Pathfinders Podcast | Healthcare

Few IPOs but plenty of follow-on for biotech in 2023

Biotech continues to bolster the healthcare market, but there are tailwinds for services and HCIT too, as well as a mixed outlook for medtech.

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By Jason Levitz and John Hoffman
Hosted by Joseph Coletti

Published January 23, 2024 | 3 min read
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Key Points

  • 2023 was a year of stark contrasts for healthcare markets.
  • Biotech continues to underpin the sector, but even here, the activity was more in follow-on events than IPOs.
  • Healthcare services and HCIT both show promise for renewed activity in 2024.
  • Medtech is likely to see further deconsolidation off the back of the FTC focus on antitrust.

For John Hoffman and Jason Levitz, co-heads of RBC Capital Markets’ Healthcare Equity Markets Group, 2023 was a year of starkly contrasting trends in healthcare. While the S&P was up 21%, the S&P healthcare index was down 2% on the year. Equity volumes were up 55% year on year, but IPO issuance volumes still sit 70-80% below pre-COVID levels.

Even where there was IPO activity, the aftermarket outcomes for those companies has been somewhat measured, even anaemic in some cases. While the prevailing interest rate hikes and general economic environment are clearly underlying the quelled activity, our analysts still see the sector as a little too quiet.

“I'm quite surprised that we haven't seen the market snap back in earnest more quickly. We're almost nine quarters in now,” said Levitz.

“If you look back to the early 90s, when the rate environment was similar or even more punitive than it is today, you still saw substantially greater IPO activity than you're seeing now.”


Biotech still bolstering the sector

On the other hand, follow-on activity in the biotech sector has been almost IPO-like in its levels. According to RBC Capital Market statistics, on an average offer to current basis, transactions are up around 15%, which is an excellent return profile, particularly given that companies that have had access in a sizeable way to the follow-on market tend to be those that have been outperforming year-to-date and have further expanded their outperformance through the sizable financings that they've been able to achieve. And although IPO activity was limited, 38% of primary issuance came from biotech.

“Historically, we like to say that follow-on market performance is probably the best leading indicator for return to IPO activity,” said Levitz. “The reason it hasn’t held true so far is in part because there are now so many public biotech companies that have market caps frankly at or even below where a traditional IPO would come, I think investors have seen the follow-on asset class as somewhat of a replacement for potential IPO activity because the return opportunities I would argue were as good or frankly even better in some of these cases.”

Biotech is likely to kickstart the new year, albeit at a sedate pace. Biotechs that have a fairly predictable playbook in the public markets will grow into their clinical catalyst calendars and have some step-function changes in their potential valuations.

“I think the other important ingredient that will precede a ramp-up in IPO activity is a high conviction belief or a consensus view that the biotech sector has reached a durable bottom,” Hoffman predicts.

“Investors have seen the follow-on asset class as somewhat of a replacement for potential IPO activity because the return opportunities were as good or frankly even better.”

Jason Levitz, Managing Director, Head of Healthcare Equity Capital Markets


Tailwinds for healthcare services and HCIT

In other subsectors, however, it may take more time for certain companies to grow into some of the historical valuations that were achieved in the private markets prior to 2023. Some of the challenge lies in the fact that there’s less discrete capital attached to these opportunities, so it’s harder for these companies to navigate the public and private markets to get to the right investors and get the right deals done.

Healthcare services is one area where deals could start to come to market. Most of these firms are owned by entrepreneurs or held by private equity, but there have been a couple of deals already that the markets are noting. These could help lead to further IPO activity or other monetisation events.

HCIT is another subsector that’s ripening for the markets, according to Hoffman.

“The HCIT universe represents a very viable and potentially high source of supply for IPO products. That said, it does feel like many of those will come towards the back half of the year, or maybe even into early 2025,” he said.

“I think a number of those businesses are thinking about ensuring that they can forecast the business appropriately, having just lived through the economic cycle that we're all going through whether we were in a recession or close to a recession, just having certainty on what the forecast stability of a business is clearly an important ingredient.”

“The HCIT universe represents a very viable and potentially high source of supply for IPO products. That said, it does feel like many of those will come towards the back half of the year, or maybe even into early 2025.”

John Hoffman, Co-Head of Equity Capital Markets


A mixed bag for medtech

In medtech, Hoffman believes the market might see further deconsolidation of certain businesses as the Federal Trade Commission ups its focus on antitrust issues, such as the Illumina/Grail case. Illumina, a leading developer of gene-sequencing machines, announced in December that it plans to sell Grail, a cancer test developer that it purchased for $7.1 billion in 2021. Illumina had just lost its appeals case against an FTC ruling that Illumina should unwind its deal with Grail on antitrust grounds.

He also highlights the return of active management across subsectors, pointing out that approximately 60% of active managers had outperformed in 2023.

“Anecdotally, we hear every day of active fund managers that have really been over levered to some of the outsize either takeouts or clinical catalysts that have had very substantial return profiles in the public markets, which is clearly one of those dynamics that is a necessary ingredient to laying the groundwork for that more robust receptivity in 2024.”

Levitz adds; “I think there are going to be a lot of ways to win and a lot of opportunities to invest. There are absolutely going to be tailwinds, and potentially some headwinds for some sectors, but I do think navigating the environment will be a marathon, not a sprint, because I think we all believe it's going to play out over a long period of time. So you have to look through some of the near-term volatility and try to think strategically.”

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