Copy to clipboard 
The immediate aftermath of the COVID-19 pandemic brought on an unprecedented market for orthopedic funding and M&A. Investors had a war chest of capital to deploy in search of disruptive, growth-at-all-costs assets. Larger orthopedic companies remained active with more than 40 acquisitions in 2020. Since then, economic disruption has changed the calculus for both investors and companies.
Downward trending economic indicators caused investors to retreat, and diminished CEO confidence. Start-up companies are withdrawing or delaying initial public offerings until the waters calm. Hospitals, in good cash positions after the pandemic, are now tightening purse strings and delaying capital equipment purchases. We expect these pressures to remain significant headwinds through the majority of 2023.
Economic Pressure Eroding CEO Confidence
Michael Ragan, an executive director in Morgan Stanley’s investment banking division, didn’t have much good economic news to share with the attendees of the 20th annual Musculoskeletal New Ventures Conference. He said, “I’m not trying to be a Debbie Downer. I’m just trying to give a realistic view of where we are today in the market. We’re facing challenges in the broader macroeconomy.”
Ragan shared a troubling comparison of economic metrics between 2021 and 2022. Real gross domestic product increased 5.7% in 2021, but Morgan Stanley expects growth of just 0.8% in 2022. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index for August increased 8.3% versus the prior year.
Likewise, interest rates in the U.S. climbed steadily since February 2022. Ragan said his firm expects the rate hike cycle to continue and exceed 4% by the end of 2023.
In 2021, the confidence of CEOs surveyed by Morgan Stanley stood at a score of 82, its highest level since 2000. However, by June 2022, that confidence score dipped to 42 and has likely further declined in step with shrinking GDP growth estimates for the year. However, executives surveyed by Morgan Stanley do not expect a protracted recession.
“Confounding all this data is we have a tight labor market, which is great. That’s good for all of us. There are questions about whether this just a technical recession. Is it going to be a hard recession? Most of the CEOs surveyed, I think it was 80%, expect just a quick dip recession,” said Ragan.
Orthopedic IPO Market Freezes After 2021 Boom
Three orthopedic companies – Treace Medical Concepts, Bioventus and Paragon 28 – went public in 2021 amid a highly favorable IPO landscape. In 2019, Nasdaq had 124 IPOs that raised $24 billion for the entire year. Through the first three quarters of 2021, it had 560 new listings raising more than $136 billion through traditional IPOs, special purpose acquisition companies and direct listings. Actual operating companies accounted for 250 new listings this year, activity that Nasdaq head of Western U.S. Listings Jeff Thomas called “off the charts.”
In the first half of 2021, Morgan Stanley took many clients through a dual-track process simultaneously preparing for an IPO and M&A deal. Nearly all those clients opted for an IPO because public investors’ willingness to pay for Medtech companies exceeded what large strategic companies would pay for an acquisition.
During that time, the market essentially valued a company’s IPO at two years forward or 24 months of annual revenue. Morgan Stanley expects an adjustment back down to 12 months forward whenever the IPO market reopens.
However, many of the Medtech companies that went public during the boom now have their stock prices underwater compared to the IPO prices. Additionally, investors have moved away from seeking growth at all costs to reasonable growth with a realistic chance at profitability.
Ragan said, “We no longer have the pure threat of, ‘Hey, if you don’t buy me at a multiple of seven or eight, I’ll price my IPO at that and trade up to 10 or 11.’ We’ve seen a lot of withdrawn IPOs and the market is basically frozen, or at least very challenging.”
Orthopedic M&A Market Evolves Away from Tuck-Ins
According to our estimates, recent orthopedic acquisitions peaked in 2020 with 42 transactions. Orthopedic M&A dropped significantly in 2021 with 25 total deals, and this year will likely struggle to muster even that many. The large strategics in orthopedics are still very acquisitive, but the criteria for a successful deal shifted in the wake of the pandemic.
In a fireside chat with MNVC attendees, Medtronic executives Skip Kiil and Kip Roberts said that company valuations are still too high. Strategics view pre-clinical companies as a risk and are biased toward assets with a clear commercial pathway. However, Medtronic is broadening how it engages with potential acquisition targets. Distribution, co-development deals and joint ventures allow strategics to reduce risk over time.
Carlton Weatherby, Vice President & General Manager of Spine & Biologics at Medtronic, said the company is seeking more substantial deals.
“While tuck-ins are attractive because there are revenue and cost synergies, today we’re doing a lot more of what we characterize as platform acquisitions, meaning it’s about the interaction and pull-through of other products. A lot of people know Medicrea as a patient-specific rod company. We viewed it as a data collection analytics platform that we can now leverage across our products,” he said.
Skip Kiil encouraged lateral thinking and said he’s looking for disruptive intellectual property that makes “one plus one equal four.” He expects the digital evolution of orthopedics to accelerate and increasingly come under the influence of technology from other sectors like gaming. Kiil revealed that Medtronic’s R&D is “disproportionately” skewed toward digital products.
Hospitals Tighten Purse Strings on Orthopedic Capital Equipment
Despite the pandemic, hospitals remained in a strong financial position throughout 2020 and 2021. Companies like Stryker, Medtronic and Globus Medical repeatedly set company records for robotics revenue during those years. However, the extended economic downturn changed hospitals’ willingness to make large capital purchases.
Morgan Stanley’s Michael Ragan said, “It used to take six months to get through the sales cycle. From your champion physician adopter, C-suite buy-in and VAC. Maybe that took six months. I’ve got clients that can’t even tell me how long it’s going to take now. It’s definitely a more challenging market.”
Both Globus and Styrker saw softer robotic sales in the first quarter of 2022 as longer cycles stagnated the sales pipeline. Additionally, Zimmer Biomet’s entry into the space with ROSA disrupted purchasing models by making rentals an increasingly common choice.
Stryker CEO Kevin Lobo said, “If your competitor offers a rental option, the customer says do you have a rental option. We’re not going to let our prior contracting approach stop us from competing. Let the technologies fight head-to-head and let the best technology win.”
Stakeholders throughout orthopedics are rapidly adapting to the changing environment. But just as the pandemic forged more agile companies and more capable leaders, the current market conditions will act as another crucible. When the orthopedic market finds calmer waters sometime in 2023, perhaps the most successful leaders will be, to paraphrase Skip Kiil, those who can think around corners.
The immediate aftermath of the COVID-19 pandemic brought on an unprecedented market for orthopedic funding and M&A. Investors had a war chest of capital to deploy in search of disruptive, growth-at-all-costs assets. Larger orthopedic companies remained active with more than 40 acquisitions in 2020. Since then, economic disruption has changed...
The immediate aftermath of the COVID-19 pandemic brought on an unprecedented market for orthopedic funding and M&A. Investors had a war chest of capital to deploy in search of disruptive, growth-at-all-costs assets. Larger orthopedic companies remained active with more than 40 acquisitions in 2020. Since then, economic disruption has changed the calculus for both investors and companies.
Downward trending economic indicators caused investors to retreat, and diminished CEO confidence. Start-up companies are withdrawing or delaying initial public offerings until the waters calm. Hospitals, in good cash positions after the pandemic, are now tightening purse strings and delaying capital equipment purchases. We expect these pressures to remain significant headwinds through the majority of 2023.
Economic Pressure Eroding CEO Confidence
Michael Ragan, an executive director in Morgan Stanley’s investment banking division, didn’t have much good economic news to share with the attendees of the 20th annual Musculoskeletal New Ventures Conference. He said, “I’m not trying to be a Debbie Downer. I’m just trying to give a realistic view of where we are today in the market. We’re facing challenges in the broader macroeconomy.”
Ragan shared a troubling comparison of economic metrics between 2021 and 2022. Real gross domestic product increased 5.7% in 2021, but Morgan Stanley expects growth of just 0.8% in 2022. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index for August increased 8.3% versus the prior year.
Likewise, interest rates in the U.S. climbed steadily since February 2022. Ragan said his firm expects the rate hike cycle to continue and exceed 4% by the end of 2023.
In 2021, the confidence of CEOs surveyed by Morgan Stanley stood at a score of 82, its highest level since 2000. However, by June 2022, that confidence score dipped to 42 and has likely further declined in step with shrinking GDP growth estimates for the year. However, executives surveyed by Morgan Stanley do not expect a protracted recession.
“Confounding all this data is we have a tight labor market, which is great. That’s good for all of us. There are questions about whether this just a technical recession. Is it going to be a hard recession? Most of the CEOs surveyed, I think it was 80%, expect just a quick dip recession,” said Ragan.
Orthopedic IPO Market Freezes After 2021 Boom
Three orthopedic companies – Treace Medical Concepts, Bioventus and Paragon 28 – went public in 2021 amid a highly favorable IPO landscape. In 2019, Nasdaq had 124 IPOs that raised $24 billion for the entire year. Through the first three quarters of 2021, it had 560 new listings raising more than $136 billion through traditional IPOs, special purpose acquisition companies and direct listings. Actual operating companies accounted for 250 new listings this year, activity that Nasdaq head of Western U.S. Listings Jeff Thomas called “off the charts.”
In the first half of 2021, Morgan Stanley took many clients through a dual-track process simultaneously preparing for an IPO and M&A deal. Nearly all those clients opted for an IPO because public investors’ willingness to pay for Medtech companies exceeded what large strategic companies would pay for an acquisition.
During that time, the market essentially valued a company’s IPO at two years forward or 24 months of annual revenue. Morgan Stanley expects an adjustment back down to 12 months forward whenever the IPO market reopens.
However, many of the Medtech companies that went public during the boom now have their stock prices underwater compared to the IPO prices. Additionally, investors have moved away from seeking growth at all costs to reasonable growth with a realistic chance at profitability.
Ragan said, “We no longer have the pure threat of, ‘Hey, if you don’t buy me at a multiple of seven or eight, I’ll price my IPO at that and trade up to 10 or 11.’ We’ve seen a lot of withdrawn IPOs and the market is basically frozen, or at least very challenging.”
Orthopedic M&A Market Evolves Away from Tuck-Ins
According to our estimates, recent orthopedic acquisitions peaked in 2020 with 42 transactions. Orthopedic M&A dropped significantly in 2021 with 25 total deals, and this year will likely struggle to muster even that many. The large strategics in orthopedics are still very acquisitive, but the criteria for a successful deal shifted in the wake of the pandemic.
In a fireside chat with MNVC attendees, Medtronic executives Skip Kiil and Kip Roberts said that company valuations are still too high. Strategics view pre-clinical companies as a risk and are biased toward assets with a clear commercial pathway. However, Medtronic is broadening how it engages with potential acquisition targets. Distribution, co-development deals and joint ventures allow strategics to reduce risk over time.
Carlton Weatherby, Vice President & General Manager of Spine & Biologics at Medtronic, said the company is seeking more substantial deals.
“While tuck-ins are attractive because there are revenue and cost synergies, today we’re doing a lot more of what we characterize as platform acquisitions, meaning it’s about the interaction and pull-through of other products. A lot of people know Medicrea as a patient-specific rod company. We viewed it as a data collection analytics platform that we can now leverage across our products,” he said.
Skip Kiil encouraged lateral thinking and said he’s looking for disruptive intellectual property that makes “one plus one equal four.” He expects the digital evolution of orthopedics to accelerate and increasingly come under the influence of technology from other sectors like gaming. Kiil revealed that Medtronic’s R&D is “disproportionately” skewed toward digital products.
Hospitals Tighten Purse Strings on Orthopedic Capital Equipment
Despite the pandemic, hospitals remained in a strong financial position throughout 2020 and 2021. Companies like Stryker, Medtronic and Globus Medical repeatedly set company records for robotics revenue during those years. However, the extended economic downturn changed hospitals’ willingness to make large capital purchases.
Morgan Stanley’s Michael Ragan said, “It used to take six months to get through the sales cycle. From your champion physician adopter, C-suite buy-in and VAC. Maybe that took six months. I’ve got clients that can’t even tell me how long it’s going to take now. It’s definitely a more challenging market.”
Both Globus and Styrker saw softer robotic sales in the first quarter of 2022 as longer cycles stagnated the sales pipeline. Additionally, Zimmer Biomet’s entry into the space with ROSA disrupted purchasing models by making rentals an increasingly common choice.
Stryker CEO Kevin Lobo said, “If your competitor offers a rental option, the customer says do you have a rental option. We’re not going to let our prior contracting approach stop us from competing. Let the technologies fight head-to-head and let the best technology win.”
Stakeholders throughout orthopedics are rapidly adapting to the changing environment. But just as the pandemic forged more agile companies and more capable leaders, the current market conditions will act as another crucible. When the orthopedic market finds calmer waters sometime in 2023, perhaps the most successful leaders will be, to paraphrase Skip Kiil, those who can think around corners.
You’ve reached your limit.
We’re glad you’re finding value in our content — and we’d love for you to keep going.
Subscribe now for unlimited access to orthopedic business intelligence.
ME
Mike Evers is a Senior Market Analyst and writer with over 15 years of experience in the medical industry, spanning cardiac rhythm management, ER coding and billing, and orthopedics. He joined ORTHOWORLD in 2018, where he provides market analysis and editorial coverage.
