Joe 00:06
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we explore new ways to raise capital, drive growth and create value in an ever changing world. I'm your host, Joe Coletti. In this episode, we're bringing you insights from our recent global healthcare conference in New York, where we convened three of our capital markets experts to discuss the evolving landscape of healthcare M&A and equity financing.
Joe 00:33
In this episode, David Levin, our interim Global Head of Healthcare Investment Banking and Co-head of U.S. M&A, shares his perspectives on the latest trends in Life Sciences M&A. Ahmed Attia, Managing Director of Healthcare M&A, will offer his insights into the drivers of MedTech and healthcare services M&A activity.
Joe 00:54
And finally, Jason Levitz, our Head of Healthcare Equity Capital Markets, will discuss the current state of healthcare equity financing, including IPOs and investor sentiment.
Joe 01:04
Together, they'll delve into how capital is flowing, what's top of mind for investors and sponsors, and where the sector is headed in the months ahead. Now, let's dive into the conversation.
Jason 01:15
Thought I'd start by spending a little time talking about the broader capital markets backdrop, and the conference is at an opportune time. There's obviously a ton going on with the macro backdrop, when we look at healthcare, a ton of focus on policy and regulatory, it's created some challenges, certainly from an investor standpoint, around how they think about investing in the sector. Healthcare is kind of roughly 10% of the overall market, and there's been no shortage of volatility in the big-cap space, United Health, etc. And as we look at the conference and reflect on how our corporate clients are thinking about the markets and financing, I think a couple key issues. Certainly, the macro backdrop has an impact on investor receptivity, access to capital, cost of capital. And when we focus in on the biotech sector, in particular, where obviously a lot of the investor focus around small- and mid-cap is. And a lot of our conference attendees are biotech companies, which obviously are often focused on financing, they're certainly faced with a challenging backdrop, given again, some of the macro headwinds, broader market performance challenges in the sector, performance has been weak. Financing activity has been relatively light. What we're finding in the first quarter of this year and really through the conference, is that financing activity is down considerably across the board. Obviously, the April volatility had an impact, but the start of the year was relatively challenging as well. IPOs in the biotech space, which tend to be a good bellwether for investor risk appetite, have performed very poorly. Unfortunately, only three of the 22 IPOs priced since the beginning of 24 are trading above issue. So obviously the asset class has remained challenging for investors, and at the moment, we don't see a ton of pipeline on the IPO side. But when we look more broadly, the good news is that companies in the space that have good clinical data have been able to finance, and as we look forward, certainly we bounce since the early, mid-April lows, and if you look at in the past seven or eight years, the four times when the biotech index, the XPI, hit a level of 65 and you look at the three months following, you tended to see a nice bounce from a performance perspective, one and two, you saw a nice bounce in terms of issuance activity. When we look outside of biotech, new issue activity, relatively quiet. MedTech has been a modest pocket of strength. We've seen some successful IPOs in that sector, and it feels like there's a building backlog. And then, more generally, there are some very large transactions in the market, including Hinch Health, which is expected to price tonight, even by the time of this podcast publication, I suspect, will be a public company. There are a number of other big private equity owned companies in the shadow backlog. So, we are cautiously optimistic about the new issue outlook for the second half. But with that said, as I mentioned, given some of the policy and regulatory headwinds we're facing, it'll likely be a choppy couple of months, and we're expecting it, hoping for good visibility heading into the back half of the year.
David 04:44
Thanks, Jason. So I'll spend a few minutes on Life Sciences M&A, and then turn over to Ahmed to talk more about what he's seeing in services and devices M&A, as well. As you said, a lot of choppiness right now, uncertainty with what's happening on the regulatory environment. Despite all of that, M&A has been holding in. As you look at volumes and number of transactions, you know, things are actually a little bit above where they were last year – that was obviously helped by the intercellular transaction right, at the beginning of the year, which is a very large transaction. So that's benefiting volumes. Now, last year was not a very active M&A year overall for Life Sciences. So we're working off of a relatively low base. Last year, while there were a number of transactions, they tended to be closer to the billion dollar level, between one and five. But I'd say generally closer to the one than the five, and not as many big transactions. This year, we've seen activity continue, but not quite to that level. I think in the first half of last year, there were close to 15 transactions that were sort of notable in that billion dollar plus range. And so far this year, and we still got a month or so left before the end of the first half, we got less than half that number of those sort of more notable transactions, but, but nonetheless, you have been seeing deals get done. And premiums in the Biotech space have continued to hold in in, you know, high double digits, low triple digits, type levels on average, we did, you know, see one deal that was a significantly lower premium than that. I think people were questioning whether that was possibly foreshadowing of some additional activity at low premium levels, and then it seemed to bounce back on the next deal. So, so far, we haven't seen a trend for premiums getting lower. As we think about the fundamental drivers for activity overall, long-term needs for growth, which is the consolidators looking to buy the innovative companies that are doing the research and bringing the new programs to market. Those fundamental trends haven't changed, so that still needs to happen. And as we have our conversations with clients that are consolidators, they all seem to be very much of a mindset of business as usual, in a way, of continuing to look at and find opportunities to acquire companies and grow. The fundamental challenge though, that you're facing, and it's true for M&A across the board right now, when you have volatility in the markets and uncertainty like we have had, it's just hard for buyers and sellers to align on value. And so while buyers may still have an interest, they're taking a bit more of a cautious picture, given where everything is right now, and they're seeing the lower valuations and looking at values that sellers haven't quite gotten themselves around to saying, Yes, this is the right time to transact at those values versus, you know, waiting to see, Hey, maybe things will bounce back and we'll see a more robust second half, and the opportunity for better values. So I think as we look through the rest of the year, it'll be an interesting question as to where things head. I think if things start to season where they have been, some of the volatility starts to come out of it, through October board meetings from a seller perspective, we could see some pick-up in M&A activity, I think, in the second half. And then obviously, a fundamental piece, as Jason was talking about, is, where do we go from an equity financing environment? Some companies are going to be in very good shape and have plenty of cash to work their way through whatever cycle is happening, that may be challenging from a financing standpoint, but others may find themselves where the standalone story is a bit more challenged, and then may have to think more seriously about M&A. I'd say overall, some other interesting trends we tend to watch from an M&A perspective are, how competitive are the deals? What we have seen is that for a decent amount of time, you tend to have one buyer who's able to step up and get to the values that the seller is looking for, and the values and premiums aren't being driven as much by competitive processes. I'd say, about two years ago, that started to shift, where we were seeing more competition across those deals. But as we look at what's actually happened this year, it seems like it's shifted back. When you look at the last several billion dollar plus deals. While there's exceptions where you see some competitive processes, you tend to see a situation where one buyer really figures out this fits with what we're looking to do, what we can do commercially, how we can build things up, and if they see the value, then they're willing to pay what needs to get done in order to get the premium for the target. Last thing I'd mention is we also continue to track over time, just how the market reacts to acquirers’ deals and deal announcements, and that, at least, has continued to be a benign environment. We have not seen negative market reactions in general, on average, to acquirers announcing M&A, there's always, can be exceptions if the street really has a challenge with what the story is around a particular deal. But on average, across the deals, we're continuing to see pretty muted reactions as buyers announce M&A.
Ahmed Attia 09:51
Thanks, David. So, as mentioned, M&A activity, to some degree, is driven by expectations in the overall macro sentiment. So when you look at the stats in 2023 healthcare, M&A volume was at about 350 billion, and then it dipped quite a bit in 2024 to around 250, and when you look at year to date volume, through the end of April, at least, we're a little bit over 110 billion. So from a pure M&A volume and dollar perspective, we're actually tracking okay. However, back in January, the expectation and enthusiasm around M&A momentum was actually quite high. Buyer sellers looked at the political regime, the perspective that there would be a pro-business environment, there would be less scrutiny from an antitrust perspective, that would all spur M&A, and financing trends were moving in the right direction. But over the last couple months, especially with some of the tariff noises, we think about services businesses, MedTech businesses, you found a little bit of disruption in the market in terms of that enthusiasm that people expected abated a little bit because parties found it difficult to kind of guardrail and put parameters around the impact on their respective businesses as a function of the tariffs in particular, and assessing the noise has been challenging. Having said that, now that some resolutions have been met with different countries, given some of the key inputs and products that go into a lot of the businesses that we cover, people are beginning to understand and qualify and quantify the tariff impact, and we're seeing a little bit of pickup in M&A as a result. And what you essentially see from large corporate clients in particular is two perspectives. One perspective, in the minority, people say, Listen, we need more time to understand, digest how the macro environment is going to affect our core business, and therefore we're going to de-prioritize M&A in the short term. But frankly, for about two thirds of our clients look at the long term opportunities ahead of them and say, Listen, what do we need to do to drive growth, which the market continues to reward from an equity perspective, but drive growth that's really married to profitability, and they're in it for the long term, i.e., what strategic acquisitions can they do in the short term that have really strong industrial logic, that can drive their businesses overall. So when we think about the pillars that drive M&A, those pillars remain the same as they were over the last few years, in terms of one, accelerating top line growth. Two, building scale with core businesses that they're in. Three, filling portfolio gaps so they can be differentiated relative to their competitive set. A lot of focus – four – on capitalizing on IP innovation across the whole healthcare ecosystem, and a lot of focus of late as well on geographic expansion, albeit that one is one pillar that the tariffs are impacting a little bit. So by and large, activity is at a healthy level. We would like to see more activity, but there's very specific pockets that are very active. So when you think about, within healthcare, IT and tech-enabled services, the revenue cycle management opportunities have been plenty. From an RBC perspective, we advised TowerBrook and CDNR are on the take private of R1 RCM. That was an $8.9 billion deal. We worked with Ontario teachers on making a material investment in Omega. When we think about healthcare services, a lot of activity in specialty pharmacy and home infusion, home health. From an RBC perspective, we worked with Kroger on selling their specialty pharmacy division to Elevance. So some pockets are definitely a little bit slow, given the macro, but there's really nice pockets where we're going to see more activity with really good valuations overall.
David 13:33
I know sponsors are obviously an important part of M&A landscape. How are you seeing sponsors think about things, both from acquisition and from a monetization perspective these days?
Ahmed Attia 13:42
Sponsors drive, David, a ton of activity in the healthcare ecosystem. And it's been interesting. The number of assets that the sponsors have been monetizing was limited, just given some of the macro dynamics through the course of 2024 and, to some degree, as we've heard from a lot of our sponsor clients, LPs were giving them a little bit of a pass on monetizing some of the assets that they've had in their portfolio for four or five years. But there's a lot of pressure from the LPs to do two things, really, to monetize the assets that have been in their respective portfolio for a while, but also to take a lot of the large capital investments that they've received and deploy it. The challenge has been, fundamentally, you've got a lot of sellers of really nicely capitalized, nicely run businesses that are differentiated, looking at the macro environment and saying, Do I really want to sell with the environment as it is today, or do I want to wait a quarter or two before contemplating transactions. And what we're seeing is that the majority of high quality businesses are waiting for the market to improve a little bit. I only mean the next quarter or two. By then, the expectation is the financing environment will continue to get better. We've seen positive signs of light, both on the equity capital market side, on the leverage finance side as well. So while we haven't seen a ton of activity over the last three-four months, what we can say is that there's a lot of sponsors very actively preparing to monetize assets in the back half of 2025 into early 26, and then on the buy side to deploy capital, because again, you've got really a couple interesting dynamics. Some of the large funds have raised $20 billion plus funds over the last couple years. And I would say in healthcare in particular, a lot of our clients that I would characterize as middle market sponsor-focused funds on healthcare services, MedTech, even spec Pharma. They've raised bigger and bigger funds over the years. So the $1 or $2 billion funds have raised $4 or $5, they want to buy assets that are of bigger scale. So you see are really, David, to your point that you were alluding to, in terms of middle market activity and deals, really between 250 million and 2 billion, that's going to be appropriately sized businesses that both the large cap and mid cap sponsors ultimately pursue because of the lack of the mega deals. So while it's been a lot slower on the sponsor equation, year to date, we're expecting a lot more activity as sponsors, in particular, think about platform assets as they think about M&A strategy, how to build really nice scale businesses that are differentiated.
Jason 16:14
The other vector for sponsors, obviously, is the public market. And the dynamics, I'd say, are fairly similar, as Ahmed outlined around access and valuation and where buyers’ and sellers’ views meet on that front. We saw some progress and a handful of private equity backed IPOs, largely in healthcare services in ‘24 and I would say there is a healthy backlog of potential transactions as early as the second half of ‘25 and certainly into ‘26 for many of the same reasons Ahmed cited. There are a lot of very high quality businesses that could certainly find a home in the public markets and generate real investor interest. I think the question and obvious push and pull around outright sale versus an IPO is just valuation realized, number one, at the IPO, but then broadly, the monetization and disposition of the residual position in the public market afterwards, which can take up to two to three years. Certainly, banks like RBC are happy to help facilitate those sell downs, but they do take time. The flip side is hopefully those incremental sales happen as multiples expand and stock prices increase. And so there is a nice blueprint, certainly in the market, and we've seen a number of sponsors execute on that strategy. And certainly, I'd say the velocity of dialog around IPO as a potential exit strategy for certain scale portfolio companies that are profitable and can get to a reasonable pro-forming at leverage level that the public market is comfortable with, which is typically, call it in the three to four times range. I think you're going to see a substantial pickup, not just in healthcare, frankly, but really across sponsored assets.
David 18:09
And I'd say on the Life Sciences side, we've seen a real pickup in the level of dialog we've had with sponsors around commercial biopharma, late stage biopharma and generics. We did a nice transaction selling the largest oral liquid player, PAI Pharma, this past year, that was a transaction between sponsors. And, you know, we're seeing increased interest of people look back to that space.
Ahmed Attia 18:35
To add to David's point there, in terms of activity pickup, as we think about trends, what's interesting is the way in which M&A got done historically. One, is we're going to start seeing an increase in unsolicited activity, whether that's sponsors approaching other sponsors to combine assets or to acquire other portfolio assets, or really doing bespoke deals. And David alluded to this earlier too, is we're seeing a lot of behavior which I think is actually constructive in terms of M&A, which is buyers self-selecting in or out in processes early on. It enables buyers to obviously focus on the assets that they really want, and lean in and approach all the requisite stakeholders appropriately. But also from a sell side perspective, it's actually very constructive, because very early on in a lifecycle of an M&A deal, from a sell side perspective, you realize who are the buyers that you need to focus on and help them navigate the opportunity and underwrite the investment thesis. The other dynamic which is interesting is, really, it has two flavors. One is, we're seeing an increase in partnership between our strategic corporate clients as well as sponsors, where everyone's trying to find an angle to create opportunities that are very compelling, that can create value over time. And also we're seeing on the MedTech and services side, really good convergence with technology. Again, AI is driving a lot of the talk in in the macro environment broadly, but we're seeing a lot of dialog with our healthcare IT colleagues, as well as our clients, across every ecosystem within healthcare, and as a function of that, expect to see more M&A around technology-enabling tools and capabilities that can help drive traditional services and traditional MedTech businesses.
Jason 20:28
Might be worth adding a few points around tactics and how we're advising our clients from a financing perspective. And these are topics that have come up quite a bit during our meetings at the conference. But I would say more broadly, as we talk with management teams and boards about the environment, how to be nimble, how we, RBC, as an advisor, can help clients find best execution in a volatile market. I'd make a couple of high level points. I'd say the first is, de-risking transactions is incredibly important in this environment, and there are a handful of ways to do that. I'd say one is, and we've seen about 20% of the private placements this year from Biotech companies have included a contemporaneous data release. So obviously, catalyst-driven financings in Biotech sector have been really the hallmark of tactics in the market for the last several years. And if you can create with key shareholders, existing in perspective, some kind of asymmetric information flow, where you can de-risk the financing through a wall cross process, where those investors are able to effectively underwrite the data and you can deliver to the market upon announcement of completed financing, alongside the data, you're able to remove a lot of the overhang that besets a lot of companies in the sector. And it's part of the reason why I think, even though there's been a fairly consistent trend of positive data releases, challenging post announcement performance, because the expectation of financing is easier. So coupling the two together has been a successful strategy. Number two, we've seen companies also look to find creative ways and alternative financing sources, either directly in the context of an equity financing, and one example of that is a deal that we were involved in recently for Senseonics in the continuous glucose monitoring space, and they were able to raise 50 million of public equity, but pair that with a concurrent private placement with Abbott, which is obviously important validator and partners. So another way to de-risk a transaction is obviously to bring in a third party, add to the capital, raise and aggregate, and also bring in important partner. I would say, additionally, what's critically important for companies, really, across the ecosystem, is maintaining investor dialog and ensuring that when you're ready to finance, investors are up to speed and in a position more quickly in what we all know is an extremely volatile market. And I think the last point is, we've seen a number of our clients look to alternative sources of capital. While obviously equity capital tends to be the cleanest, it's not necessarily the most attractive cost of capital, particularly for companies that are trading at certainly less than intrinsic value and sometimes have negative enterprise values in the Biotech space. But we've seen companies, if able, look to private credit providers, royalty providers, other ways to find access to capital and monetize existing assets in order to diversify funding sources and create financing flexibility and, most importantly, runway. And if you look at the best performing companies in the sector over the course of the first five months of the year, the vast majority of them have a comfortable cash cushion, which is typically two years or two years plus. So, the companies that face the biggest challenges are those that are lacking a near-term catalyst and have less than two years of cash. And I think those companies have to get creative. And certainly there are a lot of companies that unfortunately are hitting the wall to some degree, and are in positions where they are evaluating strategic alternatives, given they have cash, but don't really have the ability to drive a pipeline forward or raise capital. I think that will continue, and it will probably be healthy for the market, as we see those situations emerge, because that cash can hopefully be recycled either back to shareholders or in the context of reverse mergers or other transactions into companies that have pipelines that are perhaps more attractive to investors.
Ahmed Attia 25:06
And touching on the million dollar question we often get around valuation, what are the trends in valuation? What are the trends in multiples as well? And in our perspective, it's really a tale of two cities, in the sense that premium, high quality businesses continue to command premium values when they show differentiation, from a business perspective, show top line growth that's very strong, show profitability that's very strong. And then we do have on the other side of the equation that whether there are some businesses that have some challenges or execution risks or too much competition in the space, we've seen those sell at a little bit of a discount relative to prior data and mean medians where the sector has traded. So on average, the multiples when you look in the aggregate blend down. But I think what we see from a lot of the situations that we work on, really good businesses are highly sought after and continue to demand strong valuations, which again, will be a theme in terms of increased value over time, and those businesses will continue to command we think appropriate values for the motivated buyers.
David 26:14
Agree with that, Ahmed, and just one final point to close us out. The reality of M&A in the Biotech space is fundamentally driven by the science and the data. And if you’ve got a compelling data result, those companies are still going to command premium values, and going to be the ones that are most attractive to the consolidators because they see the differentiated commercial opportunity around it.
Joe 26:43
Thanks again to David, Ahmed, and Jason for joining us from RBC’s global healthcare conference. RBC is proud to be supporting our clients across our global platform, as they navigate what’s next. And thanks to all of you for listening to Strategic Alternatives, the RBC Capital Market’s podcast. This episode was recorded on May 21, 2025. Listen and subscribe to Strategic Alternatives on Apple Podcasts, Spotify, or wherever you listen to your podcast. If you enjoyed the podcast, please leave a review and share the podcast with others.