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When was the last time a big pharma’s shares massively outperformed a biotech index YTD? Hint: You likely weren’t around.
In my last column, I highlighted the substantial underperformance of the Nasdaq biotech indexes and healthcare in general, which is in stark contrast from last year’s record-breaking outperformance—with biotech IPOs leading the charge, up nearly 50%, and biotech IPOs ahead a stunning 90%. One month later, and it hasn’t gotten any better—the biotech XBI as of this writing is down 11.4%, while the S&P 500 is up 19%. Small-to-mid cap biotech investors have suffered the greatest pain, with the XBI down 13% while the DRG (weighted large cap pharma) index is up an impressive 17%, with Pfizer (market cap a whopping $262 billion) ahead on the year by an impressive 27%. You would have to go back a very long time to see that kind of a year-over-gain for Pfizer, perhaps back to the heady Lipitor days, and even then, it never happened.
The third quarter of 2021 is off to its slowest start in terms of biotech offerings in five years.
Deals are still getting done but with a high level of valuation and price sensitivity and existing investors are dictating the outcomes for IPOs. That said, 13 out of 15 of the biotech IPOs done this quarter are trading above their offer price and up an average of 35%. Despite the headwinds and underperformance, there have been 68 biotech IPOs priced this year, which is already ahead of last year, but, again, companies are price-takers and heavily dependent on existing investors.
We’ve cited the reasons; it began with rotation into depressed value stocks in anticipation of the reopening trade, what I call the Democratic trifecta—which brings with it the potential pricing reforms (Centers for Medicare & Medicaid Services), antitrust scrutiny with teeth (Federal Trade Commission), and a more stringent and unpredictable FDA. While biotech IPOs only began to meaningfully lag the market over the last several months, the striking underperformance for biotech follow-on offerings began in late 2020. In fact, while the XBI is up 34% since January 2020, biotech companies that executed follow-ons are up just 13%.
Clearly, this underperformance is a buzzkill for investors and blunts their appetite for new issuances; while poor performing stock prices have kept companies on the sidelines. Life sciences dedicated funds are frustrated.
Could M&A provide a much-needed boost to the sector, and could a lock down and a recalibration in valuations drive rotation back to growth, which perhaps has been more than sufficiently beaten up?
Our 2Q 2021 quarterly Ernst & Young’s Life Sciences (where I serve as a senior advisor) Earnings Analysis and Industry Outlook report shows that most companies met or exceeded expectations and a healthy number of them raised guidance. Most companies report that demand is now back to 90-95% of the pre-pandemic levels, and this combined with easy comparisons and a clear renaissance in innovation punctuated by the successful development of COVID-19 vaccines. The number of new drug approvals by FDA continues at its record-breaking pace and is certainly a bullish indicator of future performance and sustainable growth.
Most companies emphasized M&A as a high priority strategy to drive growth. According to EY, the top 12 biopharma companies by market cap have over $170 billion in “dry powder” available for deal-making. With the dramatic outperformance of large cap pharma versus the small-to-mid cap biotech sector, the preferred hunting ground for acquisitions, perhaps buyers and sellers will find greater common ground and drive an acceleration in M&A in the sector.
Could M&A lead a rotation back into biotech and reignite stock prices?
Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board