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  May 20th, 2024

 

 

Please find attached an update on the biopharma market for the week of May 20,
2024.

 

Biopharma Market

The biotech market has been moving sideways in recent weeks as investors are
increasingly coming to believe that it will take more than a month or two for
the direction of inflation to sort itself out.

Institutional Investor reported last week that most biotech hedge funds lost
money in April, and that many have lost most of their gains from earlier in the
year.

There is an obvious hunt for return underway in the specialist investor
community.

Given the hunt for return, investors are telling us at Stifel that they are
particularly focused on seeking new ideas for bets in the small and mid-cap
biotech field.

Sector sentiment will obviously be impacted by upcoming data from ASCO, ADA and
key trials such as Alnylam’s HELIOS-B study.

There are a number of emerging developments that could positively impact biotech
stocks.

First, we expect to see many biotechs enter the Russell indices in June. Because
over half the market is indexed this would be a big boon for the sector.

Second, there is a perspective that the FDA is become more flexible in CDER in
its review of rare disease drug applications. As this plays out in 2024 there is
potential for upside in stocks like Avidity, Denali and Ultragenyx.

Third, we are seeing generalists and retail come into the sector in a more
meaningful way.

Recent 13g filings show substantial increase in participation in biotech stocks
by non-specialist fund groups.

Finally.

Further, last week’s short-lived visit from “Roaring Kitty” on X sparked retail
participation in a number of heavily shorted biopharma stocks like Anavex and
Novavax. Novavax shares are up 173% since announcing a partnership with Sanofi –
amidst a classic retail-driven short squeeze.

It feels like retail is starting to pay more attention to biotech although maybe
not for the reasons we would hope.

Last week saw the CPI grow at 0.3% in April, slightly better than expected, and
there is growing optimism that we’ll see the Fed start to lower rates in the
back half of the year.

The Financial Times wrote last week:

“‘It is something of a relief that for the first time this year, CPI did not
come in higher than forecast,’ said Eric Winograd, senior economist for fixed
income at AllianceBernstein. US stocks set new peaks on the news while
government bond yields fell. The S&P 500 closed 1.2 per cent higher, chalking up
its first record closing high since late March and leaving the blue-chip index
11.3 per cent higher this year. The tech-heavy Nasdaq Composite climbed 1.4 per
cent for its second record in as many days.”

We should note that larger cap companies in the life sciences have done quite
well in recent weeks. We think this reflects the growing interest in our sector
from generalists.

Eighty-eight percent of the top 40 life sciences stocks by value have traded up
in the last two weeks. Lilly is up 5%. Novo is up 6.6%. Roche, fresh off of new
obesity data, is up 8.8%. Vertex is up 10.8% on strong earnings and Merck KGaA
is up 11%, also on positive earnings.

 

Capital Markets Update

The IPO market remained inactive last week. The last company to go public in the
U.S. or Europe debuted six weeks ago. Rapport revealed its plans to go public
last week.

The pipeline of IPO’s on file has continued to swell as issuers anticipate an
opening of the window after Memorial Day.

The equity follow-on market remained quiet last week as the inflation situation
sorts itself out. A total of $541 million was raised across 21 issues. The
largest issues were from Erasca ($160 million), Allogene ($110 million) and
Monte Rosa ($100 million).

The venture private market was active last week with $1.1 billion raised by
issuers. The largest issues were Hercules ($400 million), Uniquity ($300
million), Lycia ($106 million) and Ajax ($95 million).

The private debt market remained active last week with $500 million raised. The
largest deal was a refinancing by Apellis which raised $375 million from Sixth
Street.

 

Deals Update

Last week saw $1.2 billion in M&A volume led by J&J’s $850 million acquisition
of Proteologix. Reneo did a reverse merger with Onkure and Grupo Uriach of Spain
acquired Pascoe Pharmazeutische Parate Gesellschaft. Pascoe is a German company
with €50 million in revenue.

The J&J Proteologix acquisition allows J&J to access a TSLP x IL-13 bispecific
antibody for atopic dermatitis.

 

TSLP Antibody Rage

TSLP antibodies have become quite the rage lately.

Several companies and research groups are actively developing antibodies
targeting thymic stromal lymphopoietin (TSLP). Notably:

 * AstraZeneca and Amgen developed the first-in-class anti-TSLP monoclonal
   antibody, tezepelumab, which has been approved for the treatment of severe
   asthma?
 * J&J has just acquired Proteologix to access its bispecific for TSLP and
   IL-13.
 * Blackstone has just started Uniquity to develop Merck’s Phase 2 high potency
   TSLP antibody.
 * Innovent Biologics is conducting a Phase I study on a dual-function antibody,
   IBI3002, which targets both IL-4Ra and TSLP?.
 * Sanofi and Regeneron are working on SAR443765, a novel biologic that targets
   both TSLP and IL-13 for asthma treatment?.
 * Teva Pharmaceuticals and Biolojic Design have an exclusive license agreement
   for developing bispecific antibodies targeting TSLP and IL-13?.
 * GSK acquired Aiolos Bio for $1 billion upfront recently to strengthen its
   respiratory biologics portfolio with the addition of AIO-001, a Phase 2
   long-acting anti-thymic stromal lymphopoietin (TSLP) monoclonal antibody.
   This acquisition aligns with GSK’s strategy to expand its offerings for
   respiratory conditions, particularly asthma.

These efforts indicate a robust interest in leveraging TSLP antibodies for
treating various inflammatory and allergic conditions.

The science story, efficacy data and unmet medical needs that can be addressed
by the emerging armamentarium of TSLP drugs is strong, hence the high strategic
interest.

 

Incyte’s Return of Capital

Count us as being among the surprised when Incyte announced last week that it
would return up to $1.67 billion in capital through a share repurchase.

Share repurchase programs are commonplace in our industry but the scale of the
return of capital here is not.

As of March 31, 2024, Incyte was sitting on $3.85 billion in cash with trailing
operating cash flow of $820 million. It then announced the acquisition of
Escient for $750 million and is offering to spend $1.67 billionn on share
repurchases. That’s roughly $2.4 billion out the door - or 62% of its cash pile.

It’s quite rare to see biopharma’s disgorge cash on such a scale. Incyte is
offering to repurchase 13% of its market cap. By our calculation, across all
life sciences companies, last year only 0.5% of companies repurchased more than
10% of their market cap (on net).

And, given the reality of average returns on R&D investment below the cost of
capital, it’s something that should be more common.

 

Why is it so rare for biopharma companies to disgorge capital?

The recently deceased Mike Jensen of Harvard Business School penned the “agency
theory of free cash flow” in 1986 where he argued that managers waste cash
because it benefits them to do so.

Later, in his career, he argued that behavioral factors (non-rational) also come
into play and that managers have a deep-seeded desire to avoid pain – which can
come when resources are tight. 

Peter Kolchinsky of RA Capital in January 2023 argued that biotechs should
consider returning cash when their outlook isn’t great (particularly when they
have negative enterprise value) and that, in the long run, this will be good for
them.

Conspicuously, there were few takers for Kolchinsky’s ideas even though the
reasoning was sound.

Why?

Biotech CEO’s, almost universally, think that their companies are undervalued
and have better prospects than understood by outsiders.

One can liken the biotech ecosystem to Garrison Keillor’s Lake Wobegon where all
the children are above average.

At least in the imagination of many market participants.

Having been in the investment banking industry for over thirty years, we have
had the opportunity to interact with thousands of management teams and observe
their behavior.

We have observed that an overwhelming, albeit not universal, managerial motive
is to not lose one’s job.

Corporate managers are optimists by nature and tend to believe that the returns
from future investments will be good.

Ben Horowitz of Andreessen Horowitz recently wrote:

“Later, in 2001, I met with Andy Grove [Intel CEO] again and I asked him about a
recent run of CEOs missing their numbers despite having told investors that
their businesses were strong. The bubble had burst for the first wave of
Internet companies nearly a year prior, so it surprised me that so many many of
them had not seen this coming. Andy replied with an answer that I did not
expect: “CEOs always act on leading indicators of good news, but only act on
lagging indicators of bad news.” “Why?” I asked him. He answered: “In order to
build anything great, you have to be an optimist, because by definition you are
trying to do something that most people would consider impossible. Optimists
most certainly do not listen to leading indicators of bad news.”

We have found the CEO’s, in general, feel strongly that they are well-suited to
drive their company forward and wish quite not to be replaced.

Financial motives are part of it, but pride is also important.

In our experience, managers keep excess cash because it increases their job
security and allows them to make more investments.

Our experience indicates that Mike Jensen’s theory is largely correct – perhaps
with the exception that most management teams don’t willfully choose to waste
money.

Rather, management optimism causes them to make decisions that too often turn
out to be lll-considered after the fact.

 

Mechanics of Capital Return

In a partial return of capital, shareholders are offered the chance to cash in
their shares at a set value or within a value range.

The company undertaking the return of capital transaction gives shareholders the
option of sticking with a specific business plan or taking their stock back.

Examples of companies that have effectively used partial return of capital to
allow orderly shareholder exit while others stay in include Adimab, Corcept,
DaVita, Royalty Pharma and Xbiotech.

The benefit of a partial recap versus letting shareholders sell on the open
market is much less negative pressure on the share price.

Incyte’s approach to returning capital is even less common – they are using a
Dutch Auction Self Tender Offer.

A self-tender offers several advantages over an open-market repurchase program:

 1. Allows a large share repurchase to be accomplished much more quickly
 2. Eliminates the price risk of an open-market repurchase program since it is
    achieved at a single fixed price
 3. Has a greater market impact since it is a more visible mechanism
 4. Self-tender offers can be done on either a fixed-price basis, where the
    issuer tenders for shares at a fixed price, or a Dutch auction basis
 5. With a Dutch Auction self-tender, the issuer sets a price range. Then
    shareholders are invited to tender all or a portion of their shares at any
    price within the range.

A significant stock buyback sends a message that management believes their stock
to be undervalued. Research strongly supports the idea that buybacks are an
effective signaling tool.

Specifically, the market reacts positively to all types of repurchases but
reacts most positively to self-tender offers.

The market price, on average, rises by 7.79% in the three days surrounding a
Dutch Auction tender announcement (Comment and Jarrell paper). While this is
somewhat less than that seen for fixed price tenders, Dutch Auctions produce the
strongest average result in the long run. By business day 50 after a tender,
Dutch Auction companies have a 12% return above the market where fixed price
firms have a 9.4% return above the market.

Self-tender offers are rare. Incyte’s deal is by far the largest in recent
memory. Looking back decades, Incyte’s deal is the third largest in the history
of the pharma industry. In 2011, Amgen used a Dutch self-tender to repurchase $5
billion in stock and in 2007 Biogen used a self-tender to repurchase $3 billion
in stock.

An alternative to a self-tender would be to pay a special dividend to all
shareholders.

This has the benefit of administrative simplicity but the cost that all
shareholders receive a dividend whether they want it or not.

Special dividends are well suited to situations where there is little reason for
shareholders to bet on future operations and the company simply wishes to pay
out cash.

A relevant case study of how to use special dividends involves the situation of
Merrimack Pharmaceuticals. The company experienced a series of clinical failures
with its pipeline and decided to liquidate all assets, terminate all employees,
pay off all debt and pay out special dividends. While it could have chosen to
delist, Merrimack stayed public on the NASDAQ and still files its reports with
the SEC.

This allows shareholders to still achieve liquidity should they choose not to
sell shares. After selling ONIVYDE® to Ipsen, Merrimack paid a $140 million
special dividend in 2017. In 2019, Merrimack paid an additional $20 million
special dividend. The company has been successful in achieving quite a few
additional small asset sales and deals such that it has an increasing cash
balance and no meaningful debt. Following a recent payment from Ipsen, the Board
of Directors declared a liquidating cash dividend in the amount of $15.10 per
share. The dividend was paid last week (May 17, 2024) and Merrimack will delist
next week.

Special dividends are even more rare than share buybacks. We count less than a
dozen special dividends paid by biopharma companies in the last three years.

 

Industry News

Changing LDT Regulations

Brian Gormley of the Wall Street Journal wrote last week about changes in how
the FDA regulates laboratory tests.

The FDA has been long-concerned about lab-developed tests (LDT’s) that do not
require FDA approval for use.

A final rule published two weeks ago in the Federal Register requires that U.S.
labs developing LDT’s either submit to FDA rules or exempt themselves. Gormley
notes that this change introduces significant uncertainty into the already
unsteady clinical lab business.

Bayer’s CEO Bill Anderson announced that the company eliminated 1,500 jobs in
the first three months of 2024. We applaud Bayer’s move in reducing employee
count but, unfortunately, company still employs over 98,000 employees. Bayer’s
employee to market cap ratio remains absurdly low relative to competitors.

This may help to explain why Bayer had over $2.5 billion in negative cash flow
last quarter.

 

Europe Taking Advantage of Chinese Biopharma Innovation

A story in the Financial Times last week cited Jan van de Winkel, CEO, Genmab,
on investment in China.

Genmab just acquired ProfoundBio, a Chinese antibody company and follows
AstraZeneca in buying a Chinese biotech in the last year (Gracell in the case of
AZ).

Mr. van de Winkel was quoted saying that Western companies need to tap into the
“mind-bogglingly impressive innovation” in China.

One can’t help but note that European companies like AstraZeneca and Genmab seem
far more relaxed than those in the U.S. about accessing Chinese drug candidates.

Recent moves to form Uniquity and Aiolos (before its sale) have been facilitated
by licenses from the deep portfolio of Hengrui Pharma.

The number of China-sourced assets available for licensure has grown massively.
We note, for example, that the BIO partnering system for next month’s meeting
lists 763 Chinese assets.

Compare this to 402 assets listed in the partnering system in 2021.

The assets listed are largely innovative, largely biologics and largely clinical
– something that can’t be said of many other assets listed on the partnering
system.

We continue to be puzzled by steps of the Biden Administration to tamp down on
cooperation in the biopharma sector between the U.S. and China.

 

Infectious Disease Developments

Last week, the CDC noted that cases of a new group of mpox viruses are rising,
potentially posing a risk to people around the world. Vigilance toward
infectious disease threats remains high with ongoing concern about H5N1 bird flu
in the dairy herd in the United States.

A timely publication last week by McKinsey was entitled “Beyond the Pandemic:
The Next Chapter of Innovation in Vaccines”. The authors of the publication note
that the

“vaccine innovation engine had begun to sputter. While the two decades preceding
the pandemic saw strong growth in the vaccine industry—with pipelines doubling
and annual growth rates of 12 to 15 percent—we identified four indicators of
stagnation in 2019: slowing revenue growth (only 5 percent across the industry
over the previous five years), a flattening development pipeline, higher
attrition rates for vaccines compared with other biologics, and limited progress
targeting disease areas of high unmet need, particularly those endemic to low-
and middle-income countries (LMICs).”

The detailed paper goes into deep detail on the current pipeline and highlights
opportunities to improve productivity in vaccine development.

It’s well worth a read if you care about vaccines.

 

Women’s Health Developments

Like Astellas, Bayer is developing a next-generation NK drug for treating
menopause in women. Last week, Bayer reported results from its study of
elinzanetant:

Pivotal OASIS 1 and 2 Phase III studies of investigational compound elinzanetant
achieved a statistically significant reduction in frequency and severity of
vasomotor symptoms (VMS; also known as hot flashes) over 12 weeks compared to
placebo. Consistent benefits were also seen across both studies in all three key
secondary endpoints, with significant reduction in frequency of VMS at week 1,
improvement in sleep disturbances and menopause-related quality of life.”

These study results are quite strong and provide both patients and Bayer with
good news at a time that it is needed. It will be interesting to see how Bayer’s
elizanetant compares clinically to Astellas’ competing NK3, fezolinetant
(VEOZAH®).

Hats off to Bayer for staying the course when others have abandoned investment
in the women’s healthcare field.

It’s been a time of foment in women’s health research as there is ever more
recognition that the field has not seen enough investment.

The actress Halle Berry recently appeared in Washington DC to speak about her
menopause experience end to encourage lawmakers to support legislation in
Congress to increase funding for menopause research.

We were thrilled to see Ms. Berry appear on a women’s health panel last week for
Time100 Health contributors. She joined Lilly CSO Dan Skovronsky and Marlena
Fejzo who is known for uncovering the role of GDF-15 in severe pregnancy
vomiting.

 

Obesity Update

Roche Data

Last week saw Roche release partial data on a Phase 1 study of CT-388, the
GIP/GLP agonist acquired as part of the Carmot deal.

Roche announced:

“The weight loss achieved with CT-388 was clinically meaningful, with a mean
placebo-adjusted weight loss of 18.8% (p-value < 0.001). At week 24, 100% of
CT-388 treated participants achieved a weight loss of >5%, 85% achieved >10%,
70% achieved >15%, and 45% achieved >20%.”

These turn out to be the most impressive weight loss statistics seen yet for an
agent at 24-weeks.

To be able to drop 18.8% of body weight with CT-388 in less than a half year is
stunning and important therapeutic option for persons who are overweight. Roche
is now giving Lilly’s drug retatrutide a run for its money.

As mentioned before Roche stock took off on the news. However, it’s important to
note that we will not see full data, including critical side effect information,
until a future professional conference presentation.

The outperformance of CT-388 is actually no big surprise as CT-388 previously
handily beat Retatrutide in a phase 1 study at 4 weeks. Amgen’s MariTide is
still the champion at four weeks and appears likely to outperform CT-388 when
Amgen releases MariTide 24-week data at the end of this year.

 

Four Year Semaglutide Data from the SELECT Study

Another Important finding published last week was four-year efficacy data for
Semaglutide from the SELECT trial.

The results did not disappoint.

A paper in Nature Medicine showed that changes in body weight with Semaglutide
didn’t just stick for four years but deepened over time.

Impressive!

 

GLP-1’s and the Brain

Another paper last week in Nature showed that NMDA antagonists can double effect
of GLP-1 on weight loss in mice.

Stunning.

Mice that were fed at GLP-1 agonist with a NMDA receptor antagonist lost twice
as much weight as those fed a GLP-1 agonist alone.

There is the obvious question as to why people who go off GLP-1 agonists tend to
put weight back on. Some have speculated that brain has a set point that is in
the wrong place.

People are mentally driven to be fat in some way. Some call this “fatty brain”.

It appears that NMDA antagonists might be able to change this and that they
would not necessarily be needed chronically.

Christoffer Clemmensen, an associate professor from the Novo Nordisk Foundation
Center for Basic Metabolic Research at the University of Copenhagen, a senior
author on the Nature noted last week that:

“This family of molecules can have a permanent effect on the brain. Studies have
demonstrated that even a relatively infrequent treatment can lead to persistent
changes to the brain pathologies. We also see molecular signatures of
neuroplasticity in our work, but in this case in the context of weight loss."

While early days in its development, one can only say “wow”. In a decade or less
we could go from having the first really good drugs for weight loss to a new set
of drugs that can keep weight off without requiring chronic treatment.

This is obviously relevant as one contemplates the cost associated with GLP-1
treatments. Last week, Senator Sanders published a study showing how costly
GLP-1’s could be for the government if widely reimbursed. While the study itself
was not well done and had political overtones, Sanders’ point is, of course,
well taken. GLP-1s could be very expensive indeed for payors.

Our own view is that innovation and competition will fix this worry over time,
hopefully delivering a major public health benefit to the many who suffer from
the side effects of a rich Western diet.


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Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifelib.com

 

 

 

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