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  • Jonathan Poyer

Dilution Acting the Grinch

The S&P biotech index is retesting the lows of the recent trading range as risk assets sold off following the latest rate hike from the Federal Reserve.

The forward projections articulated in the dot plot were hawkish relative to expectations with the median fed funds rate estimate for YE 2023 of 5.125%, 50 bps higher than the 4.625% median from September. The majority of bulge bracket bank equity strategists are now projecting the S&P 500 will retest or make new lows sometime in 2023.

The 2022 market cap swoon for FAAMG (Facebook, Apple, Amazon, Microsoft, Google) is now approaching $4 trillion. Despite the pullback, biotech remains meaningfully above the June 2022 lows as the sector's downdraft started about a year ahead of that in the S&P 500.

Takeda (TAK) kept the M&A theme rolling with the acquisition of Phase 3 allosteric TYK2 inhibitor from Nimbus Therapeutics (private). Nimbus recently disclosed positive data from a phase 2b trial in psoriasis and agreed to sell TAK the asset from $4 billion upfront plus an additional $2 billion in contingent sales milestones.

Upside clinical data surprises continued as Madrigal Pharmaceuticals (MDGL) rallied >260% on topline results from the pivotal phase 3 MAESTRO-NASH trial of resmetirom for the treatment of non-alcoholic steatohepatitis (NASH). The trial hit on both primary endpoints, including improvement of fibrosis which was ahead of analysts' expectations. Nearly 20% of the stock had been sold short into the data in expectation of a more mixed outcome, apparently contributing to the rally. MDGL is now guiding for a 2H 2023 filing and mid 2024 launch.

Mirati Therapeutics (MRTX) announced an early holiday present as FDA granted accelerated approval for Krazati (adagrasib) 2 days ahead of the December 14 PDUFA date for the treatment of adult patients with KRAS G12C-mutated non-small cell lung cancer (NSCLC). The approval was based on the 43% ORR (n=48/112) and 8.5 month median duration of response from the Phase II KRYSTAL-1 trial.

Third Harmonic Bio (THRD) reminded investors of the potential pitfalls along the path towards FDA approval as they announced the discontinuation of their clinical oral KIT inhibitor program due to unexpected liver toxicity observed in a phase 1b trial. THRD shares cratered >75% as they will need to work on optimizing a preclinical candidate with no clear timeline when they can get back in the clinic.

Likewise, Novavax (NVAX) highlighted cost of capital can be quite expensive following operational missteps. Remarkably, the company sold convertible notes and also sold equity at $10 per share which corresponded to ~$0 EV. NVAX affirmed 2022 revenue guidance of $2 billion, but ongoing retrenchment from several vaccine purchase agreements sent shares down >40% into the financing.

Dilution often becomes the Grinch who stole returns when times get tough.

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