Please find attached an update on the biopharma market for the week of October 7, 2024.
Macro Picture
Last week saw surprisingly strong U.S. jobs data. The good news is that we aren’t headed into a recession anytime soon.
The bad news is that the pressure on the Fed to cut rates quickly has eased a bit.
We are also seeing a confluence of Middle East conflict with a very close Presidential election.
There is no clear winner emerging in the U.S. race for President.
We are now a month away from election day and the key states that will determine the race (Pennsylvania, Arizona, Wisconsin, Michigan and Georgia) remain far from decided.
Implied volatility as measured by the VIX went up quite a bit last week while the 10-year Treasury bond yield headed back to nearly 4%.
The market is pricing in short-term volatility and this remains far from a “risk on” type of environment.
China announced a stimulus which helped prop up long suffering biopharma stocks in the country.
The China market was closed all last week due to a national “Golden Week” type holiday but in the few days after the stimulus announcement and before the market close, stocks took off. Names like Hengrui popped 20% or more.
We anticipate that the China stimulus will be good overall for markets.
We do not wish to miss the big picture as we drive over a few bumps in the road:
- The Federal Reserve rate-cutting cycle is in full swing. Fed Chair Jerome Powell has said projections point toward quarter-point rate cuts at the final two meetings of the year.
- While volatility is higher than it has been, it is not historically high.
- Biopharma M&A is likely to pick up substantially in 2025 once the election has passed.
Overall, we remain optimistic about the markets and see a clear road to recovery for the biotech sector in the weeks and month ahead.
Biopharma Markets
The XBI was down slightly last week as Treasury bonds rose on news of a strong jobs market. An increase in rates is, in general, not a positive for biotech. We would note that Stifel’s global biotech value tracker rose slightly last week.
On a disappearance adjusted basis, biotech is up 35.3% for the year to date (enterprise value). The market has been flat since the start of Q2 2024.
The population of high valued biotechs continues to grow. The population of companies worth $100 million to $250 million has shrunk meaningfully in recent weeks. The population of companies worth $100 million or less has been more or less stable all year. On August 9th, 2024 there were 56 biotechs with an EV greater than $1 billion. As of last Friday, there were 74 such companies.
Performance was flat in the life sciences sector last week. The best performing sectors were HCIT, API and pharma services. OTC, medical devices and pharma were all down slightly.
The number of negative EV life sciences companies has risen to 136 from 133 two weeks ago.
If one looks at year-to-date subsector performance in the life sciences, we are seeing a resurgence in specialty pharma as the rate environment improves.
Japan pharma, LatAm pharma and Asia pharma (ex-China, ex-Japan) are also doing well this year. In contrast, pharma services, HCIT and China pharma have all underperformed thus far in 2024.
Among large cap life science players, IDEXX, a diagnostics player in animal health, has been the returns leader in recent weeks, followed by Agilent and Merck KGaA. Vertex, Alcon and Roche have done quite well as have Novo Nordisk and Eli Lilly. Chugai, Abbott, Takeda and Daiichi-Sankyo have all underperformed. The Japanese Yen has dropped by 5% in the last two weeks, explaining much of the drop in the Japanese names.
There has been quite a bit of movement in the U.S. biotech market in terms of what types of companies are in favor.
A month ago, vaccines reigned supreme due to great data out of Vaxcyte. As of last Friday, obesity stocks had returned to the top spot for highest average EV. RNA stocks and protein degrader companies are also doing quite well. CV, fibrosis stories and B-cell stories have lost ground from the start of the year.
Consistent with market worries about short-term volatility around the election and the geopolitical sphere, we are continuing to see a focus on quality by biotech investors.
The value of the average Phase 3 stock, for example, has risen by more than 30% over the last eight weeks.
The market remains risk-averse, quality-oriented and focused on companies with short-term data events.
Sigh.
Hopefully, the day will soon come when investors are willing to take on a bit more risk and bet on the many really exciting earlier translational science stories in today’s biotech market.
Capital Markets Update
Through the end of Q3 we remained on track for a nice up year in biopharma capital raising. If one totals up public equity, venture equity and private debt, we are headed for a $130 billion year of new capital raised.
Not bad at all and up nicely from last year’s $90 billion.
This will be the third highest year for capital raised and behind the halcyon years of 2020 and 2021.
After months of inactivity, the U.S. IPO market priced four offerings in September (Bicara, BioAge, MBX and Zenas).
In total, roughly a billion in primary capital was raised.
All four of these companies have traded up in the aftermarket which is a great sign for the market going forward. The IPO market is perking up and is open for strong stories.
We saw the equity follow-on market open up after Labor Day with guns blazing – only to slow down in the last three weeks of September. Issuers were keen to take advantage of the window surrounding the Fed rate cut and wanted to stay well away from the election period. The biopharma equity follow-on market remains highly catalyst driven. Ten of twelve major follow-ons that took place in September were accompanied by a data event. Most issuers have had market caps over $1 billion. The market remains challenging for smaller issuers that lack tangible data catalysts.
Weekly volume of venture privates this year has averaged $750 million. The volume in recent weeks has been in line with this average.
A story in Institutional Investor last week reviewed hedge fund participation in privates and PIPE deals. The story notes that RA Capital led the market with nine deals in Q3. While impressive, this was down from 22 investments in Q2 and 27 in Q1. Perceptive and RTW also scaled back. In contrast, Cormorant scaled up Q3 investments.
Our own experience is that funds put more money to work when returns are positive following deals. This was the case early and the year and then reverted at mid-year.
We are now seeing great returns following both IPOs and follow-ons and we expect to see investment volume from hedge funds picking up ahead.
We share quite a bit of data on the venture market this week sent over by our friends at DealForma. The data do not disappoint, showing that there has been less investment in later stage venture rounds in the last two years, that the number of venture rounds has dropped, but that average deal size in the U.S. is way up this year.
This reflects the relative success of larger funds like Arch and Flagship and their larger bite sizes. In Europe, venture capital investment volume in biotech has not fallen as much and average deal size is about half that of the U.S. China venture biotech investment in 2024 has been way down.
Volumes in the private debt market have been elevated in the last several months. The issuance volume seen in the last four weeks have been in line with the levels seen since May.
September was the second strongest month for life science sector debt privates on record.
Deal News
M&A volume has been very muted in September and last week was no exception. Last week saw two asset deals but no traditional M&A type deals of any size. Recordati acquired Enjaymo® from Sanofi for $825 million and Genentech bought a portfolio of CDK inhibitors from the Chinese company Regor for $850 million.
September 2024 was the slowest month for M&A volume since Feb 2023. As we have gotten closer to the U.S. Presidential election, the volume of M&A has slowed to a crawl. We do expect volume to pick up after the election, no matter the outcome.
If one annualizes M&A and asset sale volume through Q3, we are looking at a $70 billion total M&A volume year. This will be by far the lightest year for biopharma M&A in the last decade.
Thank Lina Khan plus the IRA plus PBMs plus strong internal pipelines.
Further data from DealForma shows an ongoing decline in licensing activity throughout 2024 versus earlier years.
The dollars put out in M&A and licensing by big pharma have been relatively paltry by historic standards. Only Pfizer and Merck have averaged more than $30 billion in spend each year over the last two years. The median spend level over the last eighteen quarters on licensing upfronts and M&A has been $18 billion.
The median upfront since 2023 on an oncology license deal has been $40 million. The median upfront on a Phase 3 asset has been $95 million. Compare this to a median upfront on a preclinical asset by big pharma of $49 million.
Industry News
Key industry events include rumors that Wuxi is selling off its U.S. advanced therapies site in Philadelphia.
A shame to see it come to this, but uncertainty created by the BIOSECURE legislation may have led Wuxi to explore its options for this site.
A study out last week by LEK looked at the IRA and noted that the “real discounts” involved on prices are quite muted from the headline numbers.
Conversations about prices continue to resonate in Congress and in recent testimony, Novo Nordisk’s CEO pointed to the complex system present in the U.S. as one of the reasons for the high prices it charges for GLP-1 agonists.
PBMs are very much in the crosshairs these days and last week saw Blue Shield of California cut a direct deal with a drug company to access biosimilar adalumimab.
Several other developments on the obesity front:
- Lilly announced that its shortage on tirzepatide was officially over
- New data from NHANES showed that U.S. obesity rates actually fell in 2023
Wow!
Great news and this hopefully will portend more good news to come on the epidemic of chronic disease bedeviling the U.S. healthcare system.
We always enjoy reading Eric Topol’s blog posts and thought that his detailed analysis of new approaches to aging and chronic disease enabled by Somalogic and Olink’s proteomic assays was right on the mark. His article is well thought through and worth reading.
A fascinating paper out of UC Irvine showed that a novel protein could outperform L-Dopa in treating Parkinson’s. Exciting but this is still based on mouse data.
We were fascinated by an article in Nature that was able to solve for the entire wiring of the brain of a fruit fly.
It turns out to be a hard problem and points to all sorts of new possibilities in neurology in the decades ahead.
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