Sector-Leading Companies to Dominate Healthcare Fundraising in New Year Despite Economic Uncertainties

HSBC’s Venture Healthcare Report: Are we out of the woods, yet? provides an overview of investment activity, valuations and step-ups for venture-backed healthcare companies.

• Flat valuations are the new up as many companies struggled to grow into frothy valuations from 2021 and 2022. However, the top 10% of deals secured large funding rounds at step-ups in valuations
• In 2023, about 50% of financings in healthcare were add-on/insider rounds to help fund companies to new investor-revised milestone expectations
• Crowded and difficult fundraising environment in 2024 is anticipated as many insider rounds will need to close new investor-led financings
• Continued maturation of artificial intelligence and machine learning will spur investor interest across all four healthcare sectors

A significant number of healthcare companies will face challenges raising capital in the coming year, leading to valuation re-sets and possibly consolidations, according to HSBC’s Venture Healthcare Report: Are we out of the woods yet? Despite venture capital available for investment, investment dollars declined 28%. For the best deals, however, capital remained plentiful with large rounds and valuation step-ups.

The report shows that 2024 will bring about further transformation in key sectors (biopharma, healthtech, medical devices and dx/tools) led by a focus on patient needs, new technologies and strong partnerships.

“In 2023, technology and business-model disruption led to an ideal environment for real innovation, and we noted that sector-leading companies had significant funding rounds, which we think will continue in 2024,” said Lead Author and Managing Director Jonathan Norris. “However, with global economic uncertainty expected to continue into 2024, companies that have not hit significant value inflection in development or revenue may have trouble raising new investor-led rounds, leading to low value M&A or private company consolidation, and some may have to shut down.”

Biopharma

The trend of large first-financing deals will continue, likely marked by the re-emergence of “hub and spoke” deals designed to control cost and generate unique M&A opportunities. However, first-financing deals are anticipated to continue trailing overall investment, as investors maintain a restrained deal pace and expand interest towards later-stage deals at reduced valuations. Metabolic and neuro are two indications poised for increased investment. We expect significant drip-feeding, consolidations, and shut-downs for companies that have exhausted insider rounds and have not been able to hit significant value inflection points. Some deals might be too early to capture investor interest, as the focus has shifted significantly to clinical data. M&A interest by big pharma and biotech will remain strong but will continue to be divided between the private market and recent IPOs from the last few years.

Healthtech

In 2024, we anticipate a smaller and more targeted pool of investors, reinforcing their commitment to high-performing growth companies and simultaneously revitalizing their early-stage pipeline through new first-financing investments. We expect the continued maturation of generative AI will spur investor interest. Additionally, we foresee increased investments in value-based care, focusing on both specialty care delivery models and provider operations companies dedicated to enhancing provider infrastructure, process and analysis, thus facilitating efficient care delivery. We predict numerous mature companies considering going public in 2024, yet well-funded ventures might choose to wait, maintaining flexibility until the healthtech IPO window reopens. As we progress into early 2024, numerous insider bridge rounds from 2023 are likely to deplete, leading to consolidation through all-equity transactions. This trend may involve larger, more mature companies acquiring smaller entities to expand their platforms and geographical footprints. ​

Medical Devices

We project first-financing activity to involve a combination of smaller 510(k) pathway deals suitable for corporate M&A and larger market PMA-pathway focused deals that will likely have corporate investment from the outset. Imaging companies utilizing hardware/software solutions and neurostimulation technologies are expected to remain active areas of investment. 2024 will be a challenging year for many mid-stage companies that have depleted their insider rounds and find limited interest from new investors. In contrast, companies involved in later-stage pivotal trials and commercialization deals with strong markets and clinical data/approval are expected to secure a mix of traditional VC and growth funds. The deal-value increase in private M&A has started to reinvigorate the later-stage scene. Recent cases of early-stage deals achieving rapid, large exits and later-stage valuation resets that later result in robust M&A deal values have helped bring investors back to the table.

DX/Tools

We anticipate challenges to persist in first-financing activity, as many investors in the dx/tools sector are focused on supporting their existing portfolio companies or exploring opportunities in later-stage commercialization plays. Technology focused on gene and cell therapy production and manufacturing should remain a strong area of investment. Companies in the computational biology sector, particularly those focused on discovery or development processes, are positioned to sustain increasing investor interest. We also project that many of these companies will likely pivot from providing platforms or engaging in discovery to developing their own assets. The emergence of IPOs in 2024 appears unlikely, except in one-off scenarios. Thus, many companies with high private valuations from 2020-2021 will need to secure private new investor-led financing. Despite the likelihood of valuation re-sets for many companies, the underlying strength of the technologies is expected to attract new investor interest, likely led by traditional VCs.

The HSBC Venture Healthcare Report was written and produced by HSBC Innovation Banking’s Life Science and Healthcare Team, which serves the innovation economy by providing products and solutions to early-stage companies with growth ambitions.

“The insights in our report provide an overview of investment activity, valuations and step-ups for venture-backed healthcare companies, supported by deep-sector expertise, historical perspectives and data-informed predictions,” said Katherine Andersen, Head of Life Science and Healthcare, HSBC Innovation Banking. “We are committed to supporting the innovation ecosystem by leveraging our industry experience and the strength and stability of HSBC’s global platform.”

HSBC Innovation Banking in the U.S. includes a team of dedicated bankers assembled across the Bay Area, Boston and New York City. The proposition also has teams in the UK, Tel Aviv, and Hong Kong that deliver a globally-connected, specialized banking expertise to support a broad range of innovation businesses and their investors.

For further discussion of the HSBC Venture Healthcare Report, the Life Science and Healthcare Team will host an exclusive media roundtable, featuring Head of Life Science and Healthcare Banking Katherine Andersen, Head of Healthcare Investment Banking Becky Stevenson, Managing Director Jonathan Norris and Managing Director Chris Moniz.

WHEN: Tuesday, January 9th at 10:00 a.m. PST

WHERE: 140 Geary Street, 10th Floor, San Francisco, CA

RSVP: Matt Kozar, Vice President of External Communications

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