Healthcare investing has changed since its early pandemic boom. What do founders need to know now?

Amid worker shortages and a generally overwhelmed health system, technology can make providers’ lives easier by making their work more efficient, in terms of both human output and cost. But healthcare companies need capital to get their ideas off the ground to bring that tech to life.

Investments in healthtech companies boomed during the pandemic, as telemedicine and other digital services became even more essential to reach patients. Per a Bloomberg report from April: “In the U.S., investors put $29 billion into digital health last year, double the level of 2020 and up from about $1 billion a decade earlier.” That boom is now fading as the economic landscape changes. What comes next?

At the panel “Trend Forecast: Capital Markets and M&A” at the 2022 HealthKey Summit held last week, experts shared advice on what healthcare company leaders should keep in mind when trying to fund their businesses.

“The panelists and I think that capital is kind of the oxygen that makes some of these ideas work,” said moderator John Griffin, executive director of Morgan Stanley Private Wealth Management.

Here’s what those panelists — Jeremy Gelber, senior managing director of Centerbridge Partners; Cheri Mowrey, head of US healthcare investment banking at Morgan Stanley; and Brian G. Murphy, general partner at Radnor’s NewSpring Capital — had to say.

How has investing changed?

“We’ve had an unbelievable last two years in capital raising in healthcare services and technology,” Mowrey said, adding that she saw about 40 companies in this industry go public in 2020 and 2021, but most of them are now trading below issue price. This negatively impacted the companies hoping to go public in 2022.

Companies that raised capital in the last few years are generally doing OK in the private market, but companies that did not do that have to consider diluted financing or a sale, she said.

“Companies that have not pivoted quickly enough to rationalize the cost structure in a new environment” probably won’t do well according to Mowrey, but she does think there will be a good opportunity for companies to pivot into a “profit-driven model.”

Centerbridge’s Gelber said along with that, there has been a change in how investors think about new deals.

“As liquidity is tightening, investors’ risk tolerance is changing and with that, risk spurs innovation that allows new ideas to be created,” he said. “But what we’re seeing now is a tightening of new ideas. We’re seeing companies that were just pursuing growth at all costs, needing to focus on their unit economics and think about a combination of growth and margins and how much cash they’re gonna burn before they get to the next inflection stage.”

NewSpring’s Murphy said to keep in mind, though, that we’ve seen public markets go up and down before. Looking at this history, his firm has found that “the larger the deal, the more it kind of mimics the public market activities.”

What to keep an eye on

Morgan Stanley’s Mowrey said there is a lot of focus on software-as-a-service businesses in the relationship between healthcare and technology “because it is highly visible revenue streams, generally becomes profitable, high gross margins — and so those businesses, I think, will get funding, and I think will drive some very important changes in the ecosystem.”

More specifically, technology-enabled healthcare services will continue to see innovation, she said.

Gelber said healthcare hasn’t seen the “efficiency gains” through technology that other industries have in the last 20 years, and the pandemic exacerbated that. NewSpring is focused on home and community-based services right now because consumers prefer them, but also because there is a lot of opportunity for new and innovative models.

Mowrey added that behavioral health will be an interesting industry to watch because there is much progress that can be made through technology that hasn’t been seen before, or hasn’t been easily accessible.