MedTech startups : Who is attractive now?

Editorial by Frédéric Pette, CEO BioMAdvanced Diagnostics  

“Sorry, we don’t finance IVD companies”. That’s a tune that I have heard a lot in the past 2 years talking to Venture Capital firms and Business Angels. With the emergence of personalized medicine and in a post covid era, IVD companies that were once not so attractive for investors are becoming extremely attractive.

Let’s go back in time. The way it used to be.

If we look at historical data, It is actually quite understandable. According to the study “Ensuring innovation in diagnostics for bacterial infection: Implications for policy” by Morel C, McClure L, Edwards S, et al published by the World Health Organization in 2016 (1), the IVD industry does not feature the sexiest profile.

In the chapter 3 of this book, the authors showcase a thorough analysis of the market :

  • its size was estimated to be around $40-45Bn – barely 10% of the total MedTech market value, not even mentioning the pharma market.
  • An expected growth in the mid-single digit, so nothing to excite investors much.
  • In terms of structure, a completely fragmented market with relatively small players and only a handful of major companies representing about 50% (with some of them being part of larger groups focused on non IVD such as Siemens Healthineers or Roche Diagnostics).
  • The authors point that “reimbursement challenges are consistently flagged as an ongoing issue for diagnostic manufacturers” and “(…) as in the broader IVD market a lack of product differentiation makes scale economies essential” which indeed translates in an industrywide gross margin average ranging from 45% to 55%, clearly below some other areas of the MedTech area.

That was then but the picture has changed drastically in the past 2-3 years.

First change factor : accelerating tidal wave of precision (or personalized) medicine

Precision (or personalized) medicine has become so prominent that mainstream media have noticed. The Economist in its Technology Quarter published March 12th 2020 realized that “Treatments can increasingly be tailored to the genes, environments and activities that make every patient different” (2). And how to discriminate the various situations? One of the fastest growing segments is molecular diagnostics.

This area of IVD is a completely new and different ballgame: highly differentiated products with high prices that are backed by strong healthcare economics thanks to the efficacy improvement they allow for the treatments and the efficiencies generated thanks to the time and resources they enable saving.

Second factor : COVID

Besides this strong long term trend, another factor has completely changed the IVD industry: Covid. Thanks to the unprecedented testing needs that unfolded between 2020 and 2021, the industry leaders have enjoyed a boost in financial performance.

  • As an example, Roche Diagnostics saw its sales annual growth go from +2.9% in 2019 to +13.9% in 2020 and +29.5% in 2021. And its profit margin has gone from 15.2% of sales in 2019 to 22.1% in 2021.
  • Same story with Siemens Diagnostics (from +2% sales growth in 2019 to 44% in 2021 with a EBIT going from 9.1% not 13.3%) or Thermo Fisher (Specialty Diagnostics).

But the covid frenzy is fading. Now, imagine you are an executive in an IVD company, your sales are slowing down, profit margin is bound to decrease again, you are sitting on a pile of cash and a very lucrative and expanding market is being developed by a bunch of startups who will need backing in their go to market: what would you do? It’s probably shopping time!

 So, who’s attractive now?

References :