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  • Jonathan Poyer

Do Not Miss the Biotech Rallies...

Updated: Jul 1, 2022

The S&P Biotechnology Select Index reminded investors of the importance of staying invested as it rallied over 20% in the past seven trading ending Monday.

The rally was remarkably similar in magnitude to the two prior largest seven trading day rallies on record, specifically the +26% gain off the pandemic lows in March 2020 and the +24% gain off the Federal Reserve tapering lows in December 2018.

Many strategists have been labeling the move a 'bear market rally' motivated by technical factors, re-indexing and portfolio rebalancing into quarter end. Blockbuster M&A news for the biotech sector remains unwritten, but the velocity of 'fire sale' strategic deals accelerated materially highlighting the number of assets that are trading below what acquirers view as fair value. Monday morning Ipsen SA (IPN FP) announced the acquisition of Epizyme (EPZM) for $247 million in cash ($1.45 per share) plus additional contingent value payments up to $1 per share. The upfront represented a 52% premium to the prior day's close and a 144% premium to 60 day average price. Many investors remained underwater on the deal though as EPZM was down 65% YTD before the acquisition and down over 95% from the peak in 2020 as they struggled to launch targeted oncology drug Tazverik. Put another way, the upfront acquisition price represents only ~20% of the company's accumulated deficit of $1.3 billion. IPN projects the deal will be dilutive until the end of 2024, but believes they can improve the current revenue run rate from ~$40M to $150-250M+ based on current indications.

Likewise, F-star Therapeutics, Inc. (FSTX) was down >55% YTD when invoX Pharma (1177.HK) announced an acquisition for $7.12 per share (78.9% premium to prior day's close) or ~$161 million in cash. Private equity firms Gurnet Point & Patient Square went bargain shopping as well with the tender offer for Radius Health (RDUS) at $10 per share in cash plus a contingent payment of $1 per share (total deal value of ~$890 million). The upfront cash of represented a ~45% premium to volume-weighted average price per share over the past 30 trading days and a 12% premium to the prior day's closing price. RDUS had been trading at discounted levels as commercial osteoporosis drug Tymlos was facing pressure from a competitor going generic. The deal price rationalized ~3.3x RDUS' FY22 guided Tymlos sales assuming no credit for pipeline programs.

Finally, Galapagos (GLPG) acquired private companies CellPoint and AboundBio for ~€138MM in cash upfront to expand their pipeline to include next generation cellular and antibody therapies. GLPG has nearly $5 billion in cash to advance development, but remarkably trades at a negative $1.1 billion enterprise value.

Seasoned executives and investors appear to be seizing the day as markets are pricing assets below fair value.

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