John Kolz
Hello, and welcome to Strategic Alternatives, where we uncover new ways to raise capital drive growth and create value in an ever changing world with insights and outlooks from RBC Capital Markets. I'm John Kolz, global co-head of equity capital markets here at RBC
John Kolz
I'm here today with Jason Levitz, and John Hoffman, who co-head our healthcare equity capital markets team. And it's an exciting time, we just finished two days of our global healthcare conference. I think our numbers were so tabulating here, but by my count 120, companies, maybe 1300, plus investor interactions, 800 total in attendance, which is just really terrific. And I think it speaks to a little bit of the sentiment that we've been seeing, and you all are living on a day to day basis in terms of the activity levels, both in the IPO market and converts in the private financing markets, really any way that you slice it, and maybe John John, I’ll will start with you; I guess as you try to in your head, think about what the big takeaways from this conference were. What would you say is the key thing that that you've taken away both from the corporate side and companies that you've interacted with in the investor side in terms of sentiment?
John Hoffman
Yeah, well, maybe starting in the investor side, I think the stats are telling and of themselves and causes you asked the question, why is the interaction level so robust? And I think it all comes back to what continues to be a really complex market environment. Yes, S&P touching all-time highs, but when you peel back the onion, still a lot of concentration and where the returns have been generated. And so when you think about healthcare as a sector as a whole, and you track performance over the last couple of years, you see massive divergence between sub sectors between companies. And from an investor's perspective, that's just a great opportunity to think about redeploying capital into an area that has some really great defensive characteristics to it, but also allows you to earn that alpha, if you can be a stock picker against the broad opportunity set that exists. When you peel that back further. And you look at biotech, for instance, my favorite stat continues to be one where you look at the top 10% of companies that comprise the XBI, from a performance perspective, compare that to the NASDAQ, top 10% performers, and the differential between those two groups continues to expand. So again, it's just more evidence that the outperformance that you can earn if you can be a stock picker successfully in this broad backdrop within healthcare, broadly speaking, is something that I think investors clearly find really attractive.
John Kolz
It's interesting, we've been talking about that in many of the podcast series we've had in different sectors, the return of the stock picker, the frustration in some regard with being just index participants index huggers, and maybe in your sectors more than any others… being a stock picker, both from the very earliest stages and really having to dig deep and understand a company and be being rewarded for that is as important as it's ever been. Jason, what's your sense? Where do you where do you assess sentiment?
Jason Levitz
Would agree, I think, you know, I've found conversations about the macro, probably have been more prominent around just our broad discussions, but particularly in biotech than they have been in many years. So I think, in the interest rate environment, things that perhaps healthcare investors are less oriented to think about. The inflation data this week was front and center obviously and the trajectory of the broader market and how that impacts health care, I think has been a popular topic. I think look, on one hand, particularly around the life sciences sector, I think investors are trained to focus on what they're good at, which is evaluating idiosyncratic stock risk, as we've talked about, evaluating clinical trials and probability success. And I think that's where they'd like to focus their time. But I think, clearly in this environment, investors have to factor in the macro. I think the other interesting piece to poll was from the venture capital panel we hosted yesterday. But one of the kind of overarching comments was around long term value creation, and how do you focus on building value over a five and 10 year horizon? And if that's the case, do rates really matter? Because if you're building a company, that's going to create billions of dollars of value over an extended time period, and you're able to look with that horizon, and I think there's still an opportunity, irrespective of where rates are now or where they’ll be in six to 12 months.
John Kolz
Yeah, at our investor dinner obviously, Lori Calvasina was a guest speaker, our equity strategist at RBC. And you could see, you could see the CEOs and CFOs, and attendants leaning forward to listen to her words, maybe in a way that they hadn't before. They had got to be blissfully ignorant of what's been going on in the interest rate environment for a long time. But now it matters. They hear it directly from investors in terms of how that impacts their investment decisions, especially for those that have the longest runway to value creation, which is a key theme and in biotech. And John, pick up on the point that Jason was making and in particular in the private market some of the themes that you're seeing for private investors and how that crosses over to IPOs and into subsequent financings.
John Hoffman
Yeah, I think when you talk to investors on the private landscape, lots of excitement about the companies that have not yet come public, when you look at the statistics, there's a whole bolus of issuers that have really strong balance sheets, have the type of investor bases that can support IPOs. And have, I think, what is really become definitional for successful IPOs in that they have equity stories, where you can make the case that there's scarcity of market cap available in the public markets. So the incremental addition of a company to the broad biotech public landscape from the IPO product actually adds some element of either opportunity or diversification potential for investors that are participating as either crossover investors in those companies pre IPO, or potential IPO buyers. I'd say what's also captured a lot of airtime this week, though, has been in the performance of the IPO class that has come public this year, which has been mixed to date. So it's clearly something that investors are focused on. Corporates are equally focused on it and trying to interpret what that means for their potential path to the public markets. So if I had a rank order, the different conversations that we were having, and the frequency of the topics that were coming up, along with the macro, I'd put the IPO performance of this year's IPO class right up there with a handful of others.
John Kolz
And not withstanding that performance being maybe a little less than some would love, clearly healthcare broadly and life sciences, more specifically within that have dominated the equity capital markets calendar. I think, at last look, some 40% of all ECM dollars, the fees paid to the street have come in life sciences. And so this continues to be a major, major focus of the street as it should be. And Jason, maybe something for you, one of the things we talked about is that sometimes we lump healthcare in and just talk about biotech. But there's been quite a resurgence here at our conference and in our conversations of some of the other sub-sectors.
Jason Levitz
Yeah, great. Great point, John, I think there there's certainly an emerging story in healthcare X biotech, a couple of points. One is we've seen an outsized amount of activity in healthcare services broadly defined. And if you look at some of the recent IPO activity, we've seen several substantial how healthcare services IPOs, when we when we look at our shadow backlog, we actually see three or four very substantial assets that will likely come public in the next three to four months. And I think the performance of those transactions, I think will be an important driver for the broader healthcare IPO market backdrop, looking forward to the second half of the year, and in particular, and although we perhaps didn't discuss private equity much around this conference, I do think, you know, given the concentration of, of positions at big private equity shops that are watching cues, not only from the healthcare IPO market, but kind of the broader IPO market. I think we could see a significant pickup in IPO activity in other areas. I'd say the other the other two spots where John and I are seeing interest are in Dx and Tools and you know, there are certainly some very high quality companies that have strong backing in that segment that are potential IPO candidates, and then medtech as well, kind of classic medtech, we've seen a little bit of activity on the public side, but we know of several high quality commercial stage med tech companies that we think are likely IPO targets and candidates in the second half of this year and into early 25.
John Kolz
John, let me kick it over to you one of the we've talked about what have been key discussion points in meetings, what wasn't discussed that should have what hasn't come up as frequently that you're focused on?
John Hoffman
Yeah, well, maybe to dovetail with the commentary I had around the IPO market and the performance being one of the topics that got a lot of attention. What I felt lacking from the conversation from that point was the next order question, which is, well, what do you do in that scenario? Is there a path to the public markets that a private company can pursue? Even if performance has been challenged? Can you rethink execution strategy? Can you change how we do testing the waters? Can you think about club deals or anchor IPO indications from new investors? You know, it felt almost a little static in some respects that people weren't probing around how to navigate that dynamic. So that that stood out to me is one of the one of the topics that didn't get as much airtime, as I would have expected.
John Kolz
The three of us are probably our own echo chamber on this topic. But I know we all feel very passionate about not just following the same playbook that has been that has been executed upon for many, many years. But having the goal to look a little broader look a little deeper, try new things, especially when the market is digesting, whether it's macro, whether it's micro digesting things they haven't necessarily been used to. And that gets to some of this conversation we have about the use of PIPes or not, the use of the wall crossing technology, testing the waters, convertibles, other financing tools. So all of those, we, I think continue to want to want to have front and center in the conversation.
Jason Levitz
And maybe just to amplify the point, John, about the convertible product. I do think and also, to address your question about what was missing from conversations. I do think there's perhaps an untapped opportunity. And obviously, it's only a subset of the life sciences market that are likely candidates. But more broadly across the healthcare universe, I think, given the rate environment and the ability to monetize volatility and buydown cost the capital preserve upside around your equity. I think that's a product from our perspective that want to say it's underused. But we think that there's real opportunity, particularly around refinancings, there's only been six or seven, therapeutics focused convertible debt offerings this year, three or four of them were centered around refinancing existing securities. But we do think there's an opportunity for companies that fit the right profile, ie commercial stage billion or two plus market cap that should consider looking at the Convert market as a viable alternative to common equity in this environment.
John Kolz
One of the things that maybe I'll ask you both to comment on it might be the risk of practicing without a license talk about M&A. It has been a key driver, not only an equity story of many of the names that we talked to, but even precursor to M&A, we were just out of a meeting with a client who has signed a major strategic deal. We that is a topic that is often the precursor to M&A. So talk a little bit about how that finds its way into the conversations and advice you have with your clients.
Jason Levitz
Yeah, maybe just to start making two quick points about the M&A market one related to how corporates operate and the other around the investor side of the equation. And I do think from a from a pharma perspective, one of the things we heard loud and clear from our colleagues was that it's not just big pharma. There are a lot of midsize pharma there are European pharma, that are now looking at assets and the billion to $5 billion range. And that obviously spills over into how investors think about generating returns. And because M&A and life sciences tends to be fairly episodic, you know, we enter these periods where we see a spate of transactions. And then we may see a couple of months where there's not activity. But I think overall, the sense is that the trend is up into the right around M&A. I think the other point I'd add is, from the investor perspective, in addition to looking for potential candidates, there's also been an element of recycling capital. So most of these transactions are cash. So investors are hopefully, especially in this mid cap arena, recycling that cash into new opportunities. We don't always see that. So for the large cap, the CG ends of the world, they tend to be held, at least in part by generalist investors. Probably not all of that capital is recycled in the sector. But I think overall, this is this notion of recycling capital has been an important theme in the first half.
John Hoffman
I think, the other the other area that M&A evidences itself, when Jason and I are having the discussion around the equity product and IPOs or follow-ons, it's this concept that within your equity story narrative, having a view on what the M&A landscape looks like, for your particular company, is highly translatable and important to have that in your positioning to investors, because how they're thinking about opportunities and the incremental dollar of capital that they deploy into a new investment opportunity. Much of the thesis, it hangs around this idea that a company is or isn't an M&A takeout candidate and what that ultimately means for the return profile of the business over a longer duration hold period. So we spent quite a bit of time helping companies think through what that practically means, whether it's having a perspective on the competitive dynamics where they may ultimately fit within a different strategics portfolio, or, frankly, how they could incorporate a dual track into their process from an IPO perspective. So they're fully exploring the range of alternatives, if nothing else to have a rich information set to work from as they position themselves in the public markets.
John Kolz
Okay, I'm gonna switch gears here as we as we wrap up, we're sitting here in mid-May. Oftentimes, when we do our pods here, we make bold predictions, most of the time they are wrong. So I'm gonna ask you both for predictions we obviously have an election year, we've got a resurgent market backdrop, I think the broad equity financing markets are up over 100% this year. And as we said, healthcare making up 40% of that. So as we look toward the rest of 2024 to 25, give us a prediction as to as to what you see happening.
John Hoffman
Yeah, always love making predictions so that people can go back and check out how wrong they were. So I'm gonna say I think I'll borrow one that Jason made on a previous podcast that we did, and maybe tweak it a little bit with the benefit of some information now that time has passed. But I'll say the post-election IPO window, will be more active than the January IPO window was in this year.
John Kolz
Love it. Hope you're right.
Jason Levitz
Yeah, I'm actually going to make an IPO prediction as well, which I made, I think we did it in December and our year end podcast, I predicted we'd have 40 healthcare IPOs in 2024. We are certainly not tracking there yet. I think when we look across healthcare, it's probably in the low double digits 12 or 13. So we're certainly not at that run rate. But I'm encouraged, you know, the second half of the year that things will pick up and we may fall a little bit short, but I'll stick with my predict.
John Kolz
Great. Well, Jason, John, thanks so much for doing this this afternoon. We know it's been a terrific couple of days at our conference, and we certainly appreciate all of your comments and your predictions. Thanks, John. Thanks, Jason.
John Kolz
You've been listening to Strategic Alternatives the RBC podcast, this episode was recorded on May 14, 2024. Listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you listen to your podcast. If you enjoyed the podcast, please leave us a review and share the podcast with others. Thank you.