With the numbers tallied for the year behind us, we can confirm that funding for medical device and diagnostics companies experienced a dramatic slowdown in 2023. Now that the 2024 J.P. Morgan Healthcare Conference has passed, we are turning to what funding the market managed to raise last year and what may be on the horizon.
Medical Devices
According to the HSBC Venture Healthcare Report 2023 Year-End Recap and 2024 Outlook, medical device companies raised $7 billion in venture capital (VC) financings over 474 deals. This represents a 19% decrease from 2022. Medical device companies that were raising their first investment rounds (either Series Seed or Series A) brought in $778 million over 108 deals, representing an 18% decrease from 2022. Interestingly, the first financing rounds decreased in each successive quarter throughout the year, with the highest number of financing deals in Q1, and the lowest number in Q4. All of that to say, it was difficult for companies seeking new funds to raise them in 2023.
In 2023, first-round financing deals tended to favor devices with the quicker 510(k) pathway to market, as opposed to those requiring premarket approval (PMA). This is notable because only a few years ago, investors/funders were most interested in seeing PMAs—truly novel medical devices—as opposed to something on the 510(k) path. However, it seems this has shifted, as devices that take the 510(k) pathway are currently favored.
More than 30% of the later-stage deals (Series B and beyond) in 2023 were down rounds and done at valuations that were lower than their earlier financing. This resulted in a significant reset of valuations in a subset of the financings moving forward. Last year, the top indications for VC financing were for neurotech, particularly focused on neurostimulation technology and brain-computer interfaces, with 40 deals worth more than $1.3 billion collectively. Imaging, including equipment and software, was also very popular, with 65 deals amounting to more than $903 million. Additionally, surgical ventures had 46 deals worth more than $852 million.
Tools and Diagnostics
Tools and diagnostics companies raised only $6.2 billion in VC financings across 423 deals in 2023. This represents a substantial 37% decrease from 2022. Tools and diagnostics companies raising their first investment rounds brought in $1.1 billion over 126 deals, a 31% drop from 2022.
In particular, deals that exceeded $100 million in value decreased significantly last year. In 2022, there were 20 deals that exceeded $100 million in value but only eight such deals in 2023.
Research and development (R&D) tools, including computational biology tools, was the leading subsector, raising $3.3 billion over 187 deals. R&D was followed by diagnostic analytics, with 99 deals worth $1.4 billion. Finally, diagnostics tests raised $1.4 billion over 119 deals.
M&A
For the second straight year, medtech merger and acquisition (M&A) numbers were depressed due to inflation and high interest rates, resulting in a lack of deals greater than $1 billion. Most medtech deals completed in 2023 were tuck-in acquisitions of products or services that fit well within the existing pipelines of the acquiring companies, as opposed to something novel that could have brought them into a new area.
According to the 2024 EY M&A Firepower report, only 46 medtech deals worth more than $100 million were completed by December 10, 2023 for aggregate proceeds of $33.7 billion. Some of the more notable M&A deals of 2023 included the merger of Globus Medical Inc. with NuVasive Inc., Danaher Corporation’s acquisition of AbCam plc, and Thermo Fischer Scientific Inc.’s acquisition of Olink.
More information on the 2023 developments that shaped the life sciences space are discussed in our As Prescribed blog post Year in Review: How 2023 Events Affected Life Sciences Companies and Transactions.
If interest rates decline in the year ahead, the medtech and tools and diagnostics markets may experience more M&A activity, given the stabilization we have seen in some of the larger buyers’ internal operations and the increase in medical device companies with cash on hand to put toward acquisitions. Boston Scientific’s January 8 announcement that it will acquire Axonics Inc. for $3.4 billion is a good early sign for the medtech market.
Private, VC-backed, midstage companies will likely continue to face a difficult financing environment, especially if they have been unable to garner support from new investors. This is because many insider investors will already be at their maximum funding levels. Looking ahead, key areas of focus for medtech are expected to be neurotech, imaging, pulsed field ablation, biometric technology, and wearables.
If you have any questions or would like more information on the issues discussed herein, please contact Laurie Burlingame.