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Over two years into a bear market, it still can’t catch a sustainable bid.
The new year started with a fair amount of investor optimism that biotech would come out of its steepest and longest bear market since the inception of the XBI index in 2006. From its peak in early 2021, the XBI fell roughly 57% to a recent low of $63 in June 2022. By early February of this year, the biotech index had climbed its way back to $92, and investors found reasons to be optimistic. Some of those reasons include:
But wait a minute, don’t get ahead of yourselves. As I write this, the index has retrenched back to $75. What happened?
While 2023 started with enthusiasm, it was short-lived. Turns out, inflation was not peaking, and investors are pricing in further rate hikes, albeit muted by the unfolding duress in the banking sector (which, oh by the way, is a direct consequence of the Fed’s actions). This unfolding stress was led by the failure of SVB Bank, a leading VC lender to biotech. (Ouch—a one-two punch!)
Of course, there may be a silver lining to what’s unfolding across the banking sector, as it could throw a damp blanket on inflation and interest rate hikes, which ultimately could result in a rotation back into biotech for the reasons stated above.
That said, not so fast. Last week, according to my brilliant friend, Michael Darda, chief economist and market strategist at ROTH-MKM, the Fed’s discount window lending exploded to $340.7 billion, the highest weekly figure since November 2008. Policymakers are playing a game of “whack-a-mole” that is unlikely to bear fruit with tight monetary conditions in place. The conventional wisdom is that the Fed can fight inflation with tight money (short rates above neutral, money supply growth below money demand growth), while at the same time, staunching the banking crisis with a regulatory and macro-prudential toolkit.
Darda calls it: “[A] made-for-TV distinction uttered in polite, credentialed company. The problem is this: a rapid period of tightening was associated with the bond losses now creating problems on bank balance sheets. A recession will make those problems worse as weakness travels from bond books to loan books. Trying to put out a fire with one hand while reigniting it with the other is unlikely to advance the ball.”
I could not agree more!
In the meantime, I still believe it is a matter of when, not if.
The fundamentals for many across our industry are strong. Innovation is alive and well, and M&A has always been, and will continue to be, a core pillar of growth strategies for the largest companies in our industry. Biopharma is, and always has been, a growth industry, and that hasn’t changed either. There is a lot of money on the sidelines earmarked to be invested in the sector. Companies reporting good data are getting funded and are outperforming.
Last week, Karuna launched a successful $460 million secondary offering off recent positive Phase III data for its schizophrenia therapy KarXT. Separately, Royalty Pharma offered a $100 million upfront payment to PureTech Health to acquire an interest in the biotech’s stake in royalty payments from this therapy should it reach the market. On the M&A front, Pfizer announced on March 13 that it would acquire Seagen for approximately $43 billion to extend its leadership position in oncology. In the press release, Pfizer states that it expects Seagen to contribute more than $10 billion in risk-adjusted revenues in 2030. A good healthy start to achieving its goal: Pfizer stated in February that it would seek to put its cash hoards to work to bring in external science, which could generate at least $25 billion in risk-adjusted revenues by 2030.
What are your thoughts on these interesting times?