The S&P Select Biotech Index made a new annual low to end the third quarter as treasury yields on the 10-year reached the highest levels seen since 2007.
Mention of the so called “bond vigilantes” is on the rise as fiscal expansion continues apace. This resurgence in yields, higherfor-longer Fed messaging and positioning against likely tax loss selling have been pressuring the sector with upside moves generally limited to companies announcing positive news.
Biogen (BIIB) finally got an M&A deal over the goal line with news of the Reata Pharmaceuticals (RETA) acquisition for $172.50 per share in cash. The $7.3 billion deal represented a 59% premium to the prior day’s closing price and is expected to be accretive in 2025. BIIB is in dire need of near term growth as they announced an 11% workforce reduction on the 2Q earnings call and a $20 million loss from their high profile profit share agreement with Alzheimer’s drug Leqembi.
RETA’s Skyclarys is the first and only drug approved for the rare neurological disorder Friedreich’s Ataxia (FA). The deal appears fully valued at >5x 2030 RETA consensus revenue estimates, but recent launches of similar first/best in class orphan products suggest uptake will be rapid. RETA estimates there are ~5,000 FA patients in the US and the list price of Skyclarys is ~$370,000.
Eli Lilly (LLY) continued the M&A theme by announcing the plan to acquire Versanis Bio (Private) for up to $1.925 billion in cash. Versanis Bio’s lead phase 2 drug candidate bimagrumab has the potential to complement LLY’s dominant incretin franchise by helping preserving muscle mass and may lead to better outcomes for people living with obesity.
Fire sale M&A returned with the acquisition announcement of Intercept Pharmaceuticals (ICPT) by Alfasgima (private) for $19 per share in cash or ~$750 million. Although the deal was an 82% premium to the prior day’s close, it was only ~2x current revenue and 96% below the all time stock price high ($497 in 2014). Many specialists felt pain as the short interest of ICPT was >30% in anticipation of market share loss to several competitors that recently announced what analysts believe is superior data.
Gilead (GILD) highlighted the pitfalls of development stage M&A deals upon termination of the ENHANCE-2 study in AML with TP53 mutations based on an interim analysis concluding that Magrolimab is unlikely to demonstrate a survival benefit compared to the control group. GILD acquired Magrolimab as the lead asset in the $4.9 billion purchase of Forty Seven back in 2020.
Culling of the herd continued with Abbvie (ABBV) discontinuing the collaboration agreement with Caribou Biosciences (CRBU), Homology Medicines (FIXX) announcing an 87% workforce reduction and plan to seek strategic alternatives, PTC Therapeutics (PTCT) announcing a 25% reduction in force, Kinnate Biopharma (KNTE) pausing development of several programs with a 70% reduction in force, Novan Inc (NOVN) filing for Chapter 11 bankruptcy, Viewray Inc (VRAY) filing for Chapter 11 bankruptcy and Infinity Pharmaceuticals (INFI) filing for Chapter 11 bankruptcy.
It is certainly a sign of the times when a company like INFI that has been around for ~20 years and has an accumulated deficit of ~$1 billion is ceasing operations. Likewise, FIXX was a 2018 IPO that traded above $1 billion market capitalization before all the equity value was wiped out.
Companies with current $1 billion+ market caps and significant cash resources are tightening belts as well with strategic reorganization announcements form both Apellis Pharmaceuticals (APLS) and Sage Therapeutics (SAGE). APLS is reducing headcount by 25% (n=225) to save $300 million by 2024 while continuing to drive growth of SYFORVE in light of recent safety concerns. SAGE is implementing a 40% workforce reduction following a mixed regulatory update that will lead to an annualized net savings of ~$240 million. Management teams are seeing blood in the streets and will need to deliver results to help stem the tide.
The biotech bear market is getting long in the tooth as it enters its twelfth quarter approaching technical levels where a bottom might be formed. We continue to expect additional M&A activity into the end of the year. Corporate year end performance reviews often motivate action on large cap growth initiatives via goals set for the executive teams.
Specialized biotech investors appreciate the sea is unlikely to lift all boats near term as cost of capital remains elevated but are looking to individual companies that can deliver alpha independent of the broader market environment based on development milestones or commercial operations. Pullbacks in the passive biotech indices often provide stock pickers the opportunity to enter or add to positions that appear to be disconnected from fair value. The pressure on SMID cap development stage companies is expected to drive more companies out of business but offer asymmetric upside for those that succeed in developing differentiated products.
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