Key Sector Takeaways Out of JPM

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Last week was a welcomed return to the in-person J.P. Morgan Healthcare Conference held in San Francisco each January. 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 2023. In this blog post, we’re breaking down our key takeaways across the Medtech, Biotech, Tools & Diagnostics and Services/Digital Health/HCIT sectors.

Public Medtech Key Takeaways

Key Takeaway: Macro dynamics improve and stabilize, setting the scene for recovery within the MedTech sector

Context: Underperformance, market volatility, and general unpredictability complied a mixed bag for companies in 2022, but the MedTech sector looks ahead to a more positive 2023 after a successful conference.

Additional Thoughts: Most companies delivered in-line to better-than-expected results as procedure volume recovery led to positive trends within the recovering MedTech sector and provided early visibility into an improved 2023. While some uncertainty remains, the space seems to be looking ahead to a healthy year.
Why this matters: Sentiment is a crucial indicator of investor interest and appetite and now is the time to set the stage, have conversations and execute goals.

What’s needed? Market recovery and increased clarity on the direction of the market. While procedure volume recovered and staffing shortages lessened, many held off on providing initial 2023 guidance or published conservative ranges to account for unpredicted volatility.

  • FX, inflation, supply chain, and China concerns are still looming and remain top of mind, and investors will look to Q123 for clarity.

In the meantime, growth remains essential, and there is a renewed focus on profitability or a pathway to it. Investors remain interested, engaged, and patient and will keep focusing on continued growth within the sector. Setting achievable expectations and upfront communication to enable future beats and raises is key for companies looking to capitalize on upside potential.

What investors are looking for:

  • Execution – clear communication of expectations and outperformance of goals
  • Continued market recovery – stabilization/improvement of macro trends will be critical to a healthy 2023
  • Profitability or a clear plan towards it

Private Medtech Key Takeaways

Key Takeaway: Incremental buzz building around the most mature private medical device companies with M&A likely a key 2023 theme

Context: 2022 marked by volatility, fewer private financings with many valuation contractions, no meaningful non-spin IPOs.

Additional Thoughts: As the gap in bid/ask valuation expectations appears to remain wide, companies are mostly “heads down” in execution mode as they bolster their investment theses and prepare to move opportunistically to raise private capital, move to an IPO process, or consider strategic options.

At Gilmartin we see the list of “public ready” private device companies already long and continuing to grow with many eyeing a window that may be open as soon as mid/late-2023 for first movers, and more broadly in 2024 (when companies more likely to get credit for FY25 expectations).

Why this matters: Time/attention of key investors increasingly at a premium and relationship building now will pay dividends in terms of reducing IPO execution risk.

What’s needed? Further clarity on Fed action cadence/inflation and the ability for U.S. economy to “soft land” as well as avoidance of exogenous geopolitical and macroeconomic headwind events will remain critical as investors and bankers eye the VIX and further upswing in risk-on sentiment.

  • Clarity on “time to exit” will further de-risk private financings, particularly for crossover investors who seem to remain more focused on existing portfolios and fair-valued publics.

In the meantime, VCs are still fundraising with meaningful dry powder. In SF around the conference many seemed incrementally eager to put in real work (many have mandates to deploy “rain or shine”) with interesting companies beyond just relationship development.

What investors are looking for:

  • De-risked (regulatory, reimbursement, TAM) platform technologies with upside potential over medium term.
  • Strong commercial execution and supercharged growth (50%+) despite challenging macro environment over last 2 years.
  • High level of predictability in model over medium run.
  • High margins with near-term path for EBITDA positive increasingly important – this may inform which companies move first towards an IPO.

M&A: Consolidation (transformational & tuck-in) likely a key theme for 2023 and 2024 as less mature private companies with interesting assets and significant potential TAMs but dwindling capital look to M&A to deliver long-awaited shareholder value.

  • Go Deeper: Shockwave Medical Announces Agreement to Acquire Neovasc

Biotech Key Takeaways

Key Takeaway: Bankers are keen to emphasize that Big Pharma is motivated by filling gaps in their portfolio (relating to patent expiry, etc.) rather than opportunistic buying at what most would consider bargain basement prices. The biggest opportunity for rapid value creation is among undervalued small/mid cap companies, which are already starting to show some signs of life at the start of the year.

Additional Thoughts & Context: When you’ve reached rock bottom, there’s only one way to go, and that’s up. Life sciences M&A activity remains near historic lows, with a handful of deals announced early in the week, and expectations for a continued anemic environment for consolidation. All deals ranged ~$1-1.5B and went for major (~100%+) premiums, perhaps a more encouraging sign entering 2023, compared to the lower premiums observed in 2022. Acquirers continue to highlight the attractiveness of the rare disease space (as well as CV disease).

What Biotech Investors are Looking for:

  • In the biotech world, we all know that data is king…but what kind of data? In the pre-COVID era, biotech investors were more willing to take risks on preclinical stage platform companies with cutting edge science. In today’s environment, cool science simply won’t make the cut as investors seek to fund de-risked companies with clinical data.
  • Investors have emphasized that the bar for capital allocation into private companies is higher now than it has ever been. Investors with optionality are pivoting their focus to the public markets.
  • Positive data and drug approvals continue to play a significant role in value creation and upward movement in stock prices in 2023.
  • Despite the chaotic market over the past three years, Sofinnova Partners Chair and Managing Partner Antoine Papiernik believes biotech is still in a much better position than it was a decade ago.

Tools & Diagnostics Key Takeaways

Key Takeaway: J.P. Morgan engagements were exceedingly positive across the Tools & Diagnostic sector, leaving an increased appetite for bolt-on acquisitions to consolidate a fractured market.

Additional Thoughts & Context: Headed into the conference week, sentiment was largely subdued for the Tools and Diagnostics sector, as investors weighed the economic backdrop and other macro factors against companies’ fundamental business outlooks. Against that backdrop, the sector provided predominantly positive updates for Q4 of 2022 – with nearly three-quarters of the companies preannouncing messaging. Looking ahead however, companies were less forthright on the outlooks for the year, with only a handful providing forward guidance for 2023. The reluctance to provide concrete guidance metrics for 2023 is unsurprising in our view, given the persistence of various factors including inflation, China uncertainty, COVID, and the state of the global economy – in turn creating uncertainty in sales cycles, geographic expansion, and capital markets activity. For growth companies in particular, investor focus remains on cash conservation/extension and, as applicable, paths toward commercialization/revenue and profitability.

Presentations from industry leaders highlighted financial flexibility to fund current business growth as well as strategic M&A opportunities supported by strong balance sheets and often a chest of cash on hand ready to facilitate acquisitions. Across the table, sellers and investors alike remain disciplined to make sure these assets ultimately end up in the hands of the best acquirer with proven management teams that will drive long term value growth and thus, willing to be flexible on upfronts for earnouts. Following the myriad of meetings last week, we came away encouraged by the fact that investors and management teams were aligned in crafting pragmatic structures that will ultimately benefit both buyers and seller

What Tools/Dx Investors are Looking for:

  • Clarity on sales cycles and business pipelines given economic backdrop
  • Impact of macro factors – China uncertainty, COVID, inflation – on operations, and active efforts to address those persisting
  • Activities to manage cash conservation and extend runway
  • As applicable, paths toward commercialization/revenue and profitability

Tech-Enabled Healthcare: Services/Digital Health/HCIT Key Takeaways

Key Takeaway: For tech-enabled healthcare and services, JPM started with a deluge of news flow (aligning with the atmospheric river we faced); but for the takeaway on preannouncements and 2023 guidance, companies were largely in line with expectations and included a few beats.

Context: With the macro backdrop of recessionary concerns, inflation, budgetary constraints, tight labor markets, this near-term caution was somewhat expected. Once the conference started, the sentiment turned more positive based on the solid fundamentals of the sector, the availability of strategic options and longer-term outlook.

Additional Thoughts: There was strong representation across the sector with roughly 100 companies participating in the space, ~60% of which are public and ~40% private. Notable sub-sectors included primary care provider groups; behavioral health; chronic disease management; care coordination; physician enablement tools for better engagement, workflow solutions and women’s healthcare groups.

What Investors Are Looking For & Key Themes from the Public Sector:

  • M&A – top of mind for companies with strong balance sheets prioritizing objectives to broaden clinical capabilities, solidify geographic footprint and/or enhance strategic partnerships
  • Importance of ROI amid the macroeconomic backdrop
  • Restructurings and divesting less profitable businesses to expedite pathways to positive cash flow and to extend cash runway
  • Clinical labor constraints persisting with many provider groups expecting labor costs to remain a pressure point; however, many citing deceleration in wage inflation compared with past years
  • Regulatory overhang around Medicare Advantage (MA) suggesting some potential reimbursement risk into 2024
  • While early innings for value-based care (VBC), continuing growth across capitated providers and companies investing in risk bearing capabilities
  • COVID impact waning since December, including on utilization

What Investors Are Looking For & Key Themes from the Private Sector:

  • Investors eyeing 2H 2023 for a re-opening of the IPO window with an expectation for further correction to private valuations, especially late-stage, to first catch up with public markets
  • High growth companies messaging shift to profitable growth as primary focal point rather than prior emphasis around growth at all cost
  • Gross margin profile to be key bridge to EBITDA profitability pathway
  • More non-financial KPIs (e.g., patient/member engagement metrics, clinician retention rates, workflow productivity measures)

Conclusion & Final Thoughts

Overall, we come away from the week incrementally encouraged by the state of the sector given the largely positive Q4 updates, while awaiting further clarity on how the space views the outlook for 2023.  

2022 saw volatility and uncertainty across all sectors, putting many investors on the sideline, but early looks at 2023 provide insight into what a shifting landscape could look like assuming recovery continues.

There has been a very broad reshuffle of talent across banks and funds that has fundamentally changed the landscape of key players since the ’19-’21 cycle that underlines the need to plan well ahead of time for an IPO. 

Although one never really knows where rock bottom lies, optimism is in the air. 1H23 is expected to see some follow-on offerings, PIPEs and private financings, with the IPO market possibly reopening in 2H23, subject to recovery in asset prices, an easing of geopolitical tensions, an end to U.S. interest rate increases. 2023, let’s go.  

To learn more about how Gilmartin strategically partners with our clients, please contact our team today.

Authored by: David Holmes (Managing Director), Alex Khan (Vice President), Kiki Patel (Principal), Brian Johnston (Principal), Hannah Jeffrey (Associate), Ryan Halsted (Managing Director) & Ji-Yon Yi (Vice President)

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