Biotech and Soft Landings: Will Bears Drive Valuations Down?
The soft landing narrative remained front and center to start the week following Fed Chairman Powell's dovish commentary following the latest 25 bps rate hike. His tone and demeanor seemed more like a victory lap and his previous mention of economic pain was replaced by commentary on apparent disinflation. Bulls followed his lead, buying calls at such a high rate that open interest hit an all time record high.
Likewise, several companies posted remarkable rallies including Meta (META) which added nearly $100 billion in market capitalization upon announcing forward guidance bracketed by consensus estimates. Earnings misses by Alphabet (GOOG) and Apple (APPL) were seemingly ignored, with the latter even trading up on the day it reported weakness across multiple lines of business.
Perhaps the biggest impediment to the bull case for rate cuts as soon as the summer is the red-hot labor market. Last Friday's jobs report revealed the lowest unemployment rate in 53 years (3.4%) with nearly two job postings for every unemployed person. The bears continue to foresee the Fed will indeed keep higher rates into 2024+, continuation of QT, economic contraction / recession and unwinding of the FOMO rally.
Big pharma and biotech earnings showed many examples of steady performance despite the continued market uncertainty.
However, loss of exclusivity is a growing theme as Jefferies projects there will be $170 billion of branded product revenue lost by 2028 prompting urgency for M&A. To be sure, Merck (MRK), Bristol Myers (BMY) and Abbvie (ABBV) will all be losing their top selling drug(s) Keytruda, Revlimid and Humira, respectively. Sanofi (SNY) reminded investors of the potential pitfalls of pre-commercial stage M&A as they stopped a phase 3 trial of the lead candidate acquired in the $3.7 billion takeover of Principia.
Getting a drug over the goal line can be difficult, let alone proving differentiation from an oftencrowded competitive landscape. Taysha (TSHA) traded down last week upon announcing FDA is requiring the company conduct a placebo controlled trial for approval of their experimental gene therapy candidate for Giant Axonal Neuropathy. The management team at TSHA previously ran Avexis (acquired by Novartis) where they were able to get a controversial gene therapy treatment for SMA patients approved through a single arm, historical controlled trial with a limited number of investigators.
Novartis subsequently reported issues with data integrity related to the Avexis program that led some analysts to suggest the drug may not have cleared the higher bar for success demanded by a placebo controlled trial. Program positioning, data quality and management credibility all play a role in regulatory discussions.
The third biotech IPO of 2023 just might be the charm as Structure therapeutics (GPCR) traded up 73% after debuting with an upsized offering of $160 million. Bears have already taken the first two biotech IPOs of 2023 below deal price and may be hunting the third should the soft landing narrative crash back to earth (que spy balloon footage).