The H.C. Wainwright BioConnect Investor Conference, hosted by NASDAQ, was a well sought-after day where HCW clients not only had an opportunity to meet with investors, but also to discuss the current market landscape, including drivers and challenges in the health science investor relations landscape.
Paul Sagan, VP, Investor Relations and Corporate Communications, interviewed Gemma Bakx, Strategic Advisor, who attended the conference and a variety of company and industry panel presentations, on what she heard and observed.
Gemma, you just attended the BioConnect conference hosted by NASDAQ in New York this past week. Could you share some of the market landscape perspectives that were discussed?
First of all, it was great to be back in person at NASDAQ, the gold standard for biotech listings. Their team does a brilliant job hosting and making sure that the event was easy to navigate for everyone. They are welcoming hosts who are very good at this.
HC Wainwright’s views on the market and on the deals that their teams have been doing this year were invaluable. They are one of the more active banks in the biotech and life science space and have their finger on the pulse. They always bring fresh insights to the conversation.
Clearly, the market is currently being driven by specialist investors and data read-out catalysts. Retail investors, who poured into the sector during the pandemic, have largely left – albeit not completely – and the question is to what degree will they trickle back in? There doesn’t seem to be a particular event that is pointing at that yet.
M&A activity is another driving theme in the market, with Astellas’ recent acquisition of Iveric bio as a prime example. Top players had already been buying, so investors are now looking for second-tier companies. The concern is how to exit and get liquidity, a problem for small cap companies particularly.
The question is to what extent stocks will react to certain events. We might see stocks responding proactively to acquisition trends. This might drive investors, including retail, towards buying stock.
What were some of the insights and examples you took away from the panels you attended?
Good data translates to company success and valuation. While we are not sure how this translates into commercial opportunities, think of the Alzheimer’s space where there are many questions around patients and logistics. If a launch goes well, the pipeline needs to be backfilled. Will patients show interest? The buy side seems to be focused on $1-$4B commercial-stage companies, who are in markets where there is little competition and great patient need, with less developmental risk.
So, what is needed for small-cap companies of under $1B in market cap to get attention?
It’s increasingly difficult to raise money for smaller cap companies, leading to some venture capitalists trying to combine companies within their portfolio. It all goes back to the quality of a company’s data. Earlier-stage companies with bloated market caps will need to show better data than the larger companies in the same space. Some companies are down 98% over the last four years, which for some might better reflect what they are worth.
John Chambers, HCW’s President of Investment Banking, commented that ongoing volatility has changed the way investors now look at companies and at the market. HCW has seen mid- and large-cap M&A of approximately $20B year to date encompassing 70 large data-driven transactions with successful aftermarkets.
What did you hear about the political/legislative environment?
The Inflation Reduction Act – IRA – has been a theme around how companies think about their pipeline, and the industry is now paying significant attention to the Act. The concern expressed about the legislation is that could be a slippery slope. But the IRA shows that the issue of affordability is not going to go away. Orphan drugs have been somewhat of a safe haven which has been interesting to see, but they are likely not sustainable given the cost of goods.
Let’s take a closer look at the US market and retail investors.
Phil Mackintosh, NASDAQ’s Chief Economist, explained that we saw the volume of retail investors entering the market jump when COVID-19 started. The level of trading doubled and stayed high from micro-cap all the way to mega-cap stocks. But now retail investors have been net sellers of stocks during the drop off at the end of last year when interest rates started to go up.
And the good news is that we do not currently appear headed for a recession? …
Yes, GDP is growing right now, so we are not in a recession. And strikingly, employment remains strong. Consumer spending is holding up, with more of an emphasis on services spending – post COVID-19. Inflationary pressures are winding down and are expected to fall further – except perhaps energy inflation.
One of the conference observations centered around new data looking weak, and retail spending starting to look weaker. Spending habits such as credit card debt are changing. Manufacturing has been looking weak for months. The banking crisis, while seemingly contained, tightens credit.
The cost of capital has reflected a massive change. The expectation is that WACC will stay elevated too, as there is no more free money. Richard Gormley, HC Wainwright’s President of Capital Markets, pointed out that there is a lack of CEO confidence based on negative earnings growth, which can foreshadow a future recession. Earnings are now trending negative largely because of margins compression.
In summary: US trading has been boosted and there is a clear focus on earnings and margins. A further slowing is expected but not a recession.
What did you pick up specifically for life sciences?
M&A activity is clearly up in SMID cap life sciences, and specialist investor sentiment is up. Data-driven stories command attention. Insider-centric deals are outperforming, and generalist investors have not returned. There is fierce competition for investors’ mindshare and capital.
Mid-cap equities have been outperforming since Q4 as has the XBI. Life sciences indices have stabilized.
Smaller-cap equities are rising from their lows but trailing larger caps. Those with a market cap over $250M are successfully accessing capital markets. Buyers currently have all the leverage, and terms are tougher.
This year life science companies have raised $8.1B versus $6.2B in 2022 – across 57 transactions (counting deal sizes larger than $20M) and up from 45 transactions this time last year. The IPO window is closed and is expected to remain closed until generalist investors come back into the sector again. The buzz around the conference was that preparations are underway for the window to reopen potentially later in the year. There are clearly signs of life in the market.
The unsurprising consensus is that valuations of pandemic-related rallies are over and seen as a unique event. The ease of equity markets capital funding led to unsustainable burn rates with outsized budgets, and misdirected capital allocation ensued. But a return to market realism has coincided with unprecedented macro headwinds, such as inflation, overseas war, and banking stress. Investors’ risk appetite reduced accordingly.
So what can we recommend companies do in this market until it turns?
Let me summarize straight from the conference: Consult, Educate, Communicate and Prepare! The advice to our health science investor relations clients is in compete alignment here. You want to consult your trusted health science strategy advisors, board members, and shareholders. You need to educate and manage new investor knowledge and expectations. Educate on milestones. Keep doing NDRs; go to conferences; speak with KOLs. Don’t forget to bring your Board along through regular market updates for board members and maintain a dialogue with key shareholders. Lastly, prepare for readiness: including engagement with qualified banks, document preparation, and maintain flexibility – in short, position your company to act swiftly when pockets of opportunities present themselves.
Any concluding observations?
It was very encouraging to see an excellent group of NASDAQ-listed, innovating companies – brilliantly supported by HC Wainwright – and presenting good data. Many have the cash runway and catalysts to see things through until the market turns. Through this conference, HC Wainwright made an invaluable contribution to keeping us all abreast of market developments and giving companies the floor they need to step up their visibility.
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