all but closed. Similarly on the private equity front, investors appear to be more focused on portfolio value creation to prepare companies for exit next year, after the market has thawed.
Essentially dormant, today’s medtech IPO market saw zero meaningful IPOs in 2022 due in part to many of the challenges discussed above. In 2020 and 2021, the run-up of companies that went public too early led to underperformance and a natural correction of IPO activity, which is now reverting to the long-term mean. There is, however, a glimmer of hope that the backlog of high-quality IPOs is strong. If that’s the case and the overall IPO window will ultimately open, we should see several attractive private medtech companies move to tap the public markets. We’re also keeping an eye on all of the announced public spins. The class of 2022 left a lot to be desired, but 2023 should be interesting given the name brands and scale of some of the businesses.
As medtechs navigate the next several months, the differentiation we’re seeing will likely continue. Companies with resilient operations, an eye toward innovation, and a strategic mindset around dealmaking and portfolio rebalancing will be well-positioned to drive value both in late 2023 and for the long term.
About The Authors:
Jim Welch is the EY global Medtech leader. He leads the demand side of EY strategy, operations, risk, and compliance business for healthcare providers, payers, pharmaceutical, medical technology, and clinical research organizations. He also co-authors the annual Medtech Pulse of the Industry report. He has a Bachelor of Science in business from Miami University, Oxford, OH.
John Babitt is a partner at EY with almost 30 years of experience, all in the life science, medtech, and healthcare industries. He advises clients on various projects, including M&A, supply chain, IT, financial/accounting, and tax considerations and frequently speaks at AdvaMed and BIO. He holds an MBA from the University of Miami.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.