Disruptive Tech M&A Deals Defy Market Volatility


    While IPOs and SPAC deals have stalled in the face of a drop in public equity valuations, M&A and startup funding in robotics, AI, and healthcare technologies has remained strong over the past couple of quarters. Five members of the ROBO Global Innovation Indices have received takeout offers. In this installment of “Follow the Money”, we highlight deals that illustrate the financial and strategic appeal of key technology trends so far in 2022.

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    Webinar Transcript:

    Jeremie Capron:

    My name is Jeremie Capron. I'm the Director of Research here at ROBO Global, and I'm talking to you from New York. With me on the call are my colleagues from the research team, Nina Deka and Zeno Mercer. Today, we're going to talk about robotics, AI and healthcare technologies with a focus on deals and fundings. So, we will be looking at both the public equity side, where we have seen some major shifts in the last six months, as well as the private side and venture capital, and we will discuss some of the key trends that we are watching. We'll also make sure to save some time for your questions. As many of you know, we regularly share some of our research on the roboglobal.com website and biweekly emails, and we just published a new report that's covering today's presentation. So, feel free to download this report at roboglobal.com.

    So, let me start with a quick reminder of what we do here. We are a research and investment advisory company that's focused on robotics, AI and healthcare technologies, and we designed thematic investment strategies around what we believe to be a technological revolution. Today, there's over $3 billion in funds tracking our strategies, they're primarily ETFs. The most notable index is probably ROBO, R-O-B-O, that was the first robotics and automation index portfolio that launched in 2013, and now in its ninth year. Our research around automation led us to realize that something important is happening in two specific areas. So, in the last four years, we introduced two additional index portfolios. The first one is T-H-N-Q or THNQ, that is the artificial intelligence index. The second one is H-T-E-C or HTEC, that is the Healthcare Technology & Innovation Index.

    These are not your traditional index ETFs or investment strategies combine a research driven approach with the benefits of index investing and the ETF wrapper. The portfolios are selections of best in class companies from around the world, small, mid, large-caps that are more or less equal weighted and rebalanced quarterly. So, they are diversified with the 60 to 85 holdings, yet they have a very high active share and low overlap with broad equity indexes like the S&P500. The three strategies have outperformed global equity since inception, as you can see on this table of index returns as of the end of April 2022, even after the brutal decline in the past few months. So, why are we talking about M&A and fund flows? This is important to us because M&A has been a strong tailwind to ROBO's returns since we first designed the portfolio in 2013.

    In the eight or nine years that we've been running it, we've seen 27 takeover attempts on our portfolio companies. This is in the context of a little more than 80 companies in the index. We'll get back to that. But the important point here is that we have seen a clear acceleration in the past two years, despite the significant business disruptions during the pandemic. In fact, 2021 was a record year for mergers, for acquisitions and venture funding. As the pandemic really trouble charged the digitization of our economy and left some major scars as we came out to the other side. You think about the supply chain disruptions, you think about rising commodity prices and transportation costs and the shortages and semiconductors, and now increasingly pressing labor shortages.

    So, this has led to a race to digitize, to automate, and this has made automation a top priority for business leaders and companies around the world. Especially for those larger organizations that increasingly understand, they must have a presence and capabilities around automation. In many cases, they are behind the curve and they need to acquire rather than build. They're ready to pay up for quality businesses. Now, this is a very much structural trend in our view, but the massive shift in the financial markets over the past six months have clearly changed the dynamics in terms of capital deployments. In just six months, we have moved from a kind of Goldilocks of strong economic and profit growth to one of the most complex macro situation in decades. We have war in Europe, we have oil that's up 75% in the past year, and above $100 a barrel.

    We have signs of a slowing consumption just when the Fed is starting a rate hike cycle. I think tech is really where the action has been concentrated in the past six months. We've seen a dramatic collapse in the most highly valued segments of the markets, the most speculative areas of the market. We've seen essentially the gains of the pandemic being given back, and in some cases, some more. It's not only the Zoom and Peloton and Robin Hood, in fact, nearly half of the NASDAQ stocks are down 50% or more today from the high. More than one in five stocks is down more than 75%. So, that is comparable to the dot-com crash in 2000, and the FANG shares are down more than 35% on average year to date. Our three strategies are down between 27% and 34% as of the close yesterday, so on the May 17th.

    Now, that qualifies as the sharpest drawdown we have seen since we started ROBO in 2013, and it is on par with the selloff during the COVID lockdown panic. Now, the good news is that in review, this valuation reset is largely played out. I will illustrate this with a few charts in a minute. But before that, on this next slide, I want to highlight that the technology in market leaders in AI, in robotics, in healthcare technologies, the companies in our three index portfolios, they tend to be high quality businesses in terms of their margins, in terms of their return on capital, and the strength of their balance sheets. This chart here shows the percentage of companies with a net cash position for ROBO, HTEC and THNQ, and some of the broad equity industries. So, 65% of the companies in the artificial intelligence index, and 55% of the companies in the ROBO index have more cash than debt, which is a measure of balance sheet strength.

    That is a lot more that you'll find in the NASDAQ or the S&P500 index. Also, want to point out on the next slide that the companies we're talking about here, they are not just US companies. You can see here that we have more than 13 countries represented in ROBO, and that a lot of them are small and mid-caps. Between 50% and 60% of the ROBO and HTEC portfolios are in small and mid-caps. The vast majority of them are not represented in the S&P500 or global equity industries. So, most investors have very limited exposure to the companies at the forefront of robotics, AI and healthcare technologies. So, let's look at what's happening in robotics first, then I'll pass it on to my colleagues to discuss healthcare technologies and AI, and we will wrap up with what's happening on the venture capital side.

    So, this is a chart of total returns for ROBO over the past five years, just above 12% compounded average. You can see the names of the companies that have received a takeover offer over the past five years. As I said earlier, in the eight or nine years we've been running it, we've seen 27 takeover attempts on our portfolio companies. This is in the context of around 80 plus companies in the index. You can see a lot of activity in 2020, in 2021. Since we last spoke to you about six months ago, we've seen another two transactions this year in robotics index portfolio companies. The first one was Vocera which agreed to be acquired by Stryker in January for just under $3 billion. I will let Nina tell you more about it as Vocera is a healthcare automation company that was also a member of HTEC.

    Then we sell Blue Prism. If we can turn to the next slide, please. You have a list of some of the most important deals we've been watching over the past few months. Blue Prism eventually agreed to a takeover by SS&C, which is a private equity firm. That came after a short bidding contest with Vista Partners. So Blue Prism went for about $1.6 billion. Blue Prism is a top three player in robotics process automation, which is essentially software robots that automate business processes that you can find on desktop, computers and enterprise systems. In the report that you can find on the website, we also discuss a number of important acquisitions made by ROBO index companies like Zebra and its purchase of Matrox Imaging to push into computer vision. A deal by Aptiv to boost its autonomous driving and connected vehicles capabilities by acquiring Wind River that's a provider of software solutions for, I think, that was around $4 billion.

    So, our view is that despite the more complex macro backdrop that we're facing today, M&A is likely to remain strong in robotics automation. That's because the recent market selloff is presenting attractive opportunities, and acquirers have the financial capacity to acquire many of the smaller and mid-cap companies. That is something that I want to conclude with this historical chart of the price earnings ratio for ROBO. You can see that the world's leading robotics automation companies are now trading on about 22X earnings, which is below the historical average of 24X. That it also below the pre-COVID levels of 2019. That is not too far off the 19X of the S&P500 index. So, the premium relative to a broad equity index is relatively low now. That is despite what we anticipate will be superior earnings' growth over the long-term. So, I will leave you with that and ask Nina to join us and discuss trends in healthcare technologies.


    Nina Deka:

    Thanks, Jeremie. Hi, Nina Deka here. Thanks for taking the time today to join us. HTEC is for those of you knew the story, our Healthcare Technology & Innovation Index, this has comprised of 80 or so best in class healthcare tech companies that we believe represent the growth and disruption over the next five to 10 years, that is undoubtedly happening as we speak in the healthcare sector. As it pertains to recent performance, right now, similar to a lot of the macro themes that Jeremie was discussing, there has been a pullback in healthcare tech. It has not been resistant to a lot of the macro related pressures, such as rising interest rates, concerns about inflation, the increasing cost of debt, obviously. So, it caused a lot of investors to take a pause on some high growth tech forward names, particularly, those who might not be profitable or cashflow positive yet.

    But, as you can see in this chart, the ROBO Global Healthcare Technology & Innovation Index HTEC has tended to outperform the broader markets over the long-term. In fact, even in a three year period, it still continues to outperform global equities. Then, if you look at a 10 year back test, it still double the performance of global equities. So, we are remaining long and strong on healthcare tech for many reasons. I'll dive a little bit deeper into some of the M&A transactions that have taken place over the last period. So, let's see. Jeremie mentioned earlier Vocera because it happened to be a company in both ROBO and HTEC. Vocera is a really interesting communications' provider with a large presence in healthcare. This is a technology that you may not have noticed, and the reason why is because if it's doing its job correctly, you don't even know it's there.

    What I mean by that is, I like to give the example a few years ago, I was in a huge trauma hospital in New York City, Bellevue Hospital. It's a very busy city hospital and it was very loud. I was in the emergency room. Everybody was shouting, there was noise alerts everywhere. Few years later, I went into this emergency room and everything was quiet. I asked one of the nurses there, "What's going on? Why is everyone whispering?" She said, "Well, we recently implemented Vocera, and it's really caused a streamlining of all of our operations. We've been able to turn off all the alerts and they really only trigger when the specific person needs to be alerted when something interesting has happened. So, rather than having alarm fatigue, we've had it all in our households where you just hear beep after beep, alert after alert." That's dangerous in a hospital environment when you get alarm fatigue.

    So, Vocera has a way of re-coordinating this across devices to make sure the right person at the right time gets the communication. When you talked about M&A, well, what happened? Stryker acquired them. Stryker is a world leader in orthopedics, neuro, spine, and this company made a $3 billion acquisition earlier this year to acquire this communication platform. So, this is in line with to Jeremie's point, how we do expect to continue to see M&A. This is in line with healthcare tech increasingly becoming digitized. Healthcare is one of the last economic sectors to become digitized. It's only not that long ago that people were still and maybe still are filling out paper charts when they go to the doctor office. So, there's a huge opportunity for healthcare to continue to be more and more digitized. That is driving and increasing amount of investment activity.

    The Stryker acquisition of Vocera is just one example. Imagine, Stryker is everywhere. They're in the ambulance, the entire patient's journey, they're in the emergency room, they're in the operating room. Then upon discharge, Strykers got stuff that can follow the patient to the home. So, now with Vocera, in an integration platform, they can integrate all of those devices and better keep an eye on the patient, wherever the patient is. So, when we think about healthcare in long-term things, we think of decentralization like an increasing amount of care outside of the walls of the hospital, and more and more where the patient is, whether it's their work office or their home. So, integration, digitization platforms is going to help these devices follow the patient wherever they go. Speaking of digitization and decentralization, and in this theme, we saw another monster acquisition with Masimo during the period.

    Although this one was quite controversial, when Masimo announced the acquisition of a company called Sound United, they lost about a third of their market cap that day. The reason why is because the market didn't like the fact that this world leading patient monitoring company acquired a consumer electronic company. Why does Masimo need to own speakers? Well, what Masimo said they acquired was a global distribution channel. Masimo is launching a watch, not like the Apple watch with all the apps, but more of a watch that'll compete with garment and fit. So, what they acquired when they bought Sound United was a global distribution opportunity, an existing footprint of people who already liked that company and use their electronics.

    What the market might be missing though on this acquisition is that Sound United also has a home operating system. This is a multi-room operating speaker system that integrates with all the technology in a household. Masimo is going to integrate all of their high tech hospital grade equipment into this multi-room operating system. What I envision and the company's not really talking about this is the opportunity to really bring a hospital at home environment so much, so that should something happen to the patient as they move from room to room in their own home, that potentially one of their monitors could trigger an event and they could real-time get a nurse or a doctor on the phone through their speaker system and just say, "Hey, did you fall? Are you okay?" I think that's revolutionary, and this is the future of healthcare. So, when we think about watch and fitness watches, sure, maybe $1 billion to $2 billion market opportunity. When we think about home telehealth device, this could be $120 billion opportunity.

    I went into all this detail here because I just really wanted to highlight how much opportunity there is right now for investment in healthcare technology. The macro environment, although, it is pressuring stocks, it is not slowing down investment among these companies. Outside of digitization, there's a lot happening also in the diagnostics world. I'll just briefly touch base, Quidel announce the acquisition of Ortho Clinical Diagnostics that's expected to close in the coming weeks. This is huge, $6 billion. Quidel is one of those companies that really showed their market technology leadership during the pandemic, this was the COVID antigen test company. They really changed the face of what was happening in the pandemic and let people go back to work. But, now that the pandemic is becoming endemic, Quidel stock is pulled back a lot, and so has their COVID testing volume. Pairing up with a company like Ortho is really going to help diversify their product offering and enlarge their footprint, and Ortho is a diagnostic leader. So, we're excited when that acquisition is expected to close for that to be an added asset into the HTEC portfolio.

    Then, other cool things that we're seeing in the diagnostic space, as it pertains to pull back in COVID volume, companies like Danaher and Thermo Fisher Scientific are market leaders, they're in the HTEC portfolio. These are also companies where people thought, "Wow, you guys had a lot of COVID testing." But the market was worried that there was going to be a pullback in revenue when COVID testing pulled back. But these companies are so diversified that they sold a lot of instruments for COVID testing over the last three years. Now, the labs can use their instruments to run other tests. So, while COVID volumes have come back, they've seen an uptick in other tests. People are going to the doctor for other things now. So, we're really happy to see this level of diversification, and that's what you get when you have a portfolio filled with market leaders, such as the ones that are in HTEC. So, I will pause there, and turn it over to Zeno who's going to talk about THNQ, the AI portfolio. We'll be back around for questions at the end of this.


    Zeno Mercer:

    Thank you, Nina. Hello everyone. My name is Zeno Mercer, and I'll be discussing the THNQ index and strategy and M&A today. I'm going to nip the bud. I saw a question around performance. So, year to day performance as of today is down 34%. So, these numbers are to April 30th. This is the worst selloff for technology in this space since basically dot-com, and that's discounting what happened in March 2020 because that was a multiple sector drop. Speaking of March 2020, multiple contraction is brought down the portfolio to those levels 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 at the high in 2021. We're trading at a 37% discount to the long-term 7.1X EV-to-sales average. Even as earnings and top line majority beat expectations.

    For example, earnings of companies that have reported so far are up top 30% versus the long-term average of 13.7%. So, you might be asking, why is THNQ performing so badly? Some of that is obvious, global macro conflicts, inflation, just general concern. In our opinion, that's pretty shortsighted that's why we have long-term views on these trends, but we understand that people are scared and that's just how things are. But looking at 2022, which still sees growth in earnings and profit top line, as well as a ramp up in 2023 and beyond in things like autonomous vehicles, the metaverse, there's just a lot of long-term plays here that we're excited about. I'll get on the M&A in a second, I just wanted to talk about this real quick.

    Out of the 72 THNQ index members, 11 are projected the post negative earnings this year. The majority of those that's under $8 of negative earnings. Of those 11, five are projected to become profitable in the next two years. So, just thinking about our portfolio, we have high quality companies that have good cash balances discussed earlier that are in high growth areas. I think the THNQ index has really matured and proven itself in the face of the pandemic. In fact, it's thrived in the pandemic and what's going on in the world. The adoption of the digitization of everything, we've got cybersecurity becoming more and more important as we adopt these technologies across eCommerce, healthcare, fintech. So, the thesis around AI permeating into all facets of society and businesses is happening.

    Despite any temporary setbacks and fears like these, these are happening. So, I'm going to go into some of those other areas like AV and metaverse in a second when I'm discussing one of the M&A deals. So, just wrapping up here, THNQ has exposure to both the picks and shovels, the infrastructure, that's network and security, semi-cloud providers on the infrastructure end. Then on the business side, these are the things that people are excited about of, what is AI doing? This is the business process, the consumer, the eCommerce, factory automation. I think having exposure to both provides a great upside potential here, especially as we've seen just multiple contraction in the face of positive news, mostly. In the past week, we've started to test a rebound in high growth stocks across eCommerce and consumer maybe signs of being oversold.

    We've got about 7% exposure to China. China does have good AI. We're still majority US and we have companies around the globe, but, we've got indications of losing controls over the technology firms. We're also seeing de-listing fears continue to fade. So, a lot of funds got out of that, and so you could see large inflows in positive momentum if that continues to go forward.

    Moving on to M&A. So, next slide. Thank you. So, after a record 2021 that sell eight THNQ index members. As a reminder, we have 72 in our ETF right now in our index. We have not seen any new takeovers offers so far in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. The majority of those were private equity funds and consortiums taking tech companies private, they saw a value.

    So, since our last M&A report in Q3 last year, we've had three takeout offers. So those were all in Q4 2021. That includes Blue Prism, which has been discussed earlier in this report. The other two were Aspen Technology and McAfee. So, Aspen Technology, which is a global leader in asset monetization and optimization software for industrial companies was acquired by Emerson at a 30% premium for $10.7 billion in October 2021. That was representing a 31X EBITDA multiple. So, Emerson is combining Aspen with their own industrials' office business and will retain the Aspen brand. So, no longer in a portfolio, but that was an interesting deal that makes sense for Emerson. On trend and wrapping up last year's multiple take private.

    Another THNQ member, McAfee the enterprise security software company that does endpoint detection, network and data protection was taken private after being public for just one year in November by an investor group comprising of Advent, Permira, Crosspoint Capital, and many others for $14 billion enterprise value representing a 26% premium. Moving on to some of our THNQ index member acquisitions, Microsoft acquired Activision, which was one of the biggest deals in the history of all deals. The artificial intelligence universe, gaming and cybersecurity have been two of the most active areas of M&A.

    So, what is Microsoft's acquisition of Activision Blizzard mean for Microsoft and the rest of the ecosystem? Well, a lot of this is the focus on the metaverse. You have gaming, which is the obvious story behind Activision. But if you look a little deeper, the core components of Microsoft are the way we interact and communicate digitally, and that's changing. That's going to be more integrated. Eventually, 10 years from now, 20 years from now, we might not have screens we're looking at, could be overlaid in AI and augmented reality on our faces, contact lenses or glasses. Microsoft realizes this and they want the best talent possible. So, a gaming company that knows how to design great user experience, interactive design, and really debug complex interactive environments is great for them as they look to expand into this. So, I actually met and spoke with an SVP at Microsoft several weeks ago at a metaverse conference I was at, and it's interesting.

    When you think of metaverse, it's a buzzword, first of all. But second of all, it's real. If you think about their products like LinkedIn, Windows, Teams, these other things, they're all focused on getting into this immersive environment. A lot of that is going to require lots of data, lots of cloud infrastructure investment. If you're having a simulation of their virtual world in the real world, and that's all being overlaid communicating real-time, that's a lot of infrastructure and communication technology. So, I think it's really exciting to see Microsoft in the world heading into this direction.

    One of the things that that requires though, as we get more overlay technology integrated into our lives, unlocking our passwords, we're going passwordless, that's a lot of AI to detect if you are who you are. If you had intent to access what you're trying to do, requires cybersecurity and THNQ index member. Alphabet recently made the acquisition of Mandiant cybersecurity for $4.5 billion to join its cloud computing division. So, as more assets and services are digitized and automated, cybersecurity is not just a basic need for these companies, but it's a competitive moat, really, to ensure that their customers, whether it's you and I, or enterprise customers are confident in able to continue working across increasingly complex environments. So, the THNQ index captures multiple direct cybersecurity, AI angles through exposure to the companies such as Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I will pass it on to Jeremie.


    Jeremie Capron:

    Thank you, Zeno. The last thing we want to touch on today is the private side venture capital funding. Before I do that, I want to remind everybody, you can ask you questions using the Q&A box at the bottom. So, on the private side, I think, the one line summary is that we had a record breaking year in 2021, and the rapid decline in tech valuations in public equity markets is really put a damper on public exits via IPOs and particularly specs that have pretty much disappeared. The funding activity is still strong and it's happening at somewhat lower valuations. I think it's important to understand that at the extent of the boom in 2021, we sold more than $640 billion invested. That was a record high and almost a doubling year over year. Two thirds of these funds went to late-stage growth companies with very large rounds driven by financial institutions, including hedge funds, hunting for pre-IPO companies.

    I think that's where a lot of this activity is slowed in so far this year. In the meantime, we saw early stage funding that was also very strong last year, but maybe not as extreme as late-stage. In terms of where the action happened, it's really fintech companies that raised the most venture investment in 2021, followed by healthcare and eCommerce and transportation. Now, looking at the first quarter of this year, we see that funding is steadily declined by almost 20% with the shock in the public equity markets. The number of deals, however, is still up year over year, and with so strong activity in cybersecurity, in logistics automation, and healthcare technologies. We expect that over the coming month, the slowdown will continue to affect primarily the late-stage pre-IPO companies.

    We also see that investor interest remains very strong in the areas of automation, especially solutions that help with the supply chain issues and the label shortages. With lower valuations, we see a favorable outlook for early stage investing. Now, finally, here's a short list of some of the recent deals that we are watching closely as they touch on our areas of focus. These companies will likely come onto your radar as they eventually go public or get acquired. I will highlight a few of them starting with Samsara on the upper right corner. Samsara is a cloud-based IOT or supply chain software company that raised $800 million in an IPO a few months ago, $12 billion valuation. Samsara makes cloud-based software solutions for the transportation industry, the logistics industry, the construction industry and others. What they do is they help companies collect and manage data, including equipment monitoring, telematics, or how trucks and fleets of vehicles move around, and they do video analytics using AI and some more.

    So, Samsara went public at the $12 billion valuation. In just under six month, its share are now trading about 50% below the IPO price. Now, another one is Exotec. Exotec is a warehouse robotics company that's based in France. I'm sorry. They raised $300 million at a $2 billion valuation, that was at the beginning of the year in January. Exotec makes the Skypod System that is a warehouse automation system that uses stacked beans and robots that can reach up to 36 feet high, and that's used for a very high density storage and retrieval, and that participates in the order fulfillment process. Exotec is working with some of the world's largest brands in eCommerce, in retail and grocery.

    The last one I want to highlight today is Medable, which has a software platform for clinical research in healthcare. They also raise more than $300 million around $2 billion valuation. What Medable does is this easy to use software that connects patients and clinical teams and clinical trial sites to enable clinical trials anywhere. So, that's a big change for the industry that should support the boom in clinical trials we're seeing today with the expansion of precision medicine and genomics in particular and gene-based therapies. So, today, Medable is already working with over 150 decentralized trials that's remote and onsite trials, and it's the software that enables this to happen. We think that's going to change dramatically the way clinical trials are conducted going forward. Most of the company's success has been driven in part by the COVID-19 pandemic that drove up demand for remote and hybrid research settings.

    So, with that, I will invite Zeno and Nina to join me, and we are going to take your questions. I see that we have a few in the queue already. I think we'll start with question around earnings projections, and revisions for the ROBO and also HTEC indexes. I think that's a really important point because that 30% or so decline in the ROBO and HTEC index is really all about multiple, all about valuations. In fact, valuations have contracted by almost 35% from the high. In the meantime, earnings projections, earnings estimates have barely moved, and we're coming to the end of this Q1 earning season. If we look at the three month earnings revisions, so changes in street estimates over the past three months, what we see is that they've really barely moved. So, when I look at ROBO first over the past three months, the projected EPS for this year has come down by 1.5%.

    Of course, it's a combination of the better of unexpected results that we saw overall in Q1. As you know, that happens most of the time in public equities, where companies come in and beat estimates and they try and make sure they don't guide too high. So, we've seen a normal rate of beating estimates. At the same time, management teams have obviously turned a lot more cautious given the changes in the macro backdrop. So, they've tended to reduce their outlook somewhat or maintain it. In some cases, reduce it, but in aggregate for ROBO, the EPS estimate has come down by 1.5%, and for HTEC it's 1.8% over the past three months. So, really not much of a change. If we look at next year projections, it's the same story.

    We have a 1.8% reduction in the EPS estimate for next year. So, of course, anything could happen, and the noise around the possibility of a recession has increased. Obviously, we have energy prices going through the roof, and historically that has tended to lead to a more of a recessionary environment, but that's at the same time, we have a very strong momentum in the economy today. When you look at the accumulated savings during the past two years, and you look at the consumer spending patterns, consumer spending is continued to increase month over month for the four consecutive month. The latest data point that came out just a few days ago was showing more of that with April retail sales up month of the month.

    On the industrial side, you look at the industrial production numbers, they're still showing growth and they're coming in better than expected. So, I think, of course, we have to be mindful that we could turn into more of a recessionary environment, but for now that's not the case, and index projections are set in that context. So, I want to give the next question to Nina. I see there's a question around the cash flow relative to financing needs in the future. What percentage of companies in the HTEC portfolio will need financing to fund growth over the next few years? So, Nina, do you want to take this?


    Nina Deka:

    Yeah, sure. So, we conducted an analysis just to keep track of the cash flow healthiness and the cash situation of the portfolio. As we mentioned earlier, the majority of the companies and the portfolio are net cash positive. But when we look at free cash flow, there are quite a few that continue to be cash flow negative because these companies are largely investing in their growth in innovation. But when we drill down further and we look at cash balance compared to the cash burn, what we're finding is only about five to seven of the companies in the portfolio might need financing in the next year or two, and that's out of about 85 names. So, in terms of the percent about on the high end, about 8% could potentially need more financing. So, when we look further of the composition of those particular companies, it comprised largely of companies like Guardant, Natera, Editas, Fate, and these are companies in our genomics and our precision medicine sub-sector.

    So, again, companies that are investing heavily into their R&D, their clinical trials on programs that have a very high revenue market potential. To give you an example, Guardant right now is the world is awaiting data that's expected later, potentially in September, October timeframe on one of the largest ever clinical trials happening in the genomics field. They are evaluating to see whether or not you can draw blood. So, that test is known as liquid biopsy with the blood draw, a routine blood draw that you get at your normal doctor appointment to screen for colorectal cancer. The reason why this would be revolutionary is because, right now, the screen process for colorectal cancer is a little bit more tedious either through colonoscopy or through stool collection at home that you would mail in. So, while you're having a routine blood draw, have them tack on a test potentially for colorectal cancer screen. Proving that that can work is going to open up a huge market for many, many billions of other dollars of screening for other potential types of cancer.

    There are a lot of companies that have invested heavily in this liquid biopsy space over the last couple years. In the HTEC portfolio alone, we saw over $15 billion worth of M&A. Illumina acquired Grail. There's just a lot of M&A people going after this technology validating its market opportunity. So, anyway, I bring up Guardant because they are one of these companies that may potentially need to raise in the next couple years, but they're working on something revolutionary, and early data is actually showing that this could be quite promising.


    Jeremie Capron:

    Thank you, Nina. Maybe you can remind us the percentage of HTEC companies that are profitable or cash flow positive, which I believe is the vast majority of what's in the portfolio. What type of companies tend to be loss making today with expectations of future profits in terms of what kind of work they do?


    Nina Deka:

    Yeah. So, about a third of the company has negative earnings, and about a quarter of the company as of calendar year 2022 is cash flow negative. So, again, these are largely comprised of maybe the small mid-cap names in the portfolio, and they're diversified, but largely fall into that genomics and precision medicine sub-sector. We do have a lot of companies that are more than half the portfolio about 51% of the portfolio is large-cap. These are single digit, high single digit, low double digit growers, very stable companies with positive earnings, companies like Edwards Lifesciences, Boston Scientific, etc. So, a lot of real stable value oriented names in the portfolio, but it is diversified and it does contain 49% small mid-cap. Of those, like I said, about a quarter are cashflow negative this year.

    Many of them are on track to cash flow break even. For example, Natera, one of the companies I mentioned. If you look at their cash balance, merely $1 billion, but a high cash burn rate, however, they continue to have an improving reimbursement environment. They keep getting authorization from the centers for Medicare and Medicaid that more of their testing is going to be reimbursable. So, what this means is tests that they've already been doing and not generating a lot of revenue on are going to generate more revenue. A lot of that is going to continue to drop to the bottom line. So, a lot of right things have to happen, but should this company execute on plan? They could actually turn cash flow break even in the next couple years. Does that answer your question, Jeremie? Or did you have something else in mind?


    Jeremie Capron:

    No, that's great. Thank you. Moving on. We have a question about, how the investment strategies have changed with market conditions in terms of avoiding unprofitable or high P/E companies? That's a good question. I would start by reiterating that we design our strategies for long-term investments, and we don't change our style along with the market fluctuations. In fact, we have an embedded mechanism in the index construction process that ensures that every quarter, we rebalance. So, every three month, we end up selling companies that have seen their share price move up the most, and we buy those that have come down the most, as long as, of course, they still qualify for the index, and we essentially think they're great long-term investments. So, you have that smoothing or risk management mechanism that's embedded in our process.

    But I would say that, in general, again, we don't find a lot of unprofitable companies in our thematic index portfolios. When it comes to ROBO, less than 5% of the ROBO members are loss making, 95% are profitable. In many cases, extremely profitable. Those companies tend to score very high on the quality factor. They have fact margins and high return on capital. It's a little different in AI, and Zeno mentioned that we have 11 out of 72 members in the AI portfolio that are lost making, so it's a little more. In healthcare technologies, it's even more, just around 30%. But, again, robotics automation, it's belly any. Now, in terms of the high P/Es, that's a good question, and I think you'll find it surprising that, in fact, we have more companies in ROBO that are trading on very low multiples than we have companies that are trading on high multiples.

    The metric I'll use here is that sales multiple, the EV-to-sales where we have about 10 companies or so. In ROBO, they have a double digit EV-to-sales multiple, so both 10X, which one could qualify as expensive. But we have more than a dozen that are trading below one times EV-to-sales, and that is remarkable. Those companies tend to be involved in industrial end markets. There's a good member of Japanese factory automation specialists that have a high exposure to China. Whereas, we've seen a renewed lockdown situation that has severely impacted the supply chains and the industrial end markets. That's probably why those companies are trading at relatively distressed levels right now, for fear that the situation could deteriorate in the China market.

    Overall, our view is that the best time to invest in technologies when the valuations are low. If you have a long enough time horizon, this is a very good recipe. So, one more question around the M&A market. I think, Zeno, you could take a shot at that. How do we see the public market de-rating impacting the M&A market? Is that a sustain or just a temporary correction?


    Zeno Mercer:

    Yeah. There's definitely a correlation with M&A activity and the re de-rating and the public equity market sentiment. Despite what caused evaluation, contraction companies are evaluating their strategic moves. On the other side, you have companies that have large catch balance sheets that are still able to make acquisitions during this time that they can make $10 billion acquisitions for some of these companies and that wouldn't impact them that much. Now, they might wait, they might be holding off, as we've seen, we've had zero like M&A has slowed down in the THNQ index, for example, on both ends, both acquiring excluding Activision Blizzard and some of the higher ones. Those are long-term strategic plays that are fundamental to the company.

    On the other side, because you might be seeing less stock compensated buyouts because they are at depressed stock valuation, so they'd rather be buying back their stock than selling a company with depressed company shares. So, there's actually an impetus that you might see with all the corporate VC that's happened. Corporate VC is at its peak, it could stay and keep growing, but there's so many strategic acquisitions that have been blade out there that you actually might see a lot of cash balance sheet acquisitions for these AI and robotics and other companies due to that strategic implementation. If there's a company that will drive value for these companies over the long-term, and they've made an investment, they'll acquire it. So, if we're at zero now, relatively, the only way we can go is up from here.

    But, I think that's where we're at, sentiment kind of improves. Well, these companies, are not evaluating M&A opportunities. With Ukraine and just China supply chain, I think there's just been a couple things that people have been cautious about. But, otherwise, I think that's just a core part of business and there are a lot of acquisitions last year. So, a temporary pause just to integrate some of those M&A acquisitions also make sense. So, there's a number of factors there, but I do think it'll ramp up small mid-cap and then large companies with balance sheets can make moves regardless.


    Jeremie Capron:

    Okay. Thank you, Zeno. I think we've covered it all. So, I want to thank everyone for joining us today and feel free to reach out via our website, roboglobal.com if you want to ask the research team any question. You can also sign up for biweekly research newsletter, and we very much look forward to speaking to you again soon. Have a great day. Everybody bye-bye.

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