Why Equity and M&A Markets in Ophthalmology Are Poised for a Great Run

Why Equity and M&A Markets in Ophthalmology Are Poised for a Great Run

SAN DIEGO – Although the 10-year bull market is bound to end one of these days, the trend in ophthalmology and healthcare in general is a continued strong year, according to J.P. Peltier, managing director, global head, healthcare investment banking at Piper Jaffray.

Peltier gave his overview of the equity and M&A markets in ophthalmology at this year’s OIS@ASCRS. The video is available here. The first quarter of 2019 in equities was one of the best quarters on record, he said, with lower interest rates generally leading to higher stock market returns.

“The 10-year Treasury today sits at about 2.5%,” he said. “It doesn’t take a financial genius to equate 2.5% return on a US Treasury to the 15% annualized return we’ve had on the stock market for the last 10 years.”

Markets with Little Fear

Although there had been some expectation that the Federal Reserve Board would be raising interest rates twice in 2019, Peltier said, it now appears that those rate hikes are off the table. And accommodative fed policy has significant influence over the equity markets.

The volatility index (VIX) sits at 12.3, Peltier noted. Most investors worry when the VIX is higher than 20. “We have high stability and very little fear in this market,” he said.

The last seven recessions have been preceded by an inverted yield curve, which occurs when 10-year Treasury rates are lower than three-month Treasury rates. “There are a few data points that suggest you can have an inverted yield curve without a recession, but at least the last seven have all followed an inversion,” Peltier said.

Initial Public Offerings

An estimated 44 initial public offerings (IPOs) are expected in life sciences this year, Peltier said, at a value of more than $5 billion in capital invested.

In both biotech and medtech, though, companies have started to go public earlier, he said. In biotech, 23% in 2017 were in Phase I or earlier; so far this year, 45% have been in Phase I or earlier. This may be an early sign for caution, he noted, as it is a recipe for missed expectations and falling stock prices. Red flags also appear in the medtech space in terms of IPOs, he said.

Mergers and Acquisitions (M&A)

Life sciences M&A have been extremely active, Peltier said. In medtech, there were 50 to 80 deals a year; in biopharma, 30 to 70.

“What’s most notable,” he added, “is that medtech exits have averaged about $200 million, whereas biopharma has risen year to date an average of $800 million. It’s pretty obvious to see why most venture capital dollars have switched from medtech to biopharma.”

Ophthalmology Medtech versus Biopharma

Peltier noted that, since January 2018, publicly owned medtech ophthalmology companies have enjoyed a 50.6% increase in stock price versus a 13.3% decrease in stock price for biopharma ophthalmology companies.

Since the Great Recession, though, high-growth medtech companies are near peak levels, Peltier said. “Comparing apples to apples: companies that are growing at least 15% have at least $40 million in revenue; what are investors paying for growth medtech? Those prices are near all-time highs. Investors are paying almost 10 times forward-year revenue for these companies.”

The long-term average has been closer to six times forward-year revenue, he said. The bottom during the Great Recession was 2.9 times forward revenue, but the average rebounded quite quickly. “So if you have enough patience and the worst happens, you can endure when stocks return to somewhat normalized levels,” he said.

Anniversary of Tax Reform Act

After passing the first anniversary of the 2018 tax reform act, Peltier noted, some companies saw declines in growth and earnings and missed earnings projections. “There are signs of some wobbliness in the market,” he said. Despite this, Q4 2018 and Q1 2019 were near record highs. “Volatility is being watched,” he said.

Access to capital, with 2% interest rates, continues. And biotech and medtech, particularly in ophthalmology, are poised for a great run in mergers and acquisitions and probably in the markets as well.

For questions about this article, please contact Keith Croes at kjcroes@gmail.com.

Areas to Watch in 2019

Ophthalmology Innovation

  • The commercial rollouts of longer-acting anti-vascular endothelial growth factor
  • Commercialization of new lenses and intraocular lenses
  • Progress of gene editing; therapy for inherited retinal diseases
  • New rapid-onset mechanisms for treating dry eye
  • Commercialization of novel glaucoma treatment combinations

Equity and M&A Markets

  • Corporate earnings and growth
  • Fed monetary policy
  • Volatility
  • Access to capital (debt and equity)
  • Acceleration of merger and acquisition activity