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  • Jonathan Poyer

Ups and Downs - Biotech Valuations and the Cost of Capital

M&A and regulatory tailwinds contributed to the upward momentum in the S&P select biotech index, which continued to ascend above its 200 day moving average.

Swedish Orphan Biovitrum (SOBI SS) agreed to acquire CTI BioPharma Corp. (CTIC) in a deal valued at $1.7 billion or $9.10/share. The deal was a ~90% premium to the prior day's closing price and ~2.5x consensus revenue estimates in 2030. Accretion is projected by 2026 or 2027. CTIC's lead product, VONJO® (pacritinib) is FDA-approved for the treatment of myelofibrosis patients with low platelet counts and has a similar profile to the drug GSK (GSK) acquired in the ~$1.9 billion acquisition of Sierra Oncology (SRRA) last year.

A pair of positive FDA advisory committee decisions further bolstered investor expectations around streamlined approval pathways. Sarepta Therapeutics (SRPT) rallied ~30%, adding >$3 billion in market cap, following a positive FDA advisory committee vote in favor of their experimental gene therapy candidate for Duchenne muscular dystrophy (DMD). There was extensive debate during the meeting with much critical discussion on the merits of the data package and whether or not accelerated approval could be justified. The 8-6 vote in favor was reflective of the controversy, with "yes" votes from the DMD patient and consumer representatives pushing the balance over the top to the affirmative. The FDA is expected to render an approval communication by the May 29, 2023 PDUFA date.

Likewise, ARS Pharmaceuticals (SPRY) rallied >60% on a positive FDA panel vote for Neffy nasal spray in severe allergic reaction including anaphylaxis. Approval for Neffy is expected by mid-2023.

ImmunityBio (IBRX) went the other way, falling ~50%, as FDA issued a Complete Response Letter (CRL) for the company's bladder cancer therapy Anktiva citing manufacturing deficiencies and a request for updated data.

Reata Pharmaceuticals (RETA) was a beneficiary of a controversial FDA approval earlier this year, but disappointed investors on operational execution with news they will be unable to launch the drug until outstanding manufacturing specification issues are resolved. In an unusual situation for a new drug, RETA is requesting an increase in the current reporting threshold levels for an in process impurity. The company is guiding to have the issues resolved by late summer.

In contrast, Amylyx Pharmaceuticals (AMLX) seems to be making the most of their controversial approval for newly launched ALS drug RELYVRIO by reporting a strong beat. RELYVRIO sales reached $73 million in the second quarter of launch, remarkably resulting in positive net income. It is unusual for a SMID biotech to achieve positive cash flow in the second quarter of a new drug launch for their initial drug.

Finally, creative destruction continued with former high-flyer EQRX (EQRX) announcing a reset of corporate strategy. The company raised billions from mainly tech investors with a vision to radically lower drug prices, address "financial toxicity" and "re-engineer the model for the health of all". The company will now focus on "clinically differentiated, high value medicines" in similar fashion to most 'traditional' biotech companies and "remove several programs [directed at lowering prices] that are inconsistent with this new vision". EQRX traded down on the news to a ~$850 million market capitalization despite forecasting a ~$1.1 billion cash balance at YE 2023.

It seems hyperbole is inversely correlated with cost and availability of capital.

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