Aris Constantinides represented Kreos Capital at the 35th annual JP Morgan Healthcare conference in San Fransisco in January 2017.
The conference is an annual “pilgrimage” of the healthcare investment sector such as entrepreneurs, executives, investors, and intermediaries. There are of course several other healthcare conferences throughout the year but JP Morgan has grown over the years to draw the highest global attendance and achieve its status as a “must go” event.
A few people have speculated why this event in particular has managed to draw such an unusually large audience. Several explanations have been offered, ranging from it being the first event of the calendar year, so attendees start their year fresh and with an accurate and up to date pulse of the sector, through to the size and prestige of a bank like JP Morgan attracting the most promising large and smaller companies, or simply that the setting in San Francisco is a pleasant destination for January usually offering plenty of warmth and sunshine.
This year was a slight exception as San Francisco had its worst storm in years during the days of the conference resulting in a lot of travel disruption and broken umbrellas!
Aside from the bad weather and the concerns surrounding the Trump administration which was being sworn in around the time of the conference, the mood was upbeat as analysts expect a healthy year ahead for the sector.
Overall JP Morgan recommends an overweight rating to healthcare which remains a compelling sector for investment due to expected outperformance over the market as a whole in terms of revenue growth (9% vs 6.9%) and earnings growth (12.7% vs 11.8%) as well as due to attractive valuations (15.5x p/e vs 18.8x p/e for the overall S&P 500).
In terms of underlying sectors, analysts expect a stronger year for biotech and pharma following a challenging 2016 with trading performance at -21% and -15% respectively. Medtech, as well as managed care facilities, should continue their positive trajectory in 2017 following 7% and 12% uplifts respectively in 2016. Finally, caution remains on tools and diagnostics as reimbursement and budgets remain tight.
However, policy uncertainty in healthcare is still significant due to the incoming Trump administration whose impact is still unclear. On the positive side there are suggestions of less regulation and of strong US government support for technology, which are positive for development stage companies such as those backed by Kreos – but there is uncertainty surrounding drug prices as well as the repeal of the Affordable Care Act which create nervousness and may limit price growth. The pace of healthcare IPOs moderated in 2016 at
$20bn raised, down from $28bn in 2015, with services being a more active sub-sector than biotech mostly due to price volatility. Biotech IPOs demonstrated greater reliance on existing investor participation particularly in H1 2016. However, the 2017 outlook is positive as the buy side remains focused on healthcare IPOs as a source of growth and alpha generation. In addition, attractive aftermarket performance in 2016 (73% of IPOs above offer price) and a large and growing pipeline, position 2017 as another active year for IPOs.
The picture for healthcare M&A was also similar and global volume was down in 2016 at almost 20% vs. a record year in 2015, driven by a lack of large ($5bn+) transactions. Despite equity markets and valuations being at record highs, acquirers increased the use of cash consideration, taking advantage of the low-cost funding environment. The regulatory environment (clampdown on inversions) was not helpful to deal-making and had an impact particularly on healthcare M&A activity with a record $800bn+ of canceled deals. China had a record year of outbound M&A activity and continues to be a viable buyer of ex-China assets. 2017 is expected to be a strong year for healthcare M&A, driven by the strategic need to improve growth and pipeline profile, attractive capital markets, strong cash balances and continued investor interest in strategic acquisitions.
While the conference is mostly centered around public companies, representatives from hundreds of private companies from around the world attend for business development, fundraising, discussion of M&A transactions or meeting with new investors. From Kreos‚Äô portfolio, several companies attended the event, including MyTomorrows (which also used the event to announce the closing of a $10m financing), Pixium Vision (which announced at the event the completion of its clinical trial with the 10th patient implanted) as well as Biom‚Äôup, Dysis Medical and others.
Now back at our London base¬†we¬†are busy following up on the several exciting meetings, new contacts and leads we developed last month which promise new business opportunities for the years to come!