Published on the 15/08/2024 | Written by Heather Wright

Are Kiwi companies dying with scalable tech in hand?…

New Zealand’s healthtech sector is continuing to soar with solid revenue growth in the past year – and plenty of opportunity ahead – but the Technology Investment Network is sounding alarm bells over the continuing issue of New Zealand’s poor early-stage investment ecosystem.

The third-annual New Zealand Healthtech Report, from the Technology Investment Network (TIN) shows the sector has more than doubled in the past decade, and logged revenue growth of 2.4 percent – or $61 million – in 2023 to hit $2.62 billion.

“If young companies are dying with genuine scalable tech in their hands, that has an impact on New Zealand’s innovation profile.”

The sector was the largest tech vertical until last year when fintech scooped the top position.

Alex Dickson, TIN head of research, told iStart that while revenue growth of 2.4 percent may not sound like much, and is below the five-year CAGR of 7.8 percent, the fact it is coming from a much higher benchmark, combined with the tough market, including increasing regulation globally, and financial constraints with stretched health budgets and global investment capital falling heavily, mean it is ‘a good result’.

“After a period of rapid growth, New Zealand healthtech firms are adjusting to a more stable demand environment,” he says.

The pandemic-fuelled tide of healthtech enthusiasm and investment has now subsided, leaving a tougher landscape of catch-up regulation, integration challenges and scarcer investment capital.

Healthcare regulations are becoming stricter and more onerous, providing new challenges for Kiwi healthtech companies, of which there are at least 233 early and later-stage companies. In the EU pharmaceutical legislation is under reform, while in North America the US Food and Drug Administration modernisation is bringing changes around software as a medical device. At the same time, hospitals and care providers globally are grappling with technology integration and concerns such as data privacy and security.

Despite the challenges, however, Dickson says he sees plenty of growth potential for the sector.

“Health systems are experiencing huge financial and operational pressures, with staff shortfalls forecast to exceed 10 million by 2030. Healthcare also remains one of the least digitised of the major global industries.”

Eighty-nine percent of New Zealand’s healthtech revenue is coming from offshore, with offshore growth marginally ahead of overall growth, up 2.9 percent. The US is a ‘real prize’ of a market for Kiwi companies, with its profit driven system, per-capita health spending that towers over everyone else and healthcare delivery that is underperforming.

“This adds up to a tech hungry market,” Dickson notes.

Orion Health ($106 million, up 37 percent), Aroa ($62m up 60 percent), Volpara health ($34m up 36 percent) and Pacific Edge ($19m up 76 percent) all saw growth from the US.

Australia was another success story, with 15 percent growth to $205 million, particularly for digital health companies, including partnerships by the likes of Celo, Konnect Net, Medi-Map and Vensa.

Dickson dubs Asia an ‘interesting’ market.

“It was down [nine percent to $429 million] this year, but the region has a five-year annualised growth of 12 percent,” he says. “This growth is mainly happening in the ASEAN countries like Vietnam, Thailand, Malaysia and Singapore.

“China accounts for less than $20 million of total revenue and is a much tougher nut to crack.”

Profitability was down 16 percent to $506 million as rising costs bit, however, Dickson notes that’s still 19.3 percent of total revenue as profit.

“That’s strong for a tech company, any company.

“The barriers to entry for healthtech are high, and the rewards are still big for those who can conquer them,” he says.

One thing Dickson says did surprise him in the report findings was that total employment in the sector fell for the first time in a decade.

Kiwi healthtech companies shed around 550 roles, mainly offshore manufacturing staff.

“Interestingly, the average salary actually reached record levels in 2023,” he says. “This, I suspect is because of the skill-level of worker churn with many firms continuing to hire high-skilled staff during the survey period.”

While total employment and overall profit may have taken a hit in 2023, Dickson notes that research and development spending was steady at 12 percent of total revenue.

“This hints at a play for longer-term, more sustainable growth.”

An ongoing pain point, however, is the level of investment reaching early-stage companies, which Dickson says is ‘peanuts’ compared to the likes of Ireland, Denmark and the Netherlands.

Total investment capital raise in 2023 was just $66.8 million across 30 deals. While that’s up from the $60.7 million across 25 deals a year earlier, it’s well down on 2021’s $92.0 million across 27 deals.

“Commercialisation of health products is incredibly capital- and time-intensive, even for the big guys, and $67 million for an ecosystem of 200-odd companies is not sustainable.”

This year did see a shift in focus to earlier stage, lower valuations and smaller deal sizes. Of the 30 deals made, 23 were with seed and growth-stage startups, totalling $35 million.

Dickson told iStart about 70 percent of total capital came from New Zealand-led deals ‘which is good to see, but sadly this was not matched by larger, international investors’.

The investment challenges are not an issue unique to healthtech. Instead, it’s one often lamented across New Zealand’s entire early-stage ecosystem.

He wants to see more corporate buy-in and the unlocking of some of New Zealand’s biggest money pools for technology including ACC, iwi and Kiwisaver investments and NZ Super.

“Ultimately, if young companies are dying with genuine scalable tech in their hands, then that has an impact on New Zealand’s innovation profile.

“New Zealand’s healthtech sector has significant economic and reputational benefits for New Zealand, not to mention the wellbeing of its people. It’s important the sector gets the oxygen it needs to keep growing and to recreate the success of our leading firms.”