As the MedTech and broader healthcare investment community returns from the annual J.P. Morgan Healthcare Conference and embarks on a new year, our experts provide insight and perspective on the key topics and variables that will influence activity in 2023.
- Relative valuation for public medical technology companies continues to be driven by a variety of key factors including fundamental results vs. Street expectations, overall competitive positioning/market share gain, and visible/sustainable/durable growth prospects.
- For smaller cap companies in particular, a clear path to profitability/cash flow generation is important. As market sentiment has shifted away from the growth-at-all-cost mindset that has persisted over the last few years, investors are now encouraging companies to “grow, then spend” rather than “spend to grow.” While topline growth is still viewed favorably, there will be a continued emphasis on improving profitability through a tighter rein on cash OpEx spending.
- In emerging categories, the rush to get exposure has subsided. Instead, there is a wait-and-see mentality with investors who are trying to determine which companies will be the “winners” in their respective market segments. As a result, there will be stricter evaluation of execution as companies begin commercializing new technologies.
- Inflationary pressures in raw materials, freight and logistics remain top-of-mind for investors as we head into 2023. The more important question is whether these inflationary pressures will prove transient or represent a longer-term headwind to profitability.
- While inflationary pressures in the COGS line may prove transient, labor-related challenges will likely continue to pressure operating expenses/profitability going forward. Management teams should expect investor focus on how the challenging labor market is expected to impact margins during this year and beyond.
- Investors continue to evaluate the impacts on GAAP revenue as a result of changes in foreign exchange rates vs. the U.S. dollar. For companies with significant OUS revenue, management teams should consider providing average exchange rate details supporting the expected FX headwind to GAAP results in 2023. Companies with significant OUS operations should expect investors to focus on how changes in foreign exchange rates impact COGS and OPEX results as well – especially when these represent potential benefits to year-over-year GM, OPM and EPS performance.
- Balance sheet/financial condition and access to capital represent some of the largest drivers of relative valuation for medical technology companies. The negative impact on valuation is often more pronounced during periods where sentiment is not favorable in, and/or fund flows exit, the sector. As such, 2023 may find companies challenged in their ability to access capital via the equity markets.
- The equity capital markets will likely see continued volatility as 2023 begins. Companies that need to raise capital soon should prepare to act quickly and be opportunistic. Those who can wait until later in the year may find more favorable conditions.
- Given the rising interest rate environment in 2022, variable rate debt exposure has been a point of focus for investors – financial deleverage / headwinds on EPS growth as a result of higher borrowing costs has impacted forward valuation multiples in recent months.
Get more trends for 2023 on the ICR Westwicke blog.