DECEMBER RECAP & BEYOND

One of the worst Decembers in history.
The sell-off in the equity markets continued in December, coupled with meaningfully greater volatility, resulting in exceptionally high losses in December. The S&P experienced its largest decline since the Great Depression in 1931 and its first negative year in ten years. In another history-making comparison: over the last 100 years, the DJIA has averaged a gain of 1.6% in December and has ended the month with gains 74% of the time. This past December, the DJIA was down 9.6% the month. Meanwhile, the Boxing Day rally was among the strongest we have experienced in ten years. December 26^th saw one-day gains of 5.3% and 5.0% for the S&P and DJIA, respectively.

For healthcare specifically, we look forward to the J.P. Morgan Healthcare conference Jan. 7-10 in San Francisco during which we will have a preview of earnings announcement and early-year M&A activity, setting the tone for the first part of the year.

MARKET COMMENTARY

Broad healthcare sell-off…implications for the new year?
The healthcare sector was down 8.7% for the month – slightly better than the 9.2% decline in the S&P with biotech and med tech both down 7.6% on the month. Most strategists expect the increased equity volatility in late 2018 to continue into 2019 driven by expectation for rising interest rates, international tariffs, and trade disruptions. Within healthcare, expectations are for continued outperformance but driven increasingly by company fundamentals as relative valuations remain robust.

What does the government shutdown mean for IPOs?
The U.S. government shutdown has stalled the early IPO “wave,” but this could be quickly reversed if the government reopens in early January. The life sciences IPO pipeline continues to build, with the recent volatility seemingly accelerating the pace at which companies are opting to ready themselves for an IPO should the market be receptive in 2019.

IPO Pricings.
As expected, December was a quiet month for IPOs. Moderna, highlighted in our November newsletter, ended up pricing at the mid-point of its filing range, raising $604 million for a market cap of over $8 billion (making it the largest biotech IPO in history). However, aftermarket performance was poor with the stock closing at $18.60 on the first day of trading and falling to $15.27 by the end of December. There was one other biotech IPO priced for Synthorx, which raised $131 million and traded up 58% by month end.

According to Street Account, 2018 saw 78 Healthcare IPOs price raising a total of $9.8 billion. This compares to a total of 202 IPOs raising $61 billion for the year.

Source: Thompson Reuters and FactSet

NOVEMBER RECAP & BEYOND

Broad-based healthcare strength in November.
The healthcare sector was up 6.8% in November, again outperforming the S&P which was up 1.8% in the month. Broad-based performance was driven by macro inflows, but with particular strength in the biotech sector (up 9.7% in November). Small and mid-caps continue to outperform their large cap counterparts. As we look to next year, relative valuations remain at a multi-year high, reflecting high expectations for strong performance, growth acceleration, and earnings upside.

MARKET COMMENTARY

After October’s falls, global equity markets climb back.
U.S. equities closed higher in November, with shares climbing early in the month then giving up much of the gains in the second half. Economic data remained encouraging and midterm elections were largely in line with expectations. Looking ahead, many strategists have speculated that investors are beginning to anticipate the potential for positive newsflow into the traditionally supportive holiday season. All things considered, November was a roller coaster ride for equities.

Medical device group continues its relative outperformance.
Whilst the medical device group underperformed biotech and the broader healthcare sector, the group’s relative valuation vs. the S&P exceeded 20% in November, marking a 10-year high. Given the higher relative valuations, analysts are shifting focus to company-specific outperformance driven by higher results, accelerating growth and improving fundamentals.

IPO Pricings.
The IPO market was quiet in November with three healthcare deals raising a total of $100 million (in total only six deals priced across all sectors). The one medtech deal, Vapotherm, priced at the low end of the filing range but is up 31% in the aftermarket. There were also two specialty pharmaceuticals pricings, with both deals posting modest gains in the aftermarket. With the Biotech Index down around 20% since the end of August, the appetite for Biotech offerings will be tested in early December with the expected pricing of Moderna’s IPO. At the midpoint of the filing range, the company is expected to raise $500 million (the largest biotech IPO on record) giving it a valuation of over $7.5 billion.

Source: Thompson Reuters and FactSet

OCTOBER RECAP & BEYOND

Broad market volatility.
Broad market volatility punctuated October, with both the Dow and the S&P erasing gains for the year. Drivers of downward pressure were worry of rising interest rates, global trade war concerns, and to a lesser extent concern about the mid-term elections. The volatility index (VIX) reached its highest level in six months, closing above 20 at the end of October. The healthcare sector was down 6.8% on the month with biotech and med tech leading the charge of underperformance, down 13.6% and 10.8% respectively.

MARKET COMMENTARY

Healthcare stocks erasing gains.
In addition to the broader market volatility, healthcare stocks which have largely been out-performers for the first nine months of the year, saw pressure driven by worry around Q3 earnings. Within the medical device sector, earnings results for Q3 have largely been in-line to positive relative to expectations, but not strong enough to overcome skittishness in the market and negative stock price reactions.

Medical device puts and takes.
Johnson & Johnson was one of the few medical device stocks that was up for the month of October (up 1% for the month), while high expectations and valuations for growth stocks lead to some of the worst performing names in the month, Abiomed, iRhythm, Insulet and Nevro. Additionally, traditional large cap medical device companies gave back much of their premium to the S&P, trading at a 14% premium versus a 19% premium in the month prior.

IPO Pricings.
The deal market remains active, despite the volatility, but stock prices of recent IPOs have also been under pressure, driving mixed aftermarket performance. Of the 12 healthcare IPOs priced during the month, seven priced below the range, while six finished the month flat from pricing. In the medical device sector, SI-Bone and Axonics are SMID caps that were flat and up 25% from pricing respectively. Guardant Health and Twist Bioscience marked a resurgence of interest in the Tools and Diagnostics sector for new issues albeit, with Guardant’s market cap and aftermarket performance eclipsing Twist Bioscience.

Source: Thompson Reuters and FactSet

SEPTEMBER RECAP & BEYOND

Healthcare continues to outperform the broader market.
Healthcare stocks continue to outperform the broader market gaining 2.8% vs. 0.4% for the S&P 500. Equipment & Supplies and Medtech were the top performers, gaining 4.9% and 3.4% respectively. Flipping the script from August, large caps stocks outperfomred SMIDs on signs of profit taking from the recent run-up in smaller names. Given ptemium multiple. this sets a high bar for the remainder of 2018 for the group.

MARKET COMMENTARY

Notable Conferences –Industry conferences TCT and NASS; Morgan Stanley.
COAPT data presented at this year’s TCT meeting dramatically surpassed expectations, boosting shares of Abbott and driving optimism in the mitral space. Meanwhile, the start of the annual spine trade show was marked by Medtronic’s acquisition of Mazor Robotics shortly before the conference where robotics continues to be a predominant theme. Morgan Stanley drove some volatility in the med tech sector with optimistic comments made by Teleflex, Integra and Zimmer drove stocks higher while Nevro and Avanos saw pressure coming out of the conference.

Biotech Strength – continued financing activity.
Within the biotech sector, financing activity remains high. Through the first nine months of 2018, >$65 billion has been raised via IPOs, follow-on offerings, venture capital debt and PIPEs and other equity. This represents the the 2^nd highest level in 20 years and is important as biotech financing activity often serves as one of the metrics which the Street uses to define the overall sentiment of the healthcare sector.

IPO Pricings.
As expected, the IPO market saw an uptick in volume following the August slowdown. In total, 23 IPOs priced in September, nine of which were in the healthcare sector. The healthcare deals were dominated by seven biotech deals and rounded out with one animal health spinout from Eli Lilly and one medtech deal, Ra Medical Systems. Pricing and performance were mixed with three IPOs breaking issue price by the end of the month, including one deal priced at the high end of the filing range (the other two priced at the low end of below). The sole medtech deal, Ra Medical Systems priced at $17 versus its $14-16 filing range and finished the month up 13%.

Source: Thompson Reuters and FactSet

AUGUST RECAP & BEYOND

Healthcare outperforms the S&P 500 for the third month in a row.
The Healthcare sector was up 4.2% in August, again outperforming the S&P 500, which gained 3.0%. After lagging the broader healthcare sector in July, Providers & Services and Medtech both saw strong gains in August, gaining 6.8% and 6.0% respectively. Small and Mid-Cap stocks (SMIDs) saw the strongest gains and largely outperformed large caps. Medtech is now the best performing healthcare sub-sector with a 26.4% YTD gain, compared to 12% for the broader healthcare sector and 8.5% for the S&P 500

MARKET COMMENTARY

Medtech outperforms due to strong earnings season.
From the Gilmartin Group client list, Surmodics was a big winner gaining 34% for the month after reporting solid results and raising guidance for FY 2018. GenMark also saw a big gain of 28% during the month after strong reported results. While Glaukos was another winner during the month, gaining 64%, this was largely driven by the news that Alcon was pulling its competing product CyPass off the market.

Multiple Expansion and M&A Activity.
With the healthcare sector outperforming the broader market YTD, the traditional large cap medtech companies now average a P/E of 20.2x. This reflects a 15.7% premium to the the S&P 500. This premium is also being reflected in M&A activity where the 37 medtech deals completed this year have seen an average of 5.2x forward 12 months revenue multiple (a ten-yr high).

IPO Pricings.
As expected, August was a quiet month with three healthcare IPOs pricing out of a total of nine deals. Pricing and aftermarket performance were weaker for the healthcare IPOs this month, which all priced at or near the low-end of their filing ranges and traded flat to down from pricing to the end of the month. There was, however, reasonably strong follow-on activity to quarter, as companies take advantage of market strength..

Source: Thompson Reuters and FactSet

JULY RECAP & BEYOND

Healthcare gains on strong start to Q2 earnings as tech giants weigh on broader S&P.
The Healthcare sector was up 6.5% in July, outperforming the broader market (3.6%) and the Medtech universe (3.8%) on the back of a broader shift to more defensive sectors, strong Q2 prints from large-caps and major declines in information technology giants in tail-end of the month. Within the sector, outperformance was broad-based and driven by Tools and Services (12.0%) surging back after the Q1 selloff on broad strength in end markets across biopharma, academic and industrial. Pharma, up 9.2%, benefitted from strong Q2 earnings reports and upbeat updates to guidance from Eli Lilly (LLY) and Biogen (BIIB), to break out of a year of middling performance.

MARKET COMMENTARY

Large-Cap Tools & Diagnostics companies comment on Chinese tariffs.
Overall, the effect of anticipated tariffs on the bottom-line of large-cap companies was ($0.01) to ($0.03), among those who broke it out from general FX guidance. This figure would largely negate the effects of tax-benefits enacted early this year.

Genomic sequencing demand drives public market interest.
Lifesciences and Biotech gained on Genomic sequencing with Illumina’s stellar quarter showing the breadth and depth of pharma and clinical demand for sequencing, up 12.1% following the Q2 print. In M&A, Roche’s acquisition of Foundation Medical (FMI) demonstrated the appetite for the acquisition of companies addressing large opportunities in cancer.

IPO Pricings.
July saw nine healthcare deals price, representing 45% of all deals completed. There was one Medtech IPO completed (Establishment Labs) which priced $1 above its initial filing range and gained 45% by month end. Overall performance for the healthcare deals has been solid, with an average return of 23% from pricing to the end of the month. As typical, we expect August to be quiet, however there are three healthcare deals expected to price.

Source: Thompson Reuters and FactSet

JUNE RECAP & BEYOND

The Healthcare sector was up 1.5% in June, outperforming the broader market (0.5%) and the Medtech universe (1.3%) for the first time in 2018 on the back of a broader shift to more defensive sectors. Within the sector, outperformance was driven by Equipment and Supplies (1.8%) and Providers & Services (1.8%), in part due to their relative shelter from China trade concerns.  Biotech (1.2%) and Pharma (1.4%) continue to weigh on the sector driven by concerns on drug pricing and despite strong capital markets activity. Medtech remains the YTD leader, up 15.7%.

MARKET COMMENTARY

Medtech & Diagnostics: More transformational M&A coming?
The largest and most notable transactions in June were Roche’s acquisition of Foundation Medicine and the merger of Redbrick and Virgin Pulse backed by Marlin. The middle of June was punctuated by a Wall Street Journal article speculating that Stryker (SYK) and Boston Scientific (BSX) were in discussions to merge, sending Medtech analysts into a tailspin to opine on the merits of a potential transaction, create consolidation models and publish reports on implications for the sector. While Stryker ultimately issued an 8-k quelling the rumors, speculation for continued M&A within the sector remains high as do sector valuations.

Notable Spin-offs Coming
Meanwhile, GE is set to spin off its healthcare business into a standalone company. GE’s Healthcare division had sales of roughly $19 billion in 2017 and spans medical imaging, monitoring, digital health and cell therapy.  Novartis is gearing up to spin off Alcon, its eye-care unit.  After the spin, Novartis will be entirely committed to prescription medicine.

ASCO Kicked off the Month
The annual American Society of Clinical Oncology (ASCO) meeting was the first week of June in Chicago. This year brought a mix of positive and negative developments for the sectors, with Wall Street more focused on the downside news. Investor sentiment continues to be cautious on the fundamentals of large cap biotech stocks. The small caps, however, are providing more opportunity for outperformance with event-driven news, catalysts and ongoing innovation.

IPO Pricings – Thirteen Life Sciences IPOs and two Medtech IPOs Completed in June
June was dominated by a flurry of activity for investors trying to keep up with meeting schedules of the double-digit number of IPOs on the road in the month. Ultimately, 15 IPOs priced in the month, again lead by 13 Life Sciences new issuances but with two Medtech companies also joining the mix. Importantly, early days of stock performance have been strong, giving rise to continued speculation that the capital markets window remains open

Source: Thompson Reuters and FactSet

MAY RECAP & BEYOND

The S&P 500 (SPX) outperformed the Healthcare Sector for the first time in 2018, gaining 2.2% in the month, and now up 1.2% for the year. Healthcare posted flat returns for the month, down about a half percent for the year. MedTech again posted strong outperformance in May, setting the industry’s highest monthly return for the year, up 5.8% driving performance of nearly 15% YTD. Providers & Services rolled over following April’s stellar growth, down 1.3% while Pharma continues to disappoint, down 1.8% for the month (and down 6.3% YTD).

MARKET COMMENTARY

Tradeshows, Investor Meetings and Investment Bank Conferences Punctuated May
May is always a busy month, with tradeshow season and Wall Street conferences underway, and this month was no exception. In addition to Heart Rhythm Society (HRS) and EuroPCR, Medtronic (MDT), Baxter (BAX) and Teleflex (TFX) all held analyst meetings.

Inspire IPO – Opening the Window for MedTech?
Within the Medtech sector, Inspire Medical Systems priced its IPO in early May, with the stock trading up roughly 100% in its first month of trading. This has driven incrementally more confidence that investor appetite for earlier stage growth stocks has risen, potentially opening the window for additional IPOs in the sector. Expectations are for several biotech companies as well a select few MedTech companies to hit the road in June with sights set on an IPO.

Capital Markets Continue to Build, Driven By Life Sciences
Equity market new issuances ticked up in May, with eight IPOs and 23 Follow-On offerings in May, a year over year increase of 33% and 21% respectively. May IPOs raised a total of $663M (+15% yoy) while Follow-Ons raised a total of $1.84B (-49% yoy). Of the eight IPOs in the month, seven were within Life Sciences, and its expected that several more (10-12) are on track to price in June.

Source: Thompson Reuters and FactSet

APRIL RECAP & BEYOND

Healthcare sector performance, which was up roughly 1% for the month of April and flat to down over the year (-0.5%) remains in-line, to slightly outperforming the broader market.  Within the sector, Medtech again outperformed (+1.7%) for the month, behind Providers & Services (+7.1%), but still retained the top spot for YTD performance (+8.5%). Pharma (-1.3%) and Biotech (-1.4%) remain down for the month and the year-to-date.

MARKET COMMENTARY

Q1 Earnings Results Drove Performance
Stock performance was well correlated with Q1 results reported in April – with underperformance following weak or “just” in line quarters and upward stock movement following meaningful upside to expectations. Large cap performance was mixed on the heels of Q1 prints while for SMID Caps, performance was predominately based on revenue results, with greater allowance for small-caps reporting in-line numbers.

Capital Markets Activity Continues to Build
Equity market new issuances and follow-ons were down in April compared to last month, pausing as earnings season wrap up and volatility returns to the mid-teens, but remain up YoY. Healthcare equity offerings raised $89.9M, with one IPO and three FO offerings. In addition, seven M&A transactions were completed in the month. The pipeline of IPO candidates continues to build, setting the stage for a busy May and June of roadshows and offerings.

Broad Market Fundamentals Are Still OK
Equity strategists have opined that despite the ~10% decline in the S&P 500 (SPX), there is reason for continued optimism looking into the remainder of 2018 as broad market fundamentals remain intact. That said, concerns over inflation, rising rates and the potential for a global slowdown in growth has driven skittish sentiment over the short term.

Source: Thompson Reuters and FactSet

MARCH RECAP & BEYOND

The macro back-drop overshadowed sector driven effects in March with monetary policy, looming trade wars and tax reform contributing to the equity market’s continued volatility. March swings of +/- 1% were notable, but still far from the heights of the financial crisis where intra-month movement peaked at +/- 5%. Within the sector, Chinese tariffs are unexpected to restrict access to the second largest device market OUS as most of what is sold in China is manufactured in China, or vice versa. Notably in March, there were also meaningful developments in diabetes: a positive panel recommendation on Eversense (SENS) and approval of the G6 device (DXCM). More broadly, Tandem (TNDM) completed a recap round, JNJ received an offer for its LifeScan blood glucose monitoring business and Bigfoot raised $55m.

MARKET COMMENTARY

Divergent Performance Within Healthcare Sector
Healthcare performance for the month of March of (-3.2%) was in-line with the broader market. However, within the sector, results diverged. Biotech continues to disappoint (-7.6%), but the underperformance does not seem to be dampening capital markets activity. Medtech escaped the month flat (+0.5%), ending the quarter up (+6.5%) YTD. Outperformance was a function of investor enthusiasm on individual stocks with performance varying widely within the space.

Tax Reform’s Effect Reflected in Q1 EPS Estimate’s Upward Revisions for the S&P 500
Prior to Q1 earnings, analyst revised EPS estimates upwards 5.4%, despite a historical trend of downward changes over the past 40 quarters (-5.5%). If results follow expectations, quarterly earnings growth for the index (+17.3%) will be the largest since 2011.

Capital Markets Active Despite Market Volatility
Equity market new issues and follow-ons were strong with four IPOs, raising ~$430mn, and 22 follow-ons, raising ~$2.3bn for issuers pricing in March – again with activity dominated by biotech. The overall financial market backdrop remains strong as does the calendar with three healthcare issuers currently in the 6mo IPO backlog.

Source: Thompson Reuters and FactSet