Gilmartin Group hosted 2 events in July focused on MedTech capital markets activity. Early in the month, our team co-sponsored a MedTech IPO Summit with Piper Sandler focused on IPO readiness and potential drivers of an upcoming acceleration in both private and public capital markets activity. This past week, we hosted a similar conversation with leaders of J.P. Morgan’s healthcare investment banking team to discuss today’s market environment and investor sentiment toward emerging growth opportunities. Despite the fact that there have been ZERO MedTech IPOs in nearly 3 years, both JP Morgan and Piper Sandler teams see reasons for optimism that a MedTech IPO window may open up in the near-to-mid-term.
Banker Viewpoints on a Potential Resurgence in IPO and MedTech Capital Markets Activity:
- Tens of private MedTech businesses (as many as 40 companies, according to bankers) meet traditional IPO-readiness criteria – for example: commercial-stage with proven technology; targeting large, underserved market opportunities; beginning to generate revenue at scale; and able to forecast a line of sight to profitability.
- Most private company valuations have now reset to align more closely with today’s public market multiples (i.e., many businesses have now bridged the valuation gap from prior financing activity at 2019-2021 peak-industry-multiples, and have completed a flat-to-down round that re-bases valuation prior to a potential public offering).
- Large, long-only investment funds are deploying capital in later-stage MedTech companies and stating a desire to invest in new opportunities (especially following a wave of M&A which has taken, or is planned to take, several companies out of the SMID MedTech “investable universe” – such as Axonics, Shockwave, and Silk Road Medical)
- Many LPs are over-indexed to private relative to public companies and need liquidity – it is likely that they will encourage, or at least be supportive of, a public market exit opportunity for their portfolio companies should a window open.
Please reach out to us to discuss specific takeaways and implications for your business.
The MedTech Sector IPO Outlook – High Level Thoughts from Piper Sandler’s Healthcare Team:
- The valuation environment has stabilized:
- High-growth MedTech valuations have been cut in half from mid-2021 highs, but current EV/ NTM revenue valuations are now in-line with 15-20 year averages, which bankers believe is a healthy level for IPO activity to resume
- According to Piper Sandler data, most IPOs in the last MedTech IPO cycle were priced at a 40-50% discount to the median multiple of high-growth, publicly traded MedTech peers. However, bankers see several reasons to believe that the relative discount for IPO candidates to their publicly-traded peers will be narrower going forward:
- The relative scale and maturity of businesses today, relative to prior classes
- The specific companies, technologies, and market opportunities in today’s potential IPO candidates
- Strong revenue trajectories (could incentivize investors to look further out)
- Potential positive market sentiment post US election
- Interest rates declining
- Strong execution from most high-growth Med Tech peers (comps are important)
- Positive / above-street FY 2025 guidance from public peers in early January
- Continued acceleration of M&A – especially of growth companies!
- Business attributes of successful MedTech IPOs have included, and will likely continue to include:
- Large TAM
- Technological differentiation
- Strong, differentiated clinical data
- Strong value proposition to key stakeholders
- Key metrics from successful MedTech IPOs of the last cycle
- Revenue scale – typically seen by investors as over $20-30M in LTM sales, but business-dependent
- Double-digit revenue growth (bankers believe at/above 20-30% growth is appropriate to be benchmarked with other high-growth public MedTech peers)
- Strong gross margins – ideally, in-line or above public peers at 60-80%, or having a clear and achievable near-term pathway to gross margin improvement
- Having a pathway to cash-flow breakeven – ideally from IPO proceeds
- Led by a strong, experienced, and communicative management team
- Bankers believe that the next cluster of IPO companies will likely face higher expectations than IPOs from the last cycle, but offsetting this, investors may be willing to be pay a closer-to-public-market-multiple for businesses that do meet / exceed the above criteria
- Critical considerations for IPO preparation and execution:
- It is important for management teams to offer a compelling overview of their progress across the above attributes. Concerns or “missing attributes” will not necessarily prevent a company from successfully going public – but the company must be prepared to articulate their status and plan transparently
- Be prepared on all fronts as though you’re a public company – institute processes and rigor several quarters ahead of your public-market debut. For example, host a mock 10-Q drafting and quarterly earnings call messaging session. In addition, map out your financial guidance strategy and key non-financial metrics for success (KPIs)
- Build a thoughtful, reasonable, and consistent engagement plan to meet with public investors (through conferences, non-deal roadshows, etc.)
- Build out internal and external teams (executives, board of directors, counsel, auditors, etc). This is critical for an IPO process and especially true if exploring a dual process (IPO / potential acquisition). Give yourself the appropriate time and bring on expert partners to execute planning activities on both fronts. Preparedness pays off!
Q&A with J.P. Morgan’s Annie Wernig & Benjamin Burdett:
What can open the IPO market for growth MedTech companies & keeps that window open? What is investors’ capacity / appetite for new issues?
- Despite headwinds, there’s significant pent-up investor demand for the next great high growth MedTech that can go public & be successful. We have not seen a MedTech IPO in 3 years. It’s now been a long time coming.
- Everything we know suggests there may be some upcoming activity and investor engagement.
- However, the bar is high. Everyone wants to see the first couple of transactions have bulletproof profiles (check all the boxes) and perform well afterwards. If we can string together a handful of those transactions, we believe the market will open up significantly.
- If not in Q4, we could certainly see this in 2025. There is risk to this outlook – if the first transaction(s) struggle or tumble, that could also close the IPO window again quickly and set the sector back.
What is that bulletproof profile? How do you think it differs from the last MedTech IPO window?
- In many ways, MedTech hasn’t changed. Investors still have an expectation for growing revenue and a line of sight to profitability (think: couple hundred million in revenue within the next couple of years). That number goes up in this environment.
- The market opportunity needs to be sufficient to allow for multiple years of strong, durable growth.
- Having good investors to support the transaction is positive, but not a requirement.
- Management that has established themselves with credibility and shown clear handle with predictability.
- Put together a model with cadences that investors look for – funds want to deploy capital in businesses that execute well, beat their forecast, and consistently raise estimates.
What is your advice to private companies on sharing forward-looking estimates vs. keeping estimates internal?
- If you’re fundraising, you need to share financial forecasts. Very rarely do we see fundraising without it.
- Work to build and refine your plan. Run a comprehensive scenario analysis (base case and what could drive downside / upside to your model) as you make decisions about communicating your profile.
- In conference presentations and other high-level meetings, act carefully on projections. We would not put projections out there that could be held against you in the future. Investors have long memories.
- Talk with attorneys and advisors if you’re close to an IPO and planning to provide projections, especially if using projections that were part of a private funding round.
What are the key components to syndicate construction? How many advisors / underwriters should a company bring on?
- Companies should have at least one lead advisor to quarterback the process. Whether you have one single lead or two to quasi-lead is a matter of preferences.
- Another objective is positioning to have thoughtful, high-quality analyst research coverage following the transaction.
- We don’t believe that there’s a firm maximum number of firms that companies should work with. It’s about bringing on the right capabilities and support frameworks.
- Understand each of your syndicate members’ value-add.
What closing thoughts / high-level advice do you have for companies that are trying to finance and looking for options?
- Regardless of whether you need capital, run rigorous scenario analysis processes (i.e., imagine your operating plan stays the same and gets worse / better). Invest time and do the work to understand your full menu of options (strategic or financing) based on those scenarios.
- Even if you’re not doing a deal today, it makes sense to interact & understand what leading groups of investors are interested in your story, and what those investors could provide. Have a pulse on what’s available.
- Engage with the right partners throughout your life cycle. Don’t get bogged down with details / discussions / potential due diligence that may not lead anywhere.
- If and when capital is available, to the extent that everyone can get comfortable around the table, take incremental capital to get to the next corporate event or catalyst with a buffer. Don’t have a razor-thin path to achieving your next milestone.
- Manage your business & maintain flexibility, where possible. Be prepared.
Gilmartin Group has extensive experience working with both private and public companies across the MedTech space. To find out more about how we strategically partner with our clients, please contact our team today.
Authored by: Marissa Bych, Principal, Gilmartin Group