Foreword
by Tommy Erdei, Global Joint Head of Healthcare Investment Banking
I am delighted to share the fifth edition of the Jefferies Healthcare Temperature Check, our annual survey that explores the issues at the top of the healthcare agenda. Based on a record number of views from well over 600 leaders and investors across our sector, the findings are now an essential addition to the insights, discussions and data generated by our London Healthcare Conference.
We are hugely excited to welcome everyone back to London for the Conference, now in its 13th year, and look forward to sharing the energy and connections that getting together in person brings.
However, having emerged from the pandemic, the world around us is once again characterised by uncertainty and instability – not least here in the UK. This unease is reflected in our findings, with inflation, interest rates and geopolitical conflict having climbed rapidly up the risk watchlist. While recession is now baked into the forecasts for many, encouragingly, most see Healthcare as a bright spot of optimism versus their more downbeat expectations for global markets.
Geopolitical tensions have also reduced appetite for exposure to China, with the number of respondents viewing the market as the greatest value opportunity having halved from two years ago. North America is again seen to be the market that offers the biggest opportunity, though Private Equity in particular sees value in the UK – perhaps particularly given weaker sterling.
As a result of the uncertain economic environment, our respondents are keenly aware of the difficulty in accessing capital, and expect the IPO market to continue to be difficult. However, for Biotech specifically, respondents are confident that quality management teams with robust underlying technology will be able to attract investors.
This appetite sits in the context of a marked shift in expectations of how various subsectors will perform over the next 12 months, with Large Cap Biopharma improving in attractiveness, at the expense of Small and Mid-Cap Biotechnology. Private Equity’s growing appetite for AI is notable, while institutional investors are increasingly interested in Peptides.
Most expect 2023’s deal landscape to improve versus the quieter 2022, but acknowledge that it will continue to be challenging. Private Equity is less bullish than other groups of respondents on deal appetite, with corporate-led M&A again seen as the most likely form of activity.
We invite you to view the full survey, which we hope you find an interesting read – and which is supported by videos demonstrating the views of our Healthcare bankers and analysts. I personally thank you for your continued support for the London Healthcare Conference.
Foreword
by Tommy Erdei, Global Joint Head of Healthcare Investment Banking
I am delighted to share the fifth edition of the Jefferies Healthcare Temperature Check, our annual research report that explores the issues at the top of the healthcare agenda. Based on a record number of views from well over 600 leaders and investors across our sector, the findings are now an essential addition to the insights, discussions and data generated by our London Healthcare Conference.
We are hugely excited to welcome everyone back to London for the Conference, now in its 13th year, and look forward to sharing the energy and connections that getting together in person brings.
However, having emerged from the pandemic, the world around us is once again characterised by uncertainty and instability – not least here in the UK. This unease is reflected in our findings, with inflation, interest rates and geopolitical conflict having climbed rapidly up the risk watchlist. While recession is now baked into the forecasts for many, encouragingly, most see healthcare as a bright spot of optimism versus their more downbeat expectations for global markets.
Geopolitical tensions have also reduced appetite for exposure to China, with the number of respondents viewing the market as the greatest value opportunity having halved from two years ago. North America is again seen to be the market that offers the biggest opportunity, though Private Equity in particular sees value in the UK – perhaps particularly given weaker sterling.
As a result of the uncertain economic environment, our respondents are keenly aware of the difficulty in accessing capital, and expect the IPO market to continue to be difficult. However, for Biotech specifically, respondents are confident that quality management teams with robust underlying technology will be able to attract investors.
This appetite sits in the context of a marked shift in expectations of how various subsectors will perform over the next 12 months, with Large Cap Biopharma improving in attractiveness, at the expense of Small and Mid-cap Biotechnology. Private Equity’s growing appetite for AI is notable, while institutional investors are increasingly interested in Peptides.
Most expect 2023’s deal landscape to improve versus the quieter 2022, but acknowledge that it will continue to be challenging. Private Equity is less bullish than other groups of respondents on deal appetite, with corporate-led M&A again seen as the most likely form of activity.
We invite you to view the full survey, which we hope you find an interesting read – and which is supported by videos demonstrating the views of our Healthcare bankers and analysts. I personally thank you for your continued support for the London Healthcare Conference.
KEY FINDINGS
It is clear that the economic environment is making access to capital far more challenging, with 97% stating it is having some degree of adverse impact on the ability of healthcare companies to raise funds. Supply chains are also stressed, with 59% of respondents concerned about the impact on healthcare businesses.
Geopolitics is a more prominent theme than ever for investors, arguably reflected in the diminishing appetite for China exposure. China is now seen as the market with the greatest value opportunity by just 12% of survey participants, down from 30% only two years ago. The US retains its dominant position as the greatest market for future value.
The risk environment, and perception of where the greatest threats lie, has changed significantly in the past 12 months. Rising inflation, interest rates and geopolitical conflict are now seen as the greatest risks facing the sector. Our findings also suggest that recession is now baked into forecasts, with only 10% identifying it as the greatest risk, versus 38% in 2022.
After a quieter 2022, the M&A market is expected to be busier next year, with 67% of corporates expecting to see more activity. However, only 39% of Private Equity participants feel the same way, suggesting a quieter year in the private markets and at the mid-market level. In fact, only 15% of respondents see Private Equity-led M&A as the most frequent type of deal activity next year.
The IPO market is anticipated to be dormant next year, with only 1% citing this as the type of transaction they expect to be most prominent. Mirroring the uncertain economic environment, restructurings are anticipated to be the most likely form of transaction by 8%, up from only 1% last year.
The underlying technology and management team quality are the most important factors when thinking about investing in a Biotech IPO, selected by 42% and 26% respectively. For those currently investing in Biotech, allocations today are evenly split between public and private markets.
The market outlook
Expectations of FTSE 100 Indexperformance in 2023
2022 has been a more difficult year for markets, and the current economic challenges see sentiment less bullish than in the past. Only 45% expect the FTSE 100 to be higher at the end of 2023, with nearly a third (31%) expecting it to be lower. Healthcare corporates are the most bullish, with 49% expecting it to be higher – but conversely, institutional investors and Private Equity investors are more cautious. That only 21% of respondents last year expected a decline in the FTSE 100 is perhaps reflective of the change in macroeconomic sentiment that has taken place over the past 12 months.
45%
45% expect the FTSE 100 to be higher at the end of 2023
45%
45% expect the FTSE 100 to be higher at the end of 2023
Expectations of MSCI World Health Care Index performance in 2023
Encouragingly for Healthcare, there is greater confidence in healthcare stocks than there is in wider markets. 54% of respondents believe the MSCI World Health Care Index will be higher at the end of 2023 and, notably, investors and corporates are similar in their outlooks.
54%
54% of institutional investors believe that the MSCI World Health Care Index will be higher at the end of 2023
54%
54% of institutional investors believe that the MSCI World Health Care Index will be higher at the end of 2023
The global economy
Growing concerns
The mood music around the global economy has shifted considerably since we undertook our last iteration of this report. This economic environment and outlook is dramatically affecting the ability of healthcare companies to raise capital, with 65% saying it is having ‘a major adverse impact’ and 97% stating it is having at least some form of impact. These challenges are most acutely felt by corporates themselves, with 69% feeling the environment is majorly impacting their ability to raise new funding.
65%
65% believe that the economic environment and outlook is having a major impact on the ability of companies to raise capital
65%
65% believe that the economic environment and outlook is having a major impact on the ability of companies to raise capital
Supply chain challenges
The difficulties in global supply chains have been well documented, and Healthcare is not immune. While only 13% are ‘very concerned’, 46% have ‘some concerns’ – with institutional and Private Equity investors more pessimistic than the corporates themselves. A further 33% of all respondents are closely monitoring developments, and only 8% of respondents have no concerns at all.
64%
64% of institutional investors are concerned about supply chain issues
64%
64% of institutional investors are concerned about supply chain issues
Geographies and sectors
Regions of opportunity
Once again, North America is seen to be the market in which there is the greatest value opportunity for Healthcare in 2023 – identified by 73% of respondents. This was a limited change from 2022, mirrored by views on Europe (38%) and the UK (21%), which were also broadly static.
More striking is the continued decline in appetite for China, selected by just 12% of respondents, and down from 30% just two years ago. The Middle East and Africa has also witnessed a resurgence in interest, with 10% of respondents viewing it as the greatest opportunity, up from 3% a year ago, driven by growing interest from Private Equity (13% from a standing start last year).
Private Equity also has outsized enthusiasm for Europe and the UK, with 54% and 33% seeing value opportunities in these markets respectively. Given the well-covered depreciation of the pound, there may be belief in opportunistic value in the UK market.
73%
North America is seen to be the market in which there is the greatest value opportunity for Healthcare in 2023, identified by 73% of respondents
73%
North America is seen to be the market in which there is the greatest value opportunity for Healthcare in 2023, identified by 73% of respondents
Best performing sub-sectors
There has been a notable shift in which sub-sectors are expected to perform best over the next 12 months. Appetite for Large Cap Biopharma has increased, with 20% expecting this part of the market to be the best performing, versus just 6% last year. In contrast, demand for Small and Mid-Cap Biotechnology has cooled, with 32% seeing these companies as the best performing, versus a massive 49% in 2021.
Private Equity demonstrates an outsized preference for Specialty Pharma, chosen by 16% of that audience and meaningfully above the 7% of institutional investors sharing that preference.
20%
20% expect Large Cap Biopharma to be the best performing sub-sector, versus just 6% last year
20%
20% expect Large Cap Biopharma to be the best performing sub-sector, versus just 6% last year
Continued Exposure
Despite the shifting market and economic environment, it is pleasing to see long-term confidence in the sector remains. Overall, 39% of all respondents are expecting their exposure to increase in 2023 and only 6% can see it being lower. It should also be noted that of those with capital to invest, both institutional investors and Private Equity are more bullish than corporates.
39%
39% suggest they will increase their exposure to Healthcare in 2023
39%
39% suggest they will increase their exposure to Healthcare in 2023
Riskier Business
The risks facing the sector, and business more widely, have changed considerably in the past year. Most prominent is the impact of inflation and rate rises, cited by 38% as the greatest risk. Geopolitical conflict has also risen up the agenda, with 20% now seeing this as the most significant risk factor, something that was unthinkable for many only a year ago.
It is interesting to see that recession has not been selected by as many respondents this year, with only 10% identifying it as the greatest risk versus 38% in 2021. This may well be due to the fact that some form of recession has already been factored into business and investor strategies.
Institutional investors (20%) and Private Equity investors (16%) are also both more concerned about labour shortages than corporates (only 9%).
38%
38% view monetary policy as the greatest risk to Healthcare in 2023
38%
38% view monetary policy as the greatest risk to Healthcare in 2023
Dealmaking in 2023
A busier 2023, for some…
After a quieter 12 months for dealflow, the expectation is for activity to resume at more normal levels in 2023 – at least for institutional investors and corporates at 74% and 67% respectively. These responses suggested there is strong expectation for deal activity involving public companies. However, Private Equity investors stand in notable contrast, with only 39% expecting to see higher levels of M&A and 24% anticipating activity to be lower. This perhaps suggests cautious deployment of Private Equity firepower in 2023.
74%
74% of institutional investors expect deal activity to be higher in 2023 than it has been this year
74%
74% of institutional investors expect deal activity to be higher in 2023 than it has been this year
Shifting types of transactions
Corporate-led M&A is the deal type expected to be most active, once again, selected by 54% of respondents – an increase of 10% from last year.
More interesting is what else is revealed. This includes a drop off in M&A led by Private Equity, with only 15% of all respondents seeing this as the most frequent type of activity next year - matching the more muted sentiment on 2023 deal activity from Private Equity practitioners themselves.
With the IPO market anticipated to be slower next year, Private Capital Raisings may be one alternative, with 11% selecting this category as most prominent next year. M&A led by SPACs has also dropped in attractiveness.
A more bearish economic sentiment reflects in an expected increase in debt refinancing – selected by 8% this year versus only 1% last year.
54%
Over 50% of respondents expect M&A led by corporates to be the most prominent form of transaction in 2023
54%
Over 50% of respondents expect M&A led by corporates to be the most prominent form of transaction in 2023
Biopharma Innovation
Gene Therapies, chosen by 16%, and Targeted Therapies, chosen by 23%, are once again the areas of Biopharma innovation expected to have the biggest impact in the next 12 months. However, both of these areas have been selected less frequently than in the past, with a greater spread of Biopharma areas being chosen.
Private Equity’s growing appetite for AI is of note, while institutional investors are most interested in Peptides, a new category this year. Vaccines have also sunk down the agenda, with only 5% of respondents expecting it to be an area of innovation, down from 13% last year.
The overall lack of certainty is notable, reflected by the high number of respondents selecting ‘do not know’ (20% versus 8% last year).
20%
20% of Private Equity participants highlight AI as the area of innovation expected to have the biggest impact in 2023
20%
20% of Private Equity participants highlight AI as the area of innovation expected to have the biggest impact in 2023
Investing in Biotech
What makes an attractive IPO candidate?
This year, we asked ‘What is the most important factor when considering investing in a Biotech IPO?’. Reassuringly, Private Equity and Institutional Investors answered very similarly, suggesting good alignment between buyer and seller. The technology itself is the most critical factor, selected by 42% as the key criteria when investing in an IPO. The track record of management was the second, selected by 26%. An oversubscribed book of demand, 5%, and existing investor support, 12%, are seen as less crucial.
42%
42% say technology is the most important consideration when investing in a Biotech IPO
42%
42% say technology is the most important consideration when investing in a Biotech IPO
Allocation in Biotech
Those investing in Biotech have not changed how they are allocating over the past 12 months, based on responses received, with a relatively even split between private opportunities (25%) and public opportunities (26%). It is no surprise to see Private Equity more focused on the private markets and institutional investors on the public markets.
Q&A withTommy Erdei
Global Joint Head of Healthcare Investment Banking
JamesVane-Tempest
Senior Equity Research Analyst
PeterWelford
Senior Equity Research Analyst
GilBar-Nahum
EMEA Head of Biotechnology
For further information on Jefferies Healthcare Investment Banking, please contact:
[email protected]
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