Medtech Investors Take Note
By Jonathan P. Gertler, MD, CEO and Managing Partner, Back Bay Life Science Advisors and Managing Director, BioVentures MedTech Funds
With so much focus this past year on the marvels of biotech and a close watch on the vaccine space, it’s easy to glaze right over MedTech’s outstanding year. Evaluate Vantage Pharma published a useful review of 2020 highlights here, according to the report:
Over the past 12 months, Venture poured $6.4 billion into the MedTech sector
Medical device companies raised $2.3 billion
The average size of MedTech venture financing rounds reached a ten-year high of nearly $38 million.
It’s no surprise elective procedures were down because of COVID-19. Certain MedTech companies did suffer (MedTech M&A declined), but the enthusiasm for digital diagnostics and the rise in telehealth and remote monitoring lifted the sector despite the health crisis. (For instance, the FDA just issued emergency use authorization for the first at-home COVID test. )
With more than $27 billion transactions taking place in 2020, MedTech and its close sibling, HealthTech, have weathered the storm.
What This Means for MedTech Investors
The pandemic laid bare that medical and health technology (which drive well over $500 billion of market value) is critically important to patient care and life science innovation. MedTech and HealthTech were overshadowed this year by the breathtaking speed by which COVID-19 vaccines were brought to market after many years of foundational research and development. The Biotech markets prove we live in the thrall of biotech’s high science/high risk/high-reward system.
However, at this moment, MedTech has a reasonable amount of dedicated capital, albeit far less than biotech, with much of the investments this year focused on diagnostics.
Our investment banking team and strategic advisors have guided many MedTech transactions throughout the years and point to the historically more difficult returns of MedTech markets— the higher hurdles of its exit market relative to previous approaches to capitalization—as a reason this sector has been under-emphasized.
MedTech investors, 2021 and beyond could be your time, but we recommend proceeding with an awareness of the pitfalls along with an appreciation of the meaningful upside opportunity.
Healthy MedTech vs. Biotech Markets
The guiding principle of the MedTech sector continues to hold; we aim to serve patients and delivery systems in ways that differ from biotech’s offering. By its very nature, biotech focuses on increasingly arcane biologic pathways, which sometimes leads to complex solutions for very small segments of patients. At the same time, MedTech serves swaths of people and larger populations, as well as the providers and systems that care for them.
Biotech zeros in on specifics which increases market segmentation; the MedTech sectors are by nature expansive and include as many people as possible.
For years, MedTech has been the paradigm for improving quality and making medicine more efficient.
As information about populations and individual patients expands logarithmically, the synthesis and utilization of that information become critically important for patient and system management, which MedTech and HealthTech consider and address.
Biotech and MedTech markets have similar drivers, but MedTech has these distinctions which can be meaningful investment/development advantages:
A combination of rapid technological advancement to meet real needs
The appropriate utilization of intelligent capital moving into the sector
Opportunities for exits both in a robust public and M&A market
Innovation-driven advances that are beneficial to patients, providers, integrated delivery systems and payors
Unwavering attraction to potential acquirers who still primarily outsource R&D and early commercialization
The ability to meet patient needs, combat healthcare costs, and increase patient access.
However, the investment criteria for MedTech and biotech are markedly different. There are both regulatory and developmental risks for biotech and MedTech, but engineering solutions—from a clinical success and a development perspective—may be more predictable for MedTech.
Learning from the Past
The MedTech IPO market is more robust than it has been in years, and venture markets are doubling down on MedTech for its important contributions. But we should still be cognizant of rational capitalization.
The historical and central pitfall in MedTech investments has been over-capitalization at valuations that could not ultimately create appropriate returns at the exit. This mistake should not be repeated even in the setting of a currently robust public market and highly valued acquisition market.
MedTech exit measurements now are different than what we have seen in recent years. There is more opportunity for technology-driven acquisitions. However, demonstrable commercial success remains the driver of the majority of M&A events.
Several newer entrants into the acquirer universe have also augmented MedTech’s exit dynamics, including private equity firms, their portfolio companies, and a growing crop of diversified giants and midcap acquirers. The public markets have more sustainably opened for MedTech and HealthTech than we have seen in years.
Returns in MedTech are not as dramatic as they can be at the upside of biotech. Thus, while there is clearly more capital going into MedTech at a higher rate than in previous years, the historical errors in MedTech investing should not be repeated. Proper capitalization, understanding the exit criteria for technology and sector, and sustainable business models are the key to appropriate returns, and most importantly, allow technologies to come to fruition.
MedTech’s Year Ahead
When returns start to diminish in a sector, investors tend to abandon the sector or “jump ship.” This creates a terrible loss both for investment opportunities and the development of technologies that can help systems, physicians, and patients thrive.
Biotech will continue to develop life-saving and life-enhancing technologies and at an incredible pace, but we would be remiss not to include MedTech’s contributions to the market. MedTech’s capabilities extend far beyond a single-focus on economic sector growth.
Perhaps, more importantly, MedTech’s guiding principle of expanding patient care and overall access to healthcare is the best way to continue serving the world in 2021 and move forward into the future. In the process, companies and investors can thrive and demonstrate the utility of MedTech is as critical as its glossier biotech cousin.
Connect with our MedTech development and investment experts with questions.