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Please find a link above for an update on the biopharma market for the week of October 23rd, 2023.
Macro Update
In previous weeks a view had emerged that the Fed may be done with its rate increases. This was associated with a drop in the 10-year Treasury yield for two weeks running.
Fed Chairman Powell gave a talk at the Economic Club of New York and wasted little time in smashing that conception, stating:
“We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Chairman Powell noted that the Fed has been “surprised” by the resilience of the American economy and those who specialize in reading the tea leaves interpret all of this to mean that the Fed is likely to raise rates again before the year’s end.
After these remarks, we saw the ten-year Treasury yield resume its upward march. The 10-year yield hit 5% last Friday – a first since 2007.
This is obviously not good news for biotech.
There is also a spreading perspective that interest rates are just going to be higher in the future even after the Fed is done knocking down inflation.
This is part of the reason for the increase in long Treasury yields.
Michael O’Rourke, Chief Market Strategist, Jones Trading opined last week:
“The reality that has begun to sink in over the past month since the FOMC meeting is that the Fed is not cutting rates back to pre-pandemic levels when inflation cools. Rates will settle back in at higher level. That means that the discount rate one uses for investment-valuation models needs to be higher, which means multiples contract and valuations come down.”
Call us cynical, but sometimes it does feel as if market participants seek ex post explanations for the facts at play.
Our own view, for what it’s worth, is that capital abundance will inevitably put downward pressure on real interest rates.
Higher long yields feel much more like the effect of shorting behavior by market participants as the Treasury borrows heavily while it still has the authority to do so.
One of the inadvertent effects of recent Congressional battles over the budget limit may be to trigger heavy government borrowing, putting upward pressure on long rates.
Biopharma Market Update
After writing about the buildup on negative sentiment a week ago, we had a number of conversations in which readers suggested that we might think about lightening up the mood a little bit.
“Why not write something positive? We want to hear that” was the subtext of many conversations.
We get it. Who wants to watch a horror movie when there is a feel good show on the next channel?
To be clear, we at Stifel are highly optimistic about the long term of the market – particularly in biotech.
If one looks at the Nasdaq Biotech Index going back 30 years, it is evident that biotech stocks are up twenty times. Further, the CAGR from buying the index over the last 15 years has been 10.9%.
Biotech is a great place to invest and history illustrates the importance of staying the course in downturns.
Stifel recently published a piece on the stock market going back to the 1930’s in which we noted that upswings in the market last longer, on average, and go further, on average than downswings.
Unfortunately, in the short run, negative momentum can be a real thing.
In the same sense that positive market euphoria can go too far – leading to an asset bubble, there is also times when market gloom takes hold – and participants steer clear of the market even though fundamentals are positive.
Based on many conversations this seems to be what is happening now in the biotech market.
In line with this, the XBI was down 3.9% on bad rate news last week. The XBI is now down 19.4% for the year. Total global biotech value dropped 6.1% for the year.
After adjusting out the effect of exits and entries (M&A and IPOs), the total biotech sector value is down 15.8% for the year.
The number of global biotechs worth $100 million or less rose substantially last week. At no point since the Pandemic have there been more companies worth $100 million or less.
Last week was very tough for the biotech sector as many of the higher quality names saw big drops in value. Gene editing, base editing and precision oncology stocks were particularly hard hit. The average top 50 biotech return was -4.6% last week. The median was -4.2%.
The number of global biotechs worth $1 billion or more dipped below 5% last week. Compare this to 16% at the end of 2021.
Phase 1 and preclinical biotechs have dropped roughly 30% over the last seven weeks while Phase 3 biotechs down 16%, on average.
The last seven weeks have seen significant weakness in protein degrader stocks, gastroenterology stocks and ophthalmology stocks while cardiometabolic biotechs have fared best. If one goes back to Dec 31st, 2021, it is evident that CVM and immunology biotechs have fared best while vaccine, gene therapy and neuro stories have also fared well in a relative sense.
The data quality premium has become ever higher in recent weeks as well. The average value of a U.S. biotech with “very good” data using or admittedly subjective judgement has dropped from $1.3 billion at the start of 2023 to $847 million last Friday (down 36%). By comparison, the average value of a U.S. biotech with “good data” has dropped from $289 million at the start of 2023 to $73 million last Friday (down 75%).
The steepening data quality premium makes it clear that there is more going on in the biotech market than just greater time discounting of biotech due to an increase in prevailing interest rates. There is also a steepening of the risk premium – that is, the value discount an investor has to accept to take on risk.
As we noted last week, many biotech funds face the possibility of extinction. If they are not able to generate positive returns over the next few years, they risk exiting the business. We saw this happen before in the 2001 to 2005 period and any sane manager will recognize the importance of good performance in today’s challenging market.
This fund extinction risk obviously induces a strong desire by investment managers to avoid “blow up” risk and to, instead, make bets where “conviction” is high. In general, managers will migrate to stocks that have the least downside risk and the most upside – hence the high premium on data quality.
The count of negative EV life sciences companies worldwide rose from 214 a week ago to 223 last Friday. We are starting to near last year’s record of the number of negative EV life sciences companies again.
The total enterprise value of the publicly traded life sciences sector was down last week by 2.8% (-$247 billion). The sectors that were hardest hit include CDMOs, biotech, pharma services and API.
Growth in total R&D spend of the public life sciences sector has slowed from 15.6% per annum between 2020 and 2019 to 2.7% over the last 12 months. Big pharma accounts for roughly half of all R&D spending in the sector.
Growth in total R&D spend of U.S. listed biotech companies is slowing down in 2023 substantially versus prior years. Most of the slowdown is confined to companies that had low years of burn remaining in cash in 2021.
To illustrate, companies that had three years of burn or more at the end of 2021 increased R&D spend by 82% from 2021 to 2023. In contrast, companies with 1 year of burn or less, cut R&D spend in the same period by 22%, in aggregate.
A key message is that R&D spend, overall, has been increasing throughout the downturn. Science progress is driving ever more investment in translational development projects.
Capital Markets Environment
There was a $10.6 million IPO on the Japan exchanges last week by K Pharma and a $236 million U.S. Listing by Abivax on the Nasdaq. Abivax was already listed in Europe.
The Abivax listing didn’t go terribly well as the company’s shares dropped 28% for the week. The company appears not to have chosen the best week to list its ADRs on the NASDAQ and do a big raise.
Last week saw $891 million in follow-on equity volume. The largest transactions were $300 million raises by Nuvalent and Ultragenyx.
Last week saw 33 companies raise $457 million in the venture equity market. The largest deal in the market was an $83 million raise by Atom Bioscience.
Continuing a trend of PE firm participation in the biotech market, last week saw KKR buy a minority stake in Catalio Capital. This will give Catalio more firepower for investment in the sector.
We saw two deals in the private debt market last week with $61 million raised. It was a quiet week on the debt front.
PTC announced a partial sale of its royalties on Evrysdi from Roche to Royalty Pharma for $1 billion. This puts total royalty monetizations for the year at a bit over $3 billion. This year is on track to be an average year for royalty monetization volume.
Deals Environment
The M&A market was quiet last week. Last week saw $143 million in M&A deals announce across six deals. The largest was an acquisition of Yingu Pharma in China and an unsolicited offer by Concentra to acquire Rain Oncology. Lilly bought another ADC company, Mablink but no price was given for the transaction.
Importantly, the European Commission has approved Pfizer’s acquisition of Seagen. We are still waiting on the U.S. approval – which, hopefully, will be coming any day.
We update our estimates of M&A firepower and can report that the top 18 pharmas have headroom to buy up to $521 billion in assets and still maintain a 3X debt/EBITDA ratio. This assumes that there is zero EBITDA coming from the target companies. If one defines “stretch M&A firepower” as the amount of cash available for M&A that would take the companies up to 5X debt/EBITDA, there is $1.1 trillion of firepower.
Bottom line, there is massive available capacity for pharma to buy biotech assets.
We were impressed by Andrew Pannu’s analysis last week that layed out the upcoming patent expiries at big pharma. His analysis shows that there is $195 billion in upcoming LOE’s in the next five years.
Pharma will need to get busy on M&A and clearly has the capacity to do it.
In perhaps the biggest news item of last week, Daiichi Sankyo announced that it is entering into a $4 to $22 billion development and commercial partnership with Merck for three ADCs.
Under the terms of the agreement, Merck will pay Daiichi Sankyo upfront payments of $1.5 billion for ifinatamab deruxtecan due upon execution; $1.5 billion for patritumab deruxtecan, where $750 million is due upon execution and $750 million is due after 12 months; and $1.5 billion for raludotatug deruxtecan, where $750 million is due upon execution and $750 million is due after 24 months. Total potential payments under the deal, ignoring royalties, are $22 billion.
We did a little homework using DealForma and can confirm that this deal involves both the largest upfront package of any pharma industry licensing deal in history, and also the largest total payment package.
GSK also paid $85 million upfront to license the rights to an ADC from Hansoh Pharma that binds to B7-H4, going into competition against Seagen/Pfizer which has a similar product.
Last week also saw Novo Nordisk acquire Ocedurenone for uncontrolled hypertension from KBP Biosciences for an undisclosed amount. This sets up Novo to compete against a similar molecule from Bayer.
Last week saw Thermo Fisher agree to acquire Olink, the research proteomics company for $3.1 billion. Hats off to the founders and employees of Olink for a $3 billion + exit. The company’s technology is transformational in the field of research proteomics.
We highlighted the value of Olink’s technology in a recent write-up on emerging techniques used in pharma industry target identification.
Last week saw Gilead enter into a $100 million partnership with Assembly Biosciences. Assembly has quietly built up an impressive next generation long-acting antiviral candidate for HSV and has a next generation core inhibitor for HBV in development.
With a stock price in tatters, this deal with Gilead was eminently rational. Assembly gets needed capital and a great commercial partner who understands the value of their drug pipeline.
Gilead gets a next generation antiviral portfolio. The deal was structured in a way similar to Gilead’s partnerships with Arcus and Galapagos, coupling product rights with a significant equity investment giving both sides upside in ASMB stock. Surprisingly, ASMB shares were only up 33% for the week – highlighting challenging capital market conditions.
We did a run of the number of $100 million licensing deals this year (counting the Merck/DS transaction as three transactions). We are on a pace for twenty such deals on an annualized basis. This compares to 23 deals last year and 37 such deals in 2021.
While licensing activity is perking up it remains down from prior years.
News stories in Bloomberg suggested that both Prothena and Jazz are preparing to go through a sale process.
It’s hard to know what to make of Bloomberg stories indicating, for example, that Jazz or Prothena are exploring options.
Do these stories reflect a reality that the company will be sold or, perhaps, an aspiration by the board or other shareholder that a company should be sold?
Presumably, reporters pick up information on what might be sold from traders, bankers and board members. The information could obviously be slanted in some way.
We went back and searched for stories in Bloomberg mentioning interest in a sale, interest from buyers, sale processes or impending sales in the period from June 2021 to July 2023. We then went to see what actually happened after the story ran. If a transaction occurred in the next 12 months on the mentioned asset, we indicate that the story successfully called the outcome.
The results of this analysis indicate that a story about a specific buyer who is near to the finish line forecasts the correct outcome 83% of the time. If a story says that the seller is weighing a sale (suggesting that there is real interest in an asset), a sale happened 39% of the time.
The two recent cases of companies exploring a sale (Jazz and Prothena) are different. When a story indicates that a company will explore a sale, the event happens 24% of the time. When a story says that there is interest in an asset, a sale happens 17% of the time. And, when a story says a shareholder is pushing a sale, the sale happens 0% of the time.
Thus, if history is any guide, there is a 24% probability that each of Jazz and Prothena will be sold in the next 12 months.
A number of companies have indicated that they are exploring strategic options in recent weeks including Evelo and Athersys. We count 45 biopharma companies that are exploring strategic options today. This number is unprecedentedly high.
Recent data from Pitchbook updates PE deal volume in healthcare. On an annualized basis, we are headed to a year that is well down from 2021 and is likely going to be the lowest in terms of dollars transacted since 2017.
Industry News
Last week saw Monica Bertignolli, the NIH nominee go before the Senate for policy questions prior to a vote on her nomination. The event was surprisingly politicized with many inappropriate questions outside of the purview of the NIH – on topics like drug pricing. Mrs. Bertignolli took it all in stride and did a nice job of emphasizing the importance of government sponsored research in health.
Last week saw J&J report Q3 earnings. Growth, excluding Covid products, was up 8.2% year on year, reflecting good performance of both oncology and immunology products.
Roche also reported earnings. The numbers were not as good because of a substantial decline in the diagnostics side. Roche is facing negative growth in diagnostics related to the end of the Pandemic and, while positive, pharma growth is restrained due to the impact of biosimilars on its legacy portfolio.
We thought the paper on the “Million Heart Model” in JAMA last week was important from a public health perspective. The paper noted that better CV screening and intervention strategies does matter – lowering the probability of a CV event over 5 years from 8.1% to 7.8%.
ESMO Update
This year’s ESMO conference in Barcelona was packed with news. Key items of note:
- Data for PADCEV+Keytruda in first line bladder cancer. The active arm of the study saw a 55% reduction in the probability of death from the disease versus chemo. Wow!
- Data from Daiichi Raludotatug DXd for heavily pretreated ovarian cancer. This ADC, newly licensed by Merck had stunning results, showing a 46% ORR in advanced disease. Unheard of before.
- Data from Cantargia for nadunolimab (IL-1RAP mAb) + chemo. The drug delivered a 60% ORR in metastatic TNBC. Very impressive.
- Data from Agenus for botensilimab (an improved CTLA4) plus a PD1 in refractory MSS colorectal cancer. Patients saw an extraordinary 29% ORR and median survival has not yet been reached in the study.
- Data from Amgen and Harpoon for DLL T-cell engagers in SCLC. Both drugs did quite well and it’s clear that this very difficult disease is going to have some new and important treatment options for patient soon.
- Data from Revolution Medicines for its RMC-6236, a multi-RAS inhibitor, in advanced lung cancer and PDAC. Among the 40 efficacy evaluable NSCLC patients, the objective response rate was a stunning 38 percent, with one patient achieving a complete response (CR) as a best response and 14 patients achieving a partial response (PR) (including three unconfirmed PRs).
- Data for Ambrx’s ARX517, a PSMA antibody, in advanced prostate cancer. The results appeared to be superior to Pluvicto. The Ambrx ADC approach avoids the need for generating and supplying radionucleotide and is potentially far more easily accessed by community oncologists. Very impressive.
- Phase 1 trial results with AMG-509 (xaluritamig), a new STEAP-CD3 engager immunotherapy for heavily pre-treated metastatic prostate cancer patients. Patients obtained a PSA drop of 50% or more most of the time.
- Impressive data for BL-B01D1, a first-in-class EGFR×HER3 bispecific ADC from Systimmune. Patients with metastatic disease experienced a PR or a CR over 40% of the time on this drug.
- The PAPILLON study from J&J in advanced NSCLC with EGFR20 mutation. The OR rate was an impressive 73% in a first line setting.
- Highly impressive data from Roche’s Alectinib (ALK/RET inhibitor) versus chemo.
- Similarly impressive data from Lilly’s Selpercatinib in RET fusions. The 84% ORR rate was far better than that in the control arm.
A key takeaway from ESMO this year was the good deal obtained by Merck in transaction last week with Daiichi Sankyo. The results of raludotatug Dxd in ovarian cancer point to a key new treatment option in ovarian cancer. The other newly acquired assets also had impressive data. We look forward to watching two great oncology development organizations put their teams together to bring a bevy of new ADCs to patients.
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