How the Confirmation of RFK Jr. as Secretary of HHS May Impact the Healthcare Sector with CG Senior Analyst Kyle Mikson, CFA

Description:

Kyle Mikson, CG Senior Analyst covering Diagnostics & Life Science Tools, returns to the podcast with Director of Research and Investment Strategy Michael Graham to discuss updates to the space following his panel discussion recapping the Precision Medicine World Conference (PMWC), his related research report, and the confirmation of Robert F. Kennedy Jr. to lead the Department of Health and Human Services (HHS). Mikson provides a preview of his ~40 page report which breaks down takeaways from the conference. He also discusses the latest news on the Trump administration’s initiatives and how it may impact NIH funding and his covered companies. Mikson and Graham also explore topics such as the future of NIH funding, potential consequences on company guidance and stock performance, uncertainty around Trump’s nominee to lead the NIH, Dr. Jay Bhattacharya, and China’s Unreliable Entities List. 

Transcript: 

00;00;00;00 - 00;00;06;18

Michael Graham

Come along on our journey through the growth economy. I'm your host, Michael Graham, director of research at Canaccord Genuity.

 

00;00;15;22 - 00;00;43;04

Michael Graham

We welcome once again to the podcast. Kyle Mixon. Kyle is a managing director and senior analyst covering the life sciences tools and diagnostics sector here at Canaccord. Great contributor to our overall team. And, someone that we're having back on the show, given a bunch of recent developments in his space. Kyle, thanks so much for joining us.

 

00;00;43;06 - 00;00;55;18

Michael Graham

5 or 6 days ago, RFK was confirmed as secretary of health and Human Services. What have you been, hearing from investors about, about that confirmation?

 

00;00;55;20 - 00;01;18;12

Kyle Mikson

Yeah. Thanks, Mike. So, as expected by most investors, he was was confirmed as confirmation hearing was a bit heated, I would say, but nevertheless, he was confirmed. You know, he's he's got some opposition to to vaccines, to infectious infectious disease research. But but the main point here is that the the impact on NIH funding that's going to happen going forward.

 

00;01;18;14 - 00;01;41;12

Kyle Mikson

RFK is a, vocal, you know, opposer to an age. And even since in the weeks since there's been some developments, in terms of like, funding cuts and, attempts to set maximum levels that NIH can actually support and fund costs that are not directly related to research. So things like that are causing uncertainty, causing, you know, stocks to decline.

 

00;01;41;14 - 00;01;47;06

Kyle Mikson

Investors overall to take a take a second look at these, you know, companies when they're, evaluating them.

 

00;01;47;07 - 00;02;09;28

Michael Graham

So yeah. No, that, that that's so interesting. And it's also timely that we're having you on because earlier this week you put out a great note, summarizing a panel discussion that you hosted, at the Precision Medicine World Conference. Maybe just tell us a little bit about that panel and, and the note that you published.

 

00;02;10;00 - 00;02;33;08

Kyle Mikson

Yes. Early February in Silicon Valley. We attended the Precision Medicine World Conference, or MWC. It's the, the preeminent precision medicine conference globally, 400 speakers, 90 exhibits. There's a lot going on. A lot of chatter about look, biopsy. So whether IP, whether that be missed or misread, which is multi cancer early detection, the role of AI in diagnostics.

 

00;02;33;08 - 00;02;54;19

Kyle Mikson

And and we also you know obviously had the opportunity to talk to some folks about this uncertainty that we just referenced with NIH. And the dynamics in the tool and the impact on the tools and space. We had this, you know, panel for investors to discuss the recap of, of this conference with, with the DC piloting the CPI was a leading consulting firm that works with a lot of precision medicine, companies.

 

00;02;54;20 - 00;03;17;25

Kyle Mikson

Some takeaways include, on the MD side, you know, clinical utility data seems like it's going to be necessary for guideline inclusion on M said. You know, collaboration is pretty important. Biopharma seems to be more interested in that. But just to kind of get past the obstacles of regulatory and reimbursement, you know, the questions remain, but it's important to have the biopharma kind of support on the funding side of things.

 

00;03;17;28 - 00;03;47;01

Kyle Mikson

This was just coming off the indirect cost cap, news flow that I'm just talking about. Basically, I think that the takeaway was that there is room to cut some of these costs that will help the US, honestly, but I think it would have to be more of a tiered approach that would sort of, maybe set lower caps for larger institutions that have endowments and so forth, whereas the smaller institutions would have, you know, higher, higher caps, higher ceilings and more funds provided for the indirect costs.

 

00;03;47;03 - 00;04;04;04

Kyle Mikson

And on the kind of AI side, just seems like that's more realm relevant for drug discovery and diagnostics. Right now. It's not really flowing to tools as much, but I'm sure over time it will get there. And finally, on the, you know, the point of like increasing competition in life science tools, it seems like vendors are trying to adapt here.

 

00;04;04;10 - 00;04;25;18

Kyle Mikson

There should be more news, you know, sooner and kind of like over the next 6 or 12 months, let's say that causes, vendors, whether it be sequencing single cell or spatial, to, again, kind of like change their portfolios to, maintain their edge in their lead. So definitely interesting takeaways from our panel. And kind of thing that our team for, for joining us.

 

00;04;25;21 - 00;04;53;15

Michael Graham

Okay. Fantastic. Sounds really interesting. And for those out there who have access to Kyle's research, we urge you to check that, no doubt. So let's get in a little bit of detail, regarding the Trump administration and RFC and you know, what we're seeing going on with funding. Maybe, Kyle, you could just, for a start, summarize what's happened in this area since since, the Trump administration took over.

 

00;04;53;18 - 00;05;17;25

Kyle Mikson

Yeah. So the administration has attempted to set maximum levels that any age can support and fund costs that are not directly related to research. These are called indirect costs. The administration is basically, trying to set caps at around 15%, even down to 10% for some labs. That's actually been delayed due, due to like, you know, broad opposition by, by many states.

 

00;05;18;00 - 00;05;42;19

Kyle Mikson

And a judge in Massachusetts have also has also delayed the order on the basis of unconstitutionality. So in theory, that would be detrimental to NIH funded labs, which would flow through to demand, life science tools. On the bright side, though, a lot of institutions have stated that, they'd be able to operate basically, as usual, business as business as usual without these, these indirect cost funding or support.

 

00;05;42;22 - 00;05;51;17

Michael Graham

Maybe if you just talk about what, indirect cost support is and what that means for, some of the companies that you cover.

 

00;05;51;20 - 00;06;14;01

Kyle Mikson

Yeah. So a lot of these NIH funded labs, have costs that are not directly related to, to the research that they're conducting, using the products from, you know, life science tools vendors. And those are called indirect costs, essentially, overhead, indirect costs are basically it's actually a portion of the grant funding, that can be used to cover general operational expenses like utilities, administrative staff and building maintenance.

 

00;06;14;01 - 00;06;38;01

Kyle Mikson

So obviously it's not directly related to a specific research project, but it's necessary to kind of carry out the grant activities. Not all grant programs allow for the inclusion of these indirect costs and the rate of that kind of like funding or support, it varies. It can be all the way up to like 70%. But, you know, now with the Trump administration potentially capping that off at 15% support within these grant programs, it's underappreciated.

 

00;06;38;01 - 00;06;59;18

Kyle Mikson

Honestly, in the grand scheme of things. And it's kind of it's known these indirect costs aren't necessarily going directly toward the tools that like, are provided by our companies. But the labs that are buying the tools from our companies need these indirect costs to be, you know, supported in some way, probably to maintain their business and to, you know, by to continuously run their projects going forward.

 

00;06;59;21 - 00;07;14;17

Michael Graham

So as we think about, you know, what's been happening at the NIH so far this year, you know, can you talk about the magnitude of the reductions in, in grant funding? Just sort of where are we in that in that curve?

 

00;07;14;20 - 00;07;39;11

Kyle Mikson

Sure. The NIH grant review process was also disrupted when the Trump administration suddenly canceled funding meetings due to temporary communications freezes. Some of those meetings have since resumed, but experts warn that delays could impede new research projects. So just just to, put some numbers around. As of, the NIH awarded about 2.5 billion in grants in the first six weeks of 2024.

 

00;07;39;13 - 00;08;08;12

Kyle Mikson

This year, that number has plummeted to 1.4 billion. And for more context, the 2025 number that 1.4 billion compares to, you know, that's like hundreds of millions of dollars lower than the amount awarded in the same time frame over the past six years. It's affecting the available funding and probably the spending, obviously, for these companies. And honestly, there's so much uncertainty that it doesn't really matter if some of these labs have been promised funding like and honestly, the rest of the next few years is tough to to predict predict with accuracy as well.

 

00;08;08;12 - 00;08;11;28

Kyle Mikson

And the numbers kind of show that already.

 

00;08;12;00 - 00;08;40;03

Michael Graham

As we get into this, maybe, you know, we can just talk about the magnitude here of impact for your companies. You know, NIH grants are very important sources of funding for a lot of labs out there. How important are these labs in the, you know, spending, for your companies? Like, what portion of revenue do a lot of these labs, comprise for your covered companies?

 

00;08;40;05 - 00;09;04;00

Kyle Mikson

For the most part, well, I guess we have to kind of break it into companies that are more academic focused and then companies that might have a more mixed, revenue base. So for companies that have, like, more like, research or discovery focused, products, maybe that's sequencing or, or single cell analysis or maybe, you know, in spatial in some cases they're very like, you know, very exposed.

 

00;09;04;00 - 00;09;26;12

Kyle Mikson

NIH. They might they might have like 20 to 25% of the revenue coming from NIH funded labs. That's a very large percentage, obviously. And then when you have other tools, this is just, tools, of course, other tools, companies that, might have offer solutions that are, applicable for like more translational applications, which is more like suited for like biopharma companies.

 

00;09;26;12 - 00;09;51;16

Kyle Mikson

They might have a revenue mix that's, you know, half and half, you know, academic, half academic, half biopharma. And within the academic portion only like, you know, a subset is NIH based, right? So like they might have, you know, 10%, let's say, or even less, maybe an NIH. So, we find that area like biopharma cares about technology such as proteomics tools as well as spatial allergy, actually, in some cases.

 

00;09;51;19 - 00;10;09;27

Kyle Mikson

And so those those are coming to focus on that stuff right there. Those are less exposed. NIH but still, I mean, for the it's such a big portion for some other companies that are exposed, it's significant when you think about kind of like the investment cases for, a lot of the kind of growth tools, companies that have research focused, businesses.

 

00;10;10;00 - 00;10;24;08

Michael Graham

Are there any, you know, are there any important labs or any really important projects or topics that are or, are going to take it on the chin here, or do we not have that level of detail?

 

00;10;24;10 - 00;10;48;27

Kyle Mikson

There is. Well, the main thing is in terms of projects, I there's not a ton of us that are relevant. Some of the labs that matter here would be, you know, broad Institute n those are, you know, major contributors to, to research, whether it be, you know, sequencing based single cell or spatial, very important to, to prove out and validate, some of these like, you know, about, emerging technologies like that.

 

00;10;48;28 - 00;11;11;02

Kyle Mikson

It kind of puts the question, you know, put some questions around if these projects or initiatives can be completed or, or at least a continued or will there be more them in the future, or at least in the US. So there's, there could be a direct impact on, you know, the validation and could end up maybe stalling some of the, adoption of emerging technologies that are not as proven but have really exciting potential.

 

00;11;11;04 - 00;11;28;29

Kyle Mikson

There's also an aspect that's kind of unrelated to this. It's the shift to the, shift to invest in chronic disease rather than infectious disease. This is like a pillar of the RF Cajun strategy when it comes to his his being head of HHS. There appears to be support in the things that are more common or consistent cause of mortality.

 

00;11;29;02 - 00;11;42;19

Kyle Mikson

And we think that does support precision medicine and precision oncology, which has returns to, you know, our coverage, for example, in the subsector of that, a lot of investors are looking for it in terms of like growth.

 

00;11;42;22 - 00;12;00;15

Michael Graham

Okay. So, when we think about the impact, you know, of some of these actions, and we try to figure out where NIH dollars will be awarded going forward. You know, can you lay out for us, like, you know, what the priorities are likely to be from here?

 

00;12;00;18 - 00;12;33;27

Kyle Mikson

We've done we've conducted some, you know, interviews with, with or some NIH researchers to understand this, this question because, you know, not only is this a near-term event, but longer term, what's going to happen with NIH dollars in general? Even post this administration, it seems like the consensus is that tools that have historically been the basis for biological research, so like sequencing, are going to be, you know, in favor going to be, going to get those dollars basically rather than tools that are unproven or more confirmatory, that might include space biology augmentation.

 

00;12;34;03 - 00;12;54;03

Kyle Mikson

I think single cell is kind of on the fence, you know, not really clear where that falls. But, you know, if there's an environment where there's less funding, less dollars to go around, maybe it goes towards these more historically prevalent, technologies like, like sequencing. That being said, though, there, you know, there is a healthy backlog of funding for spatial biology.

 

00;12;54;03 - 00;13;05;12

Kyle Mikson

So maybe longer term, funding and dollars go back to the target area. But for the near term, I think that the, you know, we're kind of you might want to bank on the, the core tools like I see which.

 

00;13;05;13 - 00;13;28;24

Michael Graham

I know there is a little bit of a battle going on on the vaccine front. But I don't think it's all vaccines that, you know, the, the new regime is, is, is focused on, you know, can you just talk about the vaccine situation and, and, and why this might not have, you know, a negative impact on the bioprocessing industry.

 

00;13;28;26 - 00;13;48;19

Kyle Mikson

Yeah. So obviously, like the, the, the knee and the big boom of, for vaccine manufacturing and development fracturing, you know, a few years ago was was huge for bioprocessing, in that, you know, and that was that lasted for, for a little bit as well being and we saw that that affected the growth rate of the bioprocessing industry in the companies within that.

 

00;13;48;22 - 00;14;10;01

Kyle Mikson

So like, you know, you would think that this was a large part of the, the revenue mix, let's say, for a bioprocessing company, the reality is, is very low. You know, vaccines do not represent a large portion of revenue for these companies. And they're just there had to be a, you know, a year or two kind of, like a period for this to settle out and so going forward, vaccines, you know, it's not going to be not going to be as as impactful.

 

00;14;10;01 - 00;14;32;18

Kyle Mikson

Now, if there is another, like you, a widespread global pandemic, obviously, and vaccines will be important or hopefully we don't get to that point. But going forward, like growth for bioprocessing is going to be driven by the newer modalities, whether it be, cell gene therapy or other, you know, maybe even just monoclonal antibodies for the most part, vaccines or not, you know, in the picture as a big growth driver going forward.

 

00;14;32;18 - 00;14;42;06

Kyle Mikson

So the the lack of support for vaccines is not you know, it's not really a huge issue, we would think, given it's no longer like a, like a tailwind the way it used to be in the recent past.

 

00;14;42;09 - 00;15;01;27

Michael Graham

How are these companies generally dealing with this NIH uncertainty? I think we've seen a lot of the stocks, you know, heading lower, as you alluded to earlier. Just, you know, at a high level, how are the companies dealing with this as they approach giving guidance and talking with investors?

 

00;15;01;29 - 00;15;23;10

Kyle Mikson

Well, depending on when earnings have taken place, it has affected the strategies I would say. But if you know, for companies that reported earnings earlier in the cycle before a lot of these announcements, rose NIH were starting, those companies have kept their guidance, at least as it relates to, to their initial expectations. Back in early January, even before Trump really took office.

 

00;15;23;13 - 00;15;43;16

Kyle Mikson

There's some natural certainty baked in in this in these cases, but nothing about indirect costs. Then companies that are in the middle that have reported a little bit more recently, but still in the early end, they baked in some headwinds regarding the uncertainty. And have you even called it out in some cases, like from a quantitative perspective, to actually quantify the number?

 

00;15;43;19 - 00;16;03;17

Kyle Mikson

However, some of these companies have not, included any kind of additional headwind from the indirect cost caps as well. You know, recognizing that would be much more of a hit than the, just overall uncertainty from NIH. So you can imagine that investors haven't really loved that approach, given there's there's further downside to the approach, as I just stated.

 

00;16;03;19 - 00;16;24;23

Kyle Mikson

So companies have taken those strategies, have seen their stock price performance underperform. Honestly, the relatively speaking, recognizing there's other idiosyncratic things going on as well with these companies. And finally, the last approach that we've seen, like really recently, is, is companies making it everything that's on the table, probably with probability weighted, honestly, but they haven't been quantifying this.

 

00;16;24;25 - 00;16;44;01

Kyle Mikson

Whether that be because you just don't have the, you know, sort of capability to quantify something like that or they're just not telling the story. They haven't, you know, they haven't put the numbers around it, which honestly is appears to be safe. And it seems to be a little bit more like proactive. And they, you know, have a better handle around this sort of these headwinds.

 

00;16;44;01 - 00;17;04;10

Kyle Mikson

And that's helps companies that have taken that approach and that strategy. And it's you know, those companies are actually up quite a bit since, since they've reported earnings and provided their guidance. So there's been a lot of different strategies and approaches. But for the most part, you know, the sectors basically earnings have been like a move downward for most of these, these companies.

 

00;17;04;12 - 00;17;20;14

Michael Graham

And it's fair to say that, in your space is typical of others and that the larger companies tend to report first. So, we probably have some of the smaller companies here that need to really decide how they're going to handle the rest of earnings season with some of this, recent news.

 

00;17;20;17 - 00;17;30;21

Kyle Mikson

Yeah, exactly. And in a lot of cases, the smaller companies are even more, you know, exposed and could be hit even harder. So they have to really be smart about their, you know, strategy to how they're communicating this industry.

 

00;17;30;21 - 00;17;55;10

Michael Graham

So there's another important nominee coming in this area. You know, we talked about RFC and Health and Human Services. Obviously part of that broader organization is at NIH. And, you know, the nominee, from President Trump, who is Stanford professor Doctor Jay Bhattacharya. Is preparing for his confirmation in the coming weeks.

 

00;17;55;12 - 00;18;06;16

Michael Graham

Talk about how the NIH, you know, stance might evolved once. If if Doctor Bhattacharya is confirmed.

 

00;18;06;18 - 00;18;31;05

Kyle Mikson

Yeah. So, you know, we still don't know enough about Bhattacharya, his true policies and opinions, or even, like, you know, if he will be confirmed or who potential replacements could be. I think based on how the the Senate confirmation hearings for RFK Jr went, it seems like a lot of these nominees are just, for lack of a better word, following what the larger administration is, is putting out there.

 

00;18;31;07 - 00;18;53;07

Kyle Mikson

It seems like whoever is going to lead NIH is probably going to support these, you know, this these funding cuts, across the board here going forward. That being said, you know, I think NIH has always been has always had bipartisan support, needs, congressional approval to do sweeping changes in NIH in general. So I think it's a little bit less important who leads it.

 

00;18;53;07 - 00;19;07;03

Kyle Mikson

But nevertheless, it's going to be important to watch and monitor going forward. And there isn't, great timelines on when when he can be confirmed. Everything. But it's a near-term event to look out for.

 

00;19;07;05 - 00;19;19;18

Michael Graham

And then lastly, just one other, important development in your space, which is, the China Unreliable Entities list. Talk about that and what's going on with some of your covered companies.

 

00;19;20;28 - 00;19;42;02

Kyle Mikson

Yeah. So Illumina was added to China's unreliable and to this list in early February. Presumably that was, you know, basically a retaliation to the US blacklisting Chinese genomics company, BGI Group in in the past, as well as Illumina lobbying for bills that would also permit, you know, Chinese genomics companies like BGI to market and sell in the US in the past.

 

00;19;42;02 - 00;20;05;03

Kyle Mikson

So, you know, I guess some might say that Illumina had this, this coming, this could have read through to other life sciences companies or markets, I guess. I mean, obviously, you know, voluminous revenue in that, in that regions probably, you know, it could be challenged going forward if they remain included on this list. I think that's relatively factual at this point with respect to what the long read market.

 

00;20;05;03 - 00;20;25;21

Kyle Mikson

I mean, there's no meaningful long read sequencing competition or companies in China. So that market shouldn't really be impacted. And, and, you know, maybe that could even benefit long read sequencing companies as they try. But maybe they could like take some accounts that were thinking about Illumina or using Illumina. Maybe, you know, as that divide between long reinsurance sequencing kind of blurs.

 

00;20;25;24 - 00;20;47;23

Kyle Mikson

And then on the single sell side, companies that offer single cell products usually rely on sequencing as like an output. In fact, most of these companies do, whether it be, you know, a box dependent, you know, workflow or a box free workflow. Most of these products are totally compatible with all sequencers, and so they should be able to still sell in market in China.

 

00;20;47;25 - 00;20;55;15

Kyle Mikson

There's also no, there's like minimal competition in China as well. So those companies should be relatively okay. So so overall it seems like the main

 

00;20;55;15 - 00;21;01;28

Kyle Mikson

impact here is going to be on, you know, Illumina, which which makes sense given they're the one on this list here.

 

00;21;02;00 - 00;21;13;13

Michael Graham

All right Kyle. Well, great job on your recent note, and panel discussion, thanks so much for outlining, all of these important developments here. And we'll keep a close eye on this, in the months ahead.

 

00;21;13;13 - 00;21;36;03

Michael Graham

As a reminder, this content is for informational purposes only and should not be taken as legal, business, financial or investment advice. This content is not intended to promote any product or service of Canaccord Genuity. The opinions and views expressed in this program may not necessarily reflect the institutional views of Canaccord Genuity or its affiliates. This program should not be copied, distributed, published or reproduced in whole or in part without the express written consent of Canaccord Genuity.

 

00;21;36;04 - 00;21;50;08

Michael Graham

Certain information contained in this program constitutes forward looking statements, and there is no guarantee that these results will be achieved. Canaccord Genuity has no obligation to provide update or changes to the information in this program. Past performance does not guarantee future results, which may vary.

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