OR WAIT null SECS
Regulatory headwinds are poised to ease as new year approaches.
Large pharma—and just about everything else, literally—has outperformed biotech in 2021. Yet, investors still poured record sums of money into the sector in the form of new VC, and subsequent dollars backing IPOs, SPACs, and follow-on offerings. 2020 saw a record number of IPOs in biotech, 69 in total, and the class saw an average stock price appreciation of 38%, substantially outperforming the market. Thus far in 2021, we have already surpassed last year’s number, with the total of IPOs approaching 80. However, that is where the similarities end—because in 2021, the average IPO is up only 5% or less, and has massively underperformed the historically far less risky and volatile “stodgy” S&P 500 Index, which is highly unusual. This year, the “boring” S&P 500 is up an impressive 22.8% as I write this, propelled by the “re-opening” trade, which led a swift rotation from investors from growth into highly depressed value stocks, a classic result of a V-shaped recovery.
Given the fierce outperformance of the biotech sector in 2020, its valuation admittedly lent it most vulnerable to this rotation. Considering this macro rotation combined with the industry specific implications of the Biden Trifecta—the potential for legislated pricing reforms, increased FTC scrutiny, and an FDA in flux—one can understand that a correction was almost unavoidable.
Pfizer, typically a value stock, was clearly the standout beneficiary of COVID and, as a result, its shares are up an unprecedented 23.55% YTD.
The flow of the money into biotech M&A, IPOs, SPACs, and follow-ons can certainly be attributed to a clear innovation renaissance in our sector, one that is unequivocally not exclusive to COVID vaccines and therapeutics. Rather, it reflects advances in cancer, rare diseases, mRNA vaccines and therapies, as well gene therapy and editing, etc.
To further interrogate this point, investors and analysts are currently knee deep digging through Q3 2021 earnings reports, management commentary, and guidance for future prospects. Both the trends and the outlook for most reflect a decidedly healthy industry.
For the larger companies, the theme is certainly positive with the lyrics to the most common analyst commentaries being “beat and raise,” in response to Q3 performances that exceed expectations and management’s increased guidance for results going forward.
Led by strong revenue, results were largely ahead of expectations owing to a return in prescription demand to pre-COVID levels, and the introduction and rapid adoption of COVID vaccines and therapeutics. These results were further punctuated by sales momentum stemming from an unprecedented number of new product introductions—thanks to a record number of new FDA product approvals this year and last.
Given the strong results for the leading companies in the sector, cash is continuing to flow into already full coffers. The largest 12 biopharma companies have dry powder approaching $200 billion, in other words, cash and borrowing power to fund M&A—which, by the way, remains core to the largest companies’ growth strategies by their own admission.
So why is biotech underperforming? In last month’s column, I discussed the primary factors behind biotech’s underperformance. With those in mind, could sentiment be shifting, as I suggested in my column last month? Fundamentals remain solid, and valuations for biotech have fallen on a relative basis dramatically and now could selectively represent compelling valuation opportunities.
The Biden administration’s initiatives behind aggressive pricing reforms appear to have lost their teeth in the last week, and investors have reacted positively. Meanwhile, M&A is alive and well as is the momentum behind well-funded disciplined R&D initiatives aimed at novel therapeutic approaches to improve patient outcomes, which are demonstrating encouraging levels of success.
It does finally feel like some of the headwinds weighing on the sector, such as drug price legislation, increased antitrust scrutiny, and FDA delays, and the flow of capital out of growth and into value have started to abate—or reverse, which could set the sector up well as we head into 2022. Is growth looking historically cheap? And value, historically expensive?
Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board