Last week was a productive and efficient return to the J.P. Morgan Healthcare Conference held in San Francisco. The annual event reunited fervid participants and fostered meetings among investors, analysts, bankers and strategic corporate teams across both public and private clients. At Gilmartin, we see this conference as the first look into the upcoming market environment, and the positive response to results and guidance has us looking ahead to investor expectations for 2024. In this blog post, we’re breaking down our key takeaways across the Medtech, Biotech, Tools & Diagnostics and Digital Health/HCIT sectors.
MEDTECH KEY TAKEAWAYS
MedTech Focus Areas During the Week: The news of the week was Boston Scientific’s (BSX) acquisition of Axonics (AXNX) for 11x EV/2023 sales (~8.5x EV/2024 consensus sales), met with widespread positive reception. Investors are optimistic that further M&A at above-market multiples could ignite a return toward modestly higher sector-wide valuations. Among large-caps at the JPM conference, Johnson & Johnson (JNJ), GE Healthcare (GEHC), and Edwards Lifesciences (EW) indicated heightened interest in growth through acquisitions, ideally through assets that are both revenue and margin accretive.
Risk-On Appetite Improving: We saw strong meeting demand across private, public, emerging growth, and value companies at our Gilmartin event at Hotel Nikko. For many client companies, investor interest was the highest it has been in over 3-6 months, with investors now leaning into diligence on new ideas. With modestly better market performance and hopes of lower rates on the horizon, it’s clear that risk appetite is improving and growth companies, while not yet back in favor, are once again benefitting from some inflows.
Pre-Announcements & Guidance: What did we learn?
- Over 60% of scaled SMID MedTech businesses preannounced Q4 revenue, a consistent rate with the prior year. The vast majority of pre-announcements beat consensus estimates, with an average beat of 5%.
- Of companies that pre-announced, 40% provided 2024 revenue guidance, up from just ~30% of companies last year. For example, Inspire (INSP) and RxSight (RXST) provided 2024 revenue guidance despite not providing guidance last year.
- On average, companies initiated guidance at or slightly-above 2024 consensus estimates.
LIFE SCIENCE TOOLS & DIAGNOSTICS KEY TAKEAWAYS
Life Science Tools/Dx themes coming out of J.P. Morgan: We sensed improved optimism for the sector coming out of the conference this year. J.P. Morgan shared in their recap that Danaher (DHR) was the most requested company for 1×1 meetings at the conference (over large cap pharma), and 5 out of the top 25 most requested companies and 10 out of the top 50 companies were in the tools/dx coverage universe. Similarly, we saw very strong demand for meetings across private and public company clients at our Gilmartin event, with many companies seeing the strongest level of inbound interest they have seen over the past several months. As 2024 progresses, we expect to see a rise in activity in M&A deals and capital-raising by mid-2024.
Continued focus on the bottom line. For SMID cap growth, one thing that is becoming increasingly clear is the bifurcation between companies with a near-term (and believable) path to becoming cash-flow positive and those with significant capital needs on the horizon. Companies with less than two years of cash continue to message cost cutting and focus on extending their cash runway.
Pre-Announcements, guidance & trends heading into 2024. Over 40% of LS tools/dx companies that we track preannounced Q4 revenue, higher than prior year trends. The vast majority of pre-announcements beat consensus estimates, with an average beat of 9%.
Commentary on 2024 was limited (6% of our tracked companies issued 2024 guidance alongside their preannouncement). That said, 2024 forecasts in LS Tools had been materially lowered at 3Q earnings following conservative outlook from a number of large caps. Commentary from tools players was consistent with messaging from 3Q earnings and, overall, 2024 is expected to be a below average growth year, with growth expecting to pick up in 2H stronger (driven by easier comps and anticipated macro recovery).
BIOTECH KEY TAKEAWAYS
As the industry converged on San Francisco there was an air of cautious optimism and even a day of sunshine to accompany a handful of M&A announcements to start the week. Large pharma continued to put their balance sheets to use with JNJ acquiring Ambrx (AMAM) for ~$2.0Bn (105% premium to prior close), MRK/Harpoon Therapeutics (HARP) for ~$680MM (118% premium to prior close), followed by two private deals GSK/Aiolos Bio for $1Bn upfront and $400MM in milestones and NVS/Calypso Biotech for $250MM upfront and $175MM in milestones.
Expectations for 2024 include a somewhat choppy market, with fits and starts of IPO activity before the election, though this is highly dependent on the anticipated rate cuts and further evidence of inflation tempering. In this environment, companies reporting clearly differentiated programs/data in large commercial opportunities will continue to be rewarded, yet there is an expectation that further cost savings measures and pipeline prioritization continues for some as cash runways are stretched. Overall, the mindset was significantly more positive than last year, the key will be maintaining the momentum.
Biggest Stories/Themes of the Week:
- M&A Activity Remains Important Market Driver: Following a strong Q4 2023 that closed with a flurry of M&A announcements in the last two weeks of 2023 (BMY/RYZB, AZN/GRCL and BMY/KRTX), the activity continued in San Francisco. Importantly, large pharma signaled their willingness to conduct more deals, with AstraZeneca, Lilly and Merck as seemingly the most bullish. Disease areas that continue to be the hottest include oncology (ADCs, radiopharma), cardiovascular, metabolic and more.
- IPOs Return: Six S-1 filings currently sit in the IPO backlog that will provide an important test of the health of the biopharma IPO market. Performance will be watched closely as companies evaluate their path towards an IPO.
- Robust Competition: Despite the challenges acutely felt over the past two years, there are more biotech companies than ever before, competing for investors’ attention and support. The need to be clearly differentiated with the approach, clinical data, etc. is crucial in today’s market.
DIGITAL HEALTH & HCIT KEY TAKEAWAYS
Key Themes: AI investment was a major theme throughout the week. The discussion focused on both near term applications, like automating administrative burden, and longer-term use cases that could prove more transformative, like ambient clinical intelligence. Scrutiny of budgets across end-markets remains a key focus, especially in the context of a challenging labor market and delayed purchasing decisions, while strengthening utilization and pharma spend were noted as points for optimism in the space. Lower cost alternative care and virtual care modalities, along with growing demand for value-based care continue to be key themes. The election was often raised given its historical importance to the sector; however, the majority opinion is that healthcare is not likely going to be a top campaign issue.
Capital markets environment: The funding environment for the sector remains challenged as companies continue to balance profitability and positive cash flow with robust growth targets. The prevailing view is for an IPO window to possibly open towards the latter part of 2024, with a significant pipeline of scaled privates waiting to come to market. Once open, the durability of the IPO window will be another important indicator. Additionally, M&A was top of mind at the conference, as certain verticals are considered poised for consolidation and big strategics position themselves for acquisitions. The overarching sentiment was that of cautious optimism as capital markets activity is expected to pick up.
Looking Towards 2024
- 2/3rds of digital health and HCIT companies issued 2024 guidance prior to the JPM healthcare conference, which was higher than past years, many highlighting macro concerns, elevated utilization trends, and budgetary constraints across end markets. Expectations heading into the conference were for higher medical cost trends and increased transparency especially around the pharma supply chain.
- At JPM, another 1/3rd of companies provided visibility into 2024 for at least one metric, with most above Street expectations. Concerns related to higher-than-expected utilization trends, especially outpatient procedures; predictability of medical cost trends, especially within Medicare Advantage; and cautious optimism across HCIT end markets dominated much of the dialogue. Stock performance was mixed during the conference with HCIT names overall flat with wide variation while Services names were overall down modestly.
Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, Digital Health & HCIT. To find out more about how we strategically partner with our clients, please contact our team today.
Authored by: Marissa Bych, Principal, Gilmartin Group; Carrie Mendivil, Managing Director, Gilmartin Group; Nick Colangelo, Vice President, Gilmartin Group; Ryan Halsted, Managing Director, Gilmartin Group