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Disruptive Tech M&A Offers Defy Market Volatility


Whereas IPOs and SPAC offers have stalled within the face of a drop in public fairness valuations, M&A and startup funding in robotics, AI, and healthcare applied sciences has remained sturdy over the previous couple of quarters. 5 members of the ROBO International Innovation Indices have obtained takeout gives. On this installment of “Observe the Cash”, we spotlight offers that illustrate the monetary and strategic enchantment of key expertise traits thus far in 2022.

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Jeremie Capron:

My title is Jeremie Capron. I am the Director of Analysis right here at ROBO International, and I am speaking to you from New York. With me on the decision are my colleagues from the analysis group, Nina Deka and Zeno Mercer. As we speak, we’ll speak about robotics, AI and healthcare applied sciences with a concentrate on offers and fundings. So, we shall be each the general public fairness aspect, the place now we have seen some main shifts within the final six months, in addition to the personal aspect and enterprise capital, and we are going to focus on a few of the key traits that we’re watching. We’ll additionally be certain to avoid wasting time on your questions. As a lot of you understand, we frequently share a few of our analysis on the web site and biweekly emails, and we simply printed a brand new report that is protecting in the present day’s presentation. So, be happy to obtain this report at

So, let me begin with a fast reminder of what we do right here. We’re a analysis and funding advisory firm that is centered on robotics, AI and healthcare applied sciences, and we designed thematic funding methods round what we imagine to be a technological revolution. As we speak, there’s over $3 billion in funds monitoring our methods, they’re primarily ETFs. Probably the most notable index might be ROBO, R-O-B-O, that was the primary robotics and automation index portfolio that launched in 2013, and now in its ninth yr. Our analysis round automation led us to comprehend that one thing necessary is going on in two particular areas. So, within the final 4 years, we launched two extra index portfolios. The primary one is T-H-N-Q or THNQ, that’s the synthetic intelligence index. The second is H-T-E-C or HTEC, that’s the Healthcare Know-how & Innovation Index.

These aren’t your conventional index ETFs or funding methods mix a analysis pushed strategy with the advantages of index investing and the ETF wrapper. The portfolios are alternatives of greatest in school corporations from world wide, small, mid, large-caps which might be roughly equal weighted and rebalanced quarterly. So, they’re diversified with the 60 to 85 holdings, but they’ve a really excessive lively share and low overlap with broad fairness indexes just like the S&P500. The three methods have outperformed international fairness since inception, as you’ll be able to see on this desk of index returns as of the top of April 2022, even after the brutal decline prior to now few months. So, why are we speaking about M&A and fund flows? That is necessary to us as a result of M&A has been a powerful tailwind to ROBO’s returns since we first designed the portfolio in 2013.

Within the eight or 9 years that we have been working it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of a bit greater than 80 corporations within the index. We’ll get again to that. However the necessary level right here is that now we have seen a transparent acceleration prior to now two years, regardless of the numerous enterprise disruptions throughout the pandemic. In truth, 2021 was a report yr for mergers, for acquisitions and enterprise funding. Because the pandemic actually bother charged the digitization of our economic system and left some main scars as we got here out to the opposite aspect. You consider the availability chain disruptions, you consider rising commodity costs and transportation prices and the shortages and semiconductors, and now more and more urgent labor shortages.

So, this has led to a race to digitize, to automate, and this has made automation a high precedence for enterprise leaders and firms world wide. Particularly for these bigger organizations that more and more perceive, they will need to have a presence and capabilities round automation. In lots of instances, they’re behind the curve and they should purchase moderately than construct. They’re able to pay up for high quality companies. Now, this can be a very a lot structural development in our view, however the large shift within the monetary markets over the previous six months have clearly modified the dynamics by way of capital deployments. In simply six months, now we have moved from a sort of Goldilocks of sturdy financial and revenue progress to one of the crucial complicated macro scenario in a long time. We have now battle in Europe, now we have oil that is up 75% prior to now yr, and above $100 a barrel.

We have now indicators of a slowing consumption simply when the Fed is beginning a charge hike cycle. I believe tech is de facto the place the motion has been concentrated prior to now six months. We have seen a dramatic collapse in probably the most extremely valued segments of the markets, probably the most speculative areas of the market. We have seen primarily the good points of the pandemic being given again, and in some instances, some extra. It is not solely the Zoom and Peloton and Robin Hood, in reality, almost half of the NASDAQ shares are down 50% or extra in the present day from the excessive. A couple of in 5 shares is down greater than 75%. So, that’s akin to the dot-com crash in 2000, and the FANG shares are down greater than 35% on common yr up to now. Our three methods are down between 27% and 34% as of the shut yesterday, so on the Might seventeenth.

Now, that qualifies because the sharpest drawdown now we have seen since we began ROBO in 2013, and it’s on par with the selloff throughout the COVID lockdown panic. Now, the excellent news is that in evaluate, this valuation reset is basically performed out. I’ll illustrate this with a number of charts in a minute. However earlier than that, on this subsequent slide, I wish to spotlight that the expertise in market leaders in AI, in robotics, in healthcare applied sciences, the businesses in our three index portfolios, they are usually top quality companies by way of their margins, by way of their return on capital, and the power of their steadiness sheets. This chart right here reveals the share of corporations with a internet money place for ROBO, HTEC and THNQ, and a few of the broad fairness industries. So, 65% of the businesses within the synthetic intelligence index, and 55% of the businesses within the ROBO index have extra cash than debt, which is a measure of steadiness sheet power.

That’s much more that you will discover within the NASDAQ or the S&P500 index. Additionally, wish to level out on the subsequent slide that the businesses we’re speaking about right here, they aren’t simply US corporations. You possibly can see right here that now we have greater than 13 international locations represented in ROBO, and that lots of them are small and mid-caps. Between 50% and 60% of the ROBO and HTEC portfolios are in small and mid-caps. The overwhelming majority of them aren’t represented within the S&P500 or international fairness industries. So, most traders have very restricted publicity to the businesses on the forefront of robotics, AI and healthcare applied sciences. So, let’s take a look at what’s taking place in robotics first, then I am going to move it on to my colleagues to debate healthcare applied sciences and AI, and we are going to wrap up with what’s taking place on the enterprise capital aspect.

So, this can be a chart of complete returns for ROBO over the previous 5 years, simply above 12% compounded common. You possibly can see the names of the businesses which have obtained a takeover supply over the previous 5 years. As I mentioned earlier, within the eight or 9 years we have been working it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of round 80 plus corporations within the index. You possibly can see lots of exercise in 2020, in 2021. Since we final spoke to you about six months in the past, we have seen one other two transactions this yr in robotics index portfolio corporations. The primary one was Vocera which agreed to be acquired by Stryker in January for just below $3 billion. I’ll let Nina let you know extra about it as Vocera is a healthcare automation firm that was additionally a member of HTEC.

Then we promote Blue Prism. If we are able to flip to the subsequent slide, please. You have got an inventory of a few of the most necessary offers we have been watching over the previous few months. Blue Prism finally agreed to a takeover by SS&C, which is a personal fairness agency. That got here after a brief bidding contest with Vista Companions. So Blue Prism went for about $1.6 billion. Blue Prism is a high three participant in robotics course of automation, which is actually software program robots that automate enterprise processes that you will discover on desktop, computer systems and enterprise methods. Within the report that you will discover on the web site, we additionally focus on plenty of necessary acquisitions made by ROBO index corporations like Zebra and its buy of Matrox Imaging to push into laptop imaginative and prescient. A deal by Aptiv to spice up its autonomous driving and related automobiles capabilities by buying Wind River that is a supplier of software program options for, I believe, that was round $4 billion.

So, our view is that regardless of the extra complicated macro backdrop that we’re going through in the present day, M&A is prone to stay sturdy in robotics automation. That is as a result of the latest market selloff is presenting engaging alternatives, and acquirers have the monetary capability to accumulate lots of the smaller and mid-cap corporations. That’s one thing that I wish to conclude with this historic chart of the worth earnings ratio for ROBO. You possibly can see that the world’s main robotics automation corporations at the moment are buying and selling on about 22X earnings, which is under the historic common of 24X. That it additionally under the pre-COVID ranges of 2019. That isn’t too far off the 19X of the S&P500 index. So, the premium relative to a broad fairness index is comparatively low now. That’s regardless of what we anticipate shall be superior earnings’ progress over the long-term. So, I’ll depart you with that and ask Nina to affix us and focus on traits in healthcare applied sciences.


Nina Deka:

Thanks, Jeremie. Hello, Nina Deka right here. Thanks for taking the time in the present day to affix us. HTEC is for these of you knew the story, our Healthcare Know-how & Innovation Index, this has comprised of 80 or so greatest in school healthcare tech corporations that we imagine symbolize the expansion and disruption over the subsequent 5 to 10 years, that’s undoubtedly taking place as we converse within the healthcare sector. Because it pertains to latest efficiency, proper now, just like lots of the macro themes that Jeremie was discussing, there was a pullback in healthcare tech. It has not been immune to lots of the macro associated pressures, akin to rising rates of interest, issues about inflation, the rising value of debt, clearly. So, it precipitated lots of traders to take a pause on some excessive progress tech ahead names, notably, those that may not be worthwhile or cashflow constructive but.

However, as you’ll be able to see on this chart, the ROBO International Healthcare Know-how & Innovation Index HTEC has tended to outperform the broader markets over the long-term. In truth, even in a 3 yr interval, it nonetheless continues to outperform international equities. Then, should you have a look at a ten yr again take a look at, it nonetheless double the efficiency of world equities. So, we’re remaining lengthy and powerful on healthcare tech for a lot of causes. I am going to dive a bit bit deeper into a few of the M&A transactions which have taken place during the last interval. So, let’s examine. Jeremie talked about earlier Vocera as a result of it occurred to be an organization in each ROBO and HTEC. Vocera is a extremely attention-grabbing communications’ supplier with a big presence in healthcare. It is a expertise that you could be not have observed, and the explanation why is as a result of if it is doing its job accurately, you do not even know it is there.

What I imply by that’s, I like to present the instance a number of years in the past, I used to be in an enormous trauma hospital in New York Metropolis, Bellevue Hospital. It is a very busy metropolis hospital and it was very loud. I used to be within the emergency room. All people was shouting, there was noise alerts all over the place. Few years later, I went into this emergency room and every part was quiet. I requested one of many nurses there, “What is going on on? Why is everybody whispering?” She mentioned, “Nicely, we lately carried out Vocera, and it is actually precipitated a streamlining of all of our operations. We have been in a position to flip off all of the alerts they usually actually solely set off when the particular individual must be alerted when one thing attention-grabbing has occurred. So, moderately than having alarm fatigue, we have had all of it in our households the place you simply hear beep after beep, alert after alert.” That is harmful in a hospital surroundings whenever you get alarm fatigue.

So, Vocera has a method of re-coordinating this throughout units to verify the correct individual on the proper time will get the communication. Once you talked about M&A, properly, what occurred? Stryker acquired them. Stryker is a world chief in orthopedics, neuro, backbone, and this firm made a $3 billion acquisition earlier this yr to accumulate this communication platform. So, that is in step with to Jeremie’s level, how we do count on to proceed to see M&A. That is in step with healthcare tech more and more turning into digitized. Healthcare is likely one of the final financial sectors to change into digitized. It is solely not that way back that individuals had been nonetheless and perhaps nonetheless are filling out paper charts after they go to the physician workplace. So, there’s an enormous alternative for healthcare to proceed to be increasingly digitized. That’s driving and rising quantity of funding exercise.

The Stryker acquisition of Vocera is only one instance. Think about, Stryker is all over the place. They’re within the ambulance, your complete affected person’s journey, they’re within the emergency room, they’re within the working room. Then upon discharge, Strykers bought stuff that may observe the affected person to the house. So, now with Vocera, in an integration platform, they will combine all of these units and higher regulate the affected person, wherever the affected person is. So, after we take into consideration healthcare in long-term issues, we consider decentralization like an rising quantity of care exterior of the partitions of the hospital, and increasingly the place the affected person is, whether or not it is their work workplace or their dwelling. So, integration, digitization platforms goes to assist these units observe the affected person wherever they go. Talking of digitization and decentralization, and on this theme, we noticed one other monster acquisition with Masimo throughout the interval.

Though this one was fairly controversial, when Masimo introduced the acquisition of an organization known as Sound United, they misplaced a few third of their market cap that day. The explanation why is as a result of the market did not like the truth that this world main affected person monitoring firm acquired a client digital firm. Why does Masimo have to personal audio system? Nicely, what Masimo mentioned they acquired was a world distribution channel. Masimo is launching a watch, not just like the Apple watch with all of the apps, however extra of a watch that’ll compete with garment and match. So, what they acquired after they purchased Sound United was a world distribution alternative, an present footprint of people that already appreciated that firm and use their electronics.

What the market may be lacking although on this acquisition is that Sound United additionally has a house working system. It is a multi-room working speaker system that integrates with all of the expertise in a family. Masimo goes to combine all of their excessive tech hospital grade gear into this multi-room working system. What I envision and the corporate’s not likely speaking about that is the chance to actually convey a hospital at dwelling surroundings a lot, so that ought to one thing occur to the affected person as they transfer from room to room in their very own dwelling, that probably one among their screens may set off an occasion they usually may real-time get a nurse or a physician on the cellphone via their speaker system and simply say, “Hey, did you fall? Are you okay?” I believe that is revolutionary, and that is the way forward for healthcare. So, after we take into consideration watch and health watches, certain, perhaps $1 billion to $2 billion market alternative. Once we take into consideration dwelling telehealth gadget, this could possibly be $120 billion alternative.

I went into all this element right here as a result of I simply actually wished to focus on how a lot alternative there may be proper now for funding in healthcare expertise. The macro surroundings, though, it’s pressuring shares, it isn’t slowing down funding amongst these corporations. Outdoors of digitization, there’s quite a bit taking place additionally within the diagnostics world. I am going to simply briefly contact base, Quidel announce the acquisition of Ortho Medical Diagnostics that is anticipated to shut within the coming weeks. That is large, $6 billion. Quidel is a kind of corporations that basically confirmed their market expertise management throughout the pandemic, this was the COVID antigen take a look at firm. They actually modified the face of what was taking place within the pandemic and let folks return to work. However, now that the pandemic is turning into endemic, Quidel inventory is pulled again quite a bit, and so has their COVID testing quantity. Pairing up with an organization like Ortho is de facto going to assist diversify their product providing and enlarge their footprint, and Ortho is a diagnostic chief. So, we’re excited when that acquisition is predicted to shut for that to be an added asset into the HTEC portfolio.

Then, different cool issues that we’re seeing within the diagnostic area, because it pertains to drag again in COVID quantity, corporations like Danaher and Thermo Fisher Scientific are market leaders, they’re within the HTEC portfolio. These are additionally corporations the place folks thought, “Wow, you guys had lots of COVID testing.” However the market was nervous that there was going to be a pullback in income when COVID testing pulled again. However these corporations are so diversified that they offered lots of devices for COVID testing during the last three years. Now, the labs can use their devices to run different assessments. So, whereas COVID volumes have come again, they’ve seen an uptick in different assessments. Individuals are going to the physician for different issues now. So, we’re actually pleased to see this stage of diversification, and that is what you get when you’ve gotten a portfolio crammed with market leaders, akin to those which might be in HTEC. So, I’ll pause there, and switch it over to Zeno who’s going to speak about THNQ, the AI portfolio. We’ll be again round for questions on the finish of this.


Zeno Mercer:

Thanks, Nina. Good day everybody. My title is Zeno Mercer, and I will be discussing the THNQ index and technique and M&A in the present day. I will nip the bud. I noticed a query round efficiency. So, yr to day efficiency as of in the present day is down 34%. So, these numbers are to April thirtieth. That is the worst selloff for expertise on this area since mainly dot-com, and that is discounting what occurred in March 2020 as a result of that was a a number of sector drop. Talking of March 2020, a number of contraction is introduced down the portfolio to these ranges of valuation. So, in March 2020, THNQ dropped to a 5X for EV-to-sales. We’re now at 5.22 for the EV-to-sales down from 11X on the excessive in 2021. We’re buying and selling at a 37% low cost to the long-term 7.1X EV-to-sales common. Whilst earnings and high line majority beat expectations.

For instance, earnings of corporations which have reported thus far are up high 30% versus the long-term common of 13.7%. So, you may be asking, why is THNQ performing so badly? A few of that’s apparent, international macro conflicts, inflation, simply common concern. In our opinion, that is fairly shortsighted that is why now we have long-term views on these traits, however we perceive that persons are scared and that is simply how issues are. However 2022, which nonetheless sees progress in earnings and revenue high line, in addition to a ramp up in 2023 and past in issues like autonomous automobiles, the metaverse, there’s simply lots of long-term performs right here that we’re enthusiastic about. I am going to get on the M&A in a second, I simply wished to speak about this actual fast.

Out of the 72 THNQ index members, 11 are projected the put up adverse earnings this yr. The vast majority of people who’s beneath $8 of adverse earnings. Of these 11, 5 are projected to change into worthwhile within the subsequent two years. So, simply fascinated with our portfolio, now we have top quality corporations which have good money balances mentioned earlier which might be in excessive progress areas. I believe the THNQ index has actually matured and confirmed itself within the face of the pandemic. In truth, it is thrived within the pandemic and what is going on on on the earth. The adoption of the digitization of every part, we have got cybersecurity turning into increasingly necessary as we undertake these applied sciences throughout eCommerce, healthcare, fintech. So, the thesis round AI permeating into all aspects of society and companies is going on.

Regardless of any non permanent setbacks and fears like these, these are taking place. So, I am going to enter a few of these different areas like AV and metaverse in a second after I’m discussing one of many M&A offers. So, simply wrapping up right here, THNQ has publicity to each the picks and shovels, the infrastructure, that is community and safety, semi-cloud suppliers on the infrastructure finish. Then on the enterprise aspect, these are the issues that persons are enthusiastic about of, what’s AI doing? That is the enterprise course of, the patron, the eCommerce, manufacturing unit automation. I believe having publicity to each offers an important upside potential right here, particularly as we have seen simply a number of contraction within the face of constructive information, largely. Up to now week, we have began to check a rebound in excessive progress shares throughout eCommerce and client perhaps indicators of being oversold.

We have got about 7% publicity to China. China does have good AI. We’re nonetheless majority US and now we have corporations across the globe, however, we have got indications of dropping controls over the expertise companies. We’re additionally seeing de-listing fears proceed to fade. So, lots of funds bought out of that, and so you would see massive inflows in constructive momentum if that continues to go ahead.

Transferring on to M&A. So, subsequent slide. Thanks. So, after a report 2021 that promote eight THNQ index members. As a reminder, now we have 72 in our ETF proper now in our index. We have now not seen any new takeovers gives thus far in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. The vast majority of these had been personal fairness funds and consortiums taking tech corporations personal, they noticed a worth.

So, since our final M&A report in Q3 final yr, we have had three takeout gives. So these had been all in This fall 2021. That features Blue Prism, which has been mentioned earlier on this report. The opposite two had been Aspen Know-how and McAfee. So, Aspen Know-how, which is a world chief in asset monetization and optimization software program for industrial corporations was acquired by Emerson at a 30% premium for $10.7 billion in October 2021. That was representing a 31X EBITDA a number of. So, Emerson is combining Aspen with their very own industrials’ workplace enterprise and can retain the Aspen model. So, not in a portfolio, however that was an attention-grabbing deal that is smart for Emerson. On development and wrapping up final yr’s a number of take personal.

One other THNQ member, McAfee the enterprise safety software program firm that does endpoint detection, community and information safety was taken personal after being public for only one yr in November by an investor group comprising of Creation, Permira, Crosspoint Capital, and plenty of others for $14 billion enterprise worth representing a 26% premium. Transferring on to a few of our THNQ index member acquisitions, Microsoft acquired Activision, which was one of many greatest offers within the historical past of all offers. The unreal intelligence universe, gaming and cybersecurity have been two of probably the most lively areas of M&A.

So, what’s Microsoft’s acquisition of Activision Blizzard imply for Microsoft and the remainder of the ecosystem? Nicely, lots of that is the concentrate on the metaverse. You have got gaming, which is the apparent story behind Activision. However should you look a bit deeper, the core elements of Microsoft are the best way we work together and talk digitally, and that is altering. That is going to be extra built-in. Ultimately, 10 years from now, 20 years from now, we would not have screens we’re , could possibly be overlaid in AI and augmented actuality on our faces, contact lenses or glasses. Microsoft realizes this they usually need the most effective expertise doable. So, a gaming firm that is aware of find out how to design nice consumer expertise, interactive design, and actually debug complicated interactive environments is nice for them as they appear to increase into this. So, I truly met and spoke with an SVP at Microsoft a number of weeks in the past at a metaverse convention I used to be at, and it is attention-grabbing.

Once you consider metaverse, it is a buzzword, initially. However second of all, it is actual. If you consider their merchandise like LinkedIn, Home windows, Groups, these different issues, they’re all centered on stepping into this immersive surroundings. A variety of that’s going to require numerous information, numerous cloud infrastructure funding. If you happen to’re having a simulation of their digital world in the true world, and that is all being overlaid speaking real-time, that is lots of infrastructure and communication expertise. So, I believe it is actually thrilling to see Microsoft on the earth heading into this course.

One of many issues that that requires although, as we get extra overlay expertise built-in into our lives, unlocking our passwords, we’re going passwordless, that is lots of AI to detect in case you are who you’re. If you happen to had intent to entry what you are making an attempt to do, requires cybersecurity and THNQ index member. Alphabet lately made the acquisition of Mandiant cybersecurity for $4.5 billion to affix its cloud computing division. So, as extra belongings and companies are digitized and automatic, cybersecurity is not only a primary want for these corporations, but it surely’s a aggressive moat, actually, to make sure that their prospects, whether or not it is you and I, or enterprise prospects are assured in in a position to proceed working throughout more and more complicated environments. So, the THNQ index captures a number of direct cybersecurity, AI angles via publicity to the businesses akin to Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I’ll move it on to Jeremie.


Jeremie Capron:

Thanks, Zeno. The very last thing we wish to contact on in the present day is the personal aspect enterprise capital funding. Earlier than I try this, I wish to remind all people, you’ll be able to ask you questions utilizing the Q&A field on the backside. So, on the personal aspect, I believe, the one line abstract is that we had a report breaking yr in 2021, and the fast decline in tech valuations in public fairness markets is de facto put a damper on public exits by way of IPOs and notably specs which have just about disappeared. The funding exercise remains to be sturdy and it is taking place at considerably decrease valuations. I believe it is necessary to know that on the extent of the growth in 2021, we offered greater than $640 billion invested. That was a report excessive and nearly a doubling yr over yr. Two thirds of those funds went to late-stage progress corporations with very massive rounds pushed by monetary establishments, together with hedge funds, looking for pre-IPO corporations.

I believe that is the place lots of this exercise is slowed in thus far this yr. Within the meantime, we noticed early stage funding that was additionally very sturdy final yr, however perhaps not as excessive as late-stage. By way of the place the motion occurred, it is actually fintech corporations that raised probably the most enterprise funding in 2021, adopted by healthcare and eCommerce and transportation. Now, wanting on the first quarter of this yr, we see that funding is steadily declined by nearly 20% with the shock within the public fairness markets. The variety of offers, nonetheless, remains to be up yr over yr, and with so sturdy exercise in cybersecurity, in logistics automation, and healthcare applied sciences. We count on that over the approaching month, the slowdown will proceed to have an effect on primarily the late-stage pre-IPO corporations.

We additionally see that investor curiosity stays very sturdy within the areas of automation, particularly options that assist with the availability chain points and the label shortages. With decrease valuations, we see a positive outlook for early stage investing. Now, lastly, this is a brief checklist of a few of the latest offers that we’re watching intently as they contact on our areas of focus. These corporations will doubtless come onto your radar as they finally go public or get acquired. I’ll spotlight a number of of them beginning with Samsara on the higher proper nook. Samsara is a cloud-based IOT or provide chain software program firm that raised $800 million in an IPO a number of months in the past, $12 billion valuation. Samsara makes cloud-based software program options for the transportation business, the logistics business, the development business and others. What they do is they assist corporations gather and handle information, together with gear monitoring, telematics, or how vehicles and fleets of automobiles transfer round, they usually do video analytics utilizing AI and a few extra.

So, Samsara went public on the $12 billion valuation. In just below six month, its share at the moment are buying and selling about 50% under the IPO worth. Now, one other one is Exotec. Exotec is a warehouse robotics firm that is based mostly in France. I am sorry. They raised $300 million at a $2 billion valuation, that was firstly of the yr in January. Exotec makes the Skypod System that could be a warehouse automation system that makes use of stacked beans and robots that may attain as much as 36 toes excessive, and that is used for a really excessive density storage and retrieval, and that participates within the order success course of. Exotec is working with a few of the world’s largest manufacturers in eCommerce, in retail and grocery.

The final one I wish to spotlight in the present day is Medable, which has a software program platform for scientific analysis in healthcare. In addition they elevate greater than $300 million round $2 billion valuation. What Medable does is that this straightforward to make use of software program that connects sufferers and scientific groups and scientific trial websites to allow scientific trials wherever. So, that is an enormous change for the business that ought to help the growth in scientific trials we’re seeing in the present day with the enlargement of precision drugs and genomics specifically and gene-based therapies. So, in the present day, Medable is already working with over 150 decentralized trials that is distant and onsite trials, and it is the software program that permits this to occur. We predict that is going to alter dramatically the best way scientific trials are performed going ahead. A lot of the firm’s success has been pushed partly by the COVID-19 pandemic that drove up demand for distant and hybrid analysis settings.

So, with that, I’ll invite Zeno and Nina to affix me, and we’re going to take your questions. I see that now we have a number of within the queue already. I believe we’ll begin with query round earnings projections, and revisions for the ROBO and likewise HTEC indexes. I believe that is a extremely necessary level as a result of that 30% or so decline within the ROBO and HTEC index is de facto all about a number of, all about valuations. In truth, valuations have contracted by nearly 35% from the excessive. Within the meantime, earnings projections, earnings estimates have barely moved, and we’re coming to the top of this Q1 incomes season. If we have a look at the three month earnings revisions, so modifications in avenue estimates over the previous three months, what we see is that they’ve actually barely moved. So, after I have a look at ROBO first over the previous three months, the projected EPS for this yr has come down by 1.5%.

In fact, it is a mixture of the higher of surprising outcomes that we noticed total in Q1. As you understand, that occurs more often than not in public equities, the place corporations are available in and beat estimates they usually attempt and ensure they do not information too excessive. So, we have seen a standard charge of beating estimates. On the identical time, administration groups have clearly turned much more cautious given the modifications within the macro backdrop. So, they’ve tended to scale back their outlook considerably or preserve it. In some instances, scale back it, however in mixture for ROBO, the EPS estimate has come down by 1.5%, and for HTEC it is 1.8% over the previous three months. So, actually not a lot of a change. If we have a look at subsequent yr projections, it is the identical story.

We have now a 1.8% discount within the EPS estimate for subsequent yr. So, in fact, something may occur, and the noise round the potential for a recession has elevated. Clearly, now we have power costs going via the roof, and traditionally that has tended to result in a extra of a recessionary surroundings, however that is on the identical time, now we have a really sturdy momentum within the economic system in the present day. Once you have a look at the gathered financial savings throughout the previous two years, and also you have a look at the patron spending patterns, client spending is sustained to extend month over month for the 4 consecutive month. The newest information level that got here out only a few days in the past was exhibiting extra of that with April retail gross sales up month of the month.

On the commercial aspect, you have a look at the commercial manufacturing numbers, they’re nonetheless exhibiting progress they usually’re coming in higher than anticipated. So, I believe, in fact, now we have to be aware that we may flip into extra of a recessionary surroundings, however for now that is not the case, and index projections are set in that context. So, I wish to give the subsequent query to Nina. I see there is a query across the money move relative to financing wants sooner or later. What share of corporations within the HTEC portfolio will want financing to fund progress over the subsequent few years? So, Nina, do you wish to take this?


Nina Deka:

Yeah, certain. So, we performed an evaluation simply to maintain monitor of the money move healthiness and the money scenario of the portfolio. As we talked about earlier, nearly all of the businesses and the portfolio are internet money constructive. However after we have a look at free money move, there are fairly a number of that proceed to be money move adverse as a result of these corporations are largely investing of their progress in innovation. However after we drill down additional and we have a look at money steadiness in comparison with the money burn, what we’re discovering is just about 5 to seven of the businesses within the portfolio would possibly want financing within the subsequent yr or two, and that is out of about 85 names. So, by way of the % about on the excessive finish, about 8% may probably want extra financing. So, after we look additional of the composition of these specific corporations, it comprised largely of corporations like Guardant, Natera, Editas, Destiny, and these are corporations in our genomics and our precision drugs sub-sector.

So, once more, corporations which might be investing closely into their R&D, their scientific trials on applications which have a really excessive income market potential. To offer you an instance, Guardant proper now could be the world is awaiting information that is anticipated later, probably in September, October timeframe on one of many largest ever scientific trials taking place within the genomics subject. They’re evaluating to see whether or not or not you’ll be able to draw blood. So, that take a look at is called liquid biopsy with the blood draw, a routine blood draw that you simply get at your regular physician appointment to display screen for colorectal most cancers. The explanation why this might be revolutionary is as a result of, proper now, the display screen course of for colorectal most cancers is a bit bit extra tedious both via colonoscopy or via stool assortment at dwelling that you’d mail in. So, whilst you’re having a routine blood draw, have them tack on a take a look at probably for colorectal most cancers display screen. Proving that that may work goes to open up an enormous market for a lot of, many billions of different {dollars} of screening for different potential forms of most cancers.

There are lots of corporations which have invested closely on this liquid biopsy area during the last couple years. Within the HTEC portfolio alone, we noticed over $15 billion price of M&A. Illumina acquired Grail. There’s simply lots of M&A folks going after this expertise validating its market alternative. So, anyway, I convey up Guardant as a result of they’re one among these corporations that will probably want to boost within the subsequent couple years, however they’re engaged on one thing revolutionary, and early information is definitely exhibiting that this could possibly be fairly promising.


Jeremie Capron:

Thanks, Nina. Perhaps you’ll be able to remind us the share of HTEC corporations which might be worthwhile or money move constructive, which I imagine is the overwhelming majority of what is within the portfolio. What sort of corporations are usually loss making in the present day with expectations of future income by way of what sort of work they do?


Nina Deka:

Yeah. So, a few third of the corporate has adverse earnings, and a few quarter of the corporate as of calendar yr 2022 is money move adverse. So, once more, these are largely comprised of perhaps the small mid-cap names within the portfolio, they usually’re diversified, however largely fall into that genomics and precision drugs sub-sector. We do have lots of corporations which might be greater than half the portfolio about 51% of the portfolio is large-cap. These are single digit, excessive single digit, low double digit growers, very steady corporations with constructive earnings, corporations like Edwards Lifesciences, Boston Scientific, and many others. So, lots of actual steady worth oriented names within the portfolio, however it’s diversified and it does include 49% small mid-cap. Of these, like I mentioned, a few quarter are cashflow adverse this yr.

Lots of them are on monitor to money move break even. For instance, Natera, one of many corporations I discussed. If you happen to have a look at their money steadiness, merely $1 billion, however a excessive money burn charge, nonetheless, they proceed to have an enhancing reimbursement surroundings. They preserve getting authorization from the facilities for Medicare and Medicaid that extra of their testing goes to be reimbursable. So, what this implies is assessments that they’ve already been doing and never producing lots of income on are going to generate extra income. A variety of that’s going to proceed to drop to the underside line. So, lots of proper issues should occur, however ought to this firm execute on plan? They might truly flip money move break even within the subsequent couple years. Does that reply your query, Jeremie? Or did you’ve gotten one thing else in thoughts?


Jeremie Capron:

No, that is nice. Thanks. Transferring on. We have now a query about, how the funding methods have modified with market situations by way of avoiding unprofitable or excessive P/E corporations? That is a very good query. I’d begin by reiterating that we design our methods for long-term investments, and we do not change our fashion together with the market fluctuations. In truth, now we have an embedded mechanism within the index building course of that ensures that each quarter, we rebalance. So, each three month, we find yourself promoting corporations which have seen their share worth transfer up probably the most, and we purchase people who have come down probably the most, so long as, in fact, they nonetheless qualify for the index, and we primarily assume they’re nice long-term investments. So, you’ve gotten that smoothing or threat administration mechanism that is embedded in our course of.

However I’d say that, generally, once more, we do not discover lots of unprofitable corporations in our thematic index portfolios. Relating to ROBO, lower than 5% of the ROBO members are loss making, 95% are worthwhile. In lots of instances, extraordinarily worthwhile. These corporations have a tendency to attain very excessive on the standard issue. They’ve truth margins and excessive return on capital. It is a bit totally different in AI, and Zeno talked about that now we have 11 out of 72 members within the AI portfolio which might be misplaced making, so it is a bit extra. In healthcare applied sciences, it is much more, simply round 30%. However, once more, robotics automation, it is stomach any. Now, by way of the excessive P/Es, that is a very good query, and I believe you will discover it shocking that, in reality, now we have extra corporations in ROBO which might be buying and selling on very low multiples than now we have corporations which might be buying and selling on excessive multiples.

The metric I am going to use right here is that gross sales a number of, the EV-to-sales the place now we have about 10 corporations or so. In ROBO, they’ve a double digit EV-to-sales a number of, so each 10X, which one may qualify as costly. However now we have greater than a dozen which might be buying and selling under one occasions EV-to-sales, and that’s exceptional. These corporations are usually concerned in industrial finish markets. There is a good member of Japanese manufacturing unit automation specialists which have a excessive publicity to China. Whereas, we have seen a renewed lockdown scenario that has severely impacted the availability chains and the commercial finish markets. That is most likely why these corporations are buying and selling at comparatively distressed ranges proper now, for concern that the scenario may deteriorate within the China market.

General, our view is that the most effective time to put money into applied sciences when the valuations are low. When you’ve got a protracted sufficient time horizon, this can be a excellent recipe. So, yet one more query across the M&A market. I believe, Zeno, you would take a shot at that. How will we see the general public market de-rating impacting the M&A market? Is {that a} maintain or only a non permanent correction?


Zeno Mercer:

Yeah. There’s positively a correlation with M&A exercise and the re de-rating and the general public fairness market sentiment. Regardless of what precipitated analysis, contraction corporations are evaluating their strategic strikes. On the opposite aspect, you’ve gotten corporations which have massive catch steadiness sheets which might be nonetheless in a position to make acquisitions throughout this time that they will make $10 billion acquisitions for a few of these corporations and that would not influence them that a lot. Now, they may wait, they may be holding off, as we have seen, we have had zero like M&A has slowed down within the THNQ index, for instance, on each ends, each buying excluding Activision Blizzard and a few of the larger ones. These are long-term strategic performs which might be basic to the corporate.

On the opposite aspect, since you may be seeing much less inventory compensated buyouts as a result of they’re at depressed inventory valuation, in order that they’d moderately be shopping for again their inventory than promoting an organization with depressed firm shares. So, there’s truly an impetus that you simply would possibly see with all the company VC that is occurred. Company VC is at its peak, it may keep and continue to grow, however there’s so many strategic acquisitions which were blade on the market that you simply truly would possibly see lots of money steadiness sheet acquisitions for these AI and robotics and different corporations attributable to that strategic implementation. If there’s an organization that may drive worth for these corporations over the long-term, they usually’ve made an funding, they’re going to purchase it. So, if we’re at zero now, comparatively, the one method we are able to go is up from right here.

However, I believe that is the place we’re at, sentiment sort of improves. Nicely, these corporations, aren’t evaluating M&A alternatives. With Ukraine and simply China provide chain, I believe there’s simply been a pair issues that individuals have been cautious about. However, in any other case, I believe that is only a core a part of enterprise and there are lots of acquisitions final yr. So, a short lived pause simply to combine a few of these M&A acquisitions additionally make sense. So, there’s plenty of elements there, however I do assume it will ramp up small mid-cap after which massive corporations with steadiness sheets could make strikes regardless.


Jeremie Capron:

Okay. Thanks, Zeno. I believe we have coated all of it. So, I wish to thank everybody for becoming a member of us in the present day and be happy to achieve out by way of our web site, if you wish to ask the analysis group any query. You can even join biweekly analysis e-newsletter, and we very a lot look ahead to chatting with you once more quickly. Have an important day. All people bye-bye.



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