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  • Jonathan Poyer

Will Fallen Angels Rise Again?

The S&P Select Biotech Index is attempting to consolidate ~5% below the 200 day moving average as stress in the banking sector bank continues to raise questions about market liquidity, lending capacity and cost of capital.

The purchase of Credit Suisse (CS) by UBS Group (UBS) at a 99% discount from its peak value in 2007 and the concomitant >$100 billion backstop provided by the Swiss National Bank raised more questions than answers.

Higher interest rates and potential FTC scrutiny are seemingly being reflected in the ~15% discount Seagen (SGEN) is trading at relative to Pfizer's (PFE) ~$43 billion cash offer. Should the deal close, it would be the largest biotech deal since 2019 (BMY-CELG) and is expected to provide a fund flows tailwind as deal proceeds are reinvested.

The importance of cash flows came into greater focus as the Centers for Medicare & Medicaid Services (CMS) published implementation guidance for the IRA legislation that suggested price controls may be more widely applied to biologics than previously thought. Specifically, CMS seems to be attempting to limit the potential of follow-on biologics with a different formulation or dosage form to circumvent price caps once the underlying active ingredient becomes eligible.

It might not have been a coincidence that biologics powerhouse Amgen (AMGN) announced a ~2% cut to its workforce around the same time as CMS' disclosure. Exelixis (EXEL), on the other hand, flexed its cash flow strength to announce a $550 million share repurchase program that will retire ~10% of outstanding shares in 2023. EXEL's small molecule kinase inhibitor Cabometyx is expected to generate >$1.5 billion in revenue this year, providing the company the ability to return capital to shareholders as well as advance pipeline development programs.

Fellow oncology company 2seventy bio (TSVT) might take notice as despite guiding 2023 US Abcema revenue of $470-570 million in partnership with Bristol Myers (BMY) the company trades at a <$500 million market capitalization. TSVT recently closed a $125 million public offering to help advance additional pipeline programs. Esperion Therapeutics (ESPR) further emphasized the risk of dilution as they conducted an emergency $56 million equity and warrant deal at an all time low valuation. ESPR shares crashed >50% last week on news their partner Daiichi Sankyo (4568 JT) disputes their obligation to make $200-300 million in milestone payments based on ESPR's recently reported CLEAR Outcomes trial data. Sarepta Therapeutics (SRPT) was also under pressure as FDA apparently had a change of heart and requested an Advisory Committee to review gene therapy candidate SRP-9001 for Duchenne.

Time will tell which of these companies may prove to be fallen angels as they rise again.

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