Last Friday saw the Dow tumble hard amidst investor concerns on inflation and tariffs.
On the positive side 10-year US Treasury yields started to come down a month ago as it becomes clear that the Trump Administration is serious about control of fiscal deficits.
In total, the yield has fallen by 35 basis points since Jan 12th.
A nice positive for biotech.
Specialist Biotech Public Investor Sentiment Remains Soft
Public biotech investor sentiment remains well below average.
While bargains abound, investors are concerned about Trump Administration signals on using the IRA and the industry’s political position.
Last week’s Black History Month event at the White House saw Pfizer’s CEO get booed by the crowd.
The populace remains ambivalent towards pharma and the healthcare industry more broadly.
We also saw United Healthcare get sued by DoJ for its Medicare billing practices.
With a bill in Congress to allow Americans to import drugs from Canada, investors are acutely aware of the industry’s political fragility.
The recent distressed sale of Bluebird didn’t exactly boost investor confidence last week.
We have spoken to a half dozen or so leading public investors in the last two weeks.
One investor spoke about the importance of being on top of breaking science and figuring out which companies will be successful.
If you will, the specialist investor appears to be responding to the current environment by becoming even more specialized.
Another investor last week spoke of the importance of the excellent drug launches we are seeing these days from emerging biopharma.
The investor was optimistic and argued that M&A isn’t quite as important as a form of exit as might have been a few years ago.
Another specialist investor attributed the lack of generalist interest in biotech to the availability of China molecules.
Because biotech has underperformed the S&P 500 for two years running it has not been surprising to see multiple funds experience an imbalance of withdrawals.
This has been accentuated by a relatively poor performance of some well-known hedge funds in the industry.
According to recent media reports, at least one prominent fund has had to give their withdrawing LP’s “IOU’s” – essentially putting up a gate on taking money out even though last year’s performance was solid.
The problem with this is that if there are forced sellers in the market due to heavy fund outflows, one can see fear spread in the market – causing fundamentals to cease to matter.
Our previously discussed belief is that exactly this sort of phenomenon played out last December and into the first few weeks of 2025.
Our conversations with fund limited partners in recent weeks indicate that outflows have halted and, if anything, money is going into biotech hedge funds.
Fund redemption time is behind us.
That’s good.
This perspective is supported by the numbers which showed that last week was the second best for biotech so far this year.
We saw both the XBI and the Stifel Total Global Biotech tracker turn positive for the year by the end of last week.
Nice.
Generalist Sentiment and the Biotech Recovery
We are hearing a clear message from generalists: “show me the money.”
Generalist investors want to see commercial success and would prefer not to place giant science or M&A bets.
At least for now.
There appears to be a gradual shift underway in the market - from the imperative of “guess which companies will get bought” to “buy into companies that can generate revenue and cash flow.”
This renewed interest in financial fundamentals strikes us as healthy, if a bit unusual.
Our own view is that we remain quite early in a classic sector recovery and that the present uncertainties, fears and desire for cash flow are all emblematic of the moment.
The historical analogue of the Reagan Administration continues to resonate with us.
While Reagan entered office Jan 1981, the market did not start to really move up until late 1983.
The nagging uncertainties associated with inflation, foreign policy issues and high gas prices continued to hold back the market.
Reagan faced strong political opposition, Congressional resistance and was slow to win confidence from the stock market.
Like now, the U.S. was highly polarized at the time.
While history never quite repeats, we think it remains highly relevant.
If Trump can successfully lower taxes, reduce regulation and trim Federal spending we should see quite a healthy capital market emerge – with all the positives that this would bring to the biopharmaceutical sector.
But, as before, it is going to take time for a strong recovery to take hold.
But we do not doubt that a recovery will come.
And its presence will be unmistakable.
Our industry continues to enjoy very strong fundamentals and now is a very good time for bargain-minded investors to back high potential biopharma companies.
The Biotech Catechism: Case for Long-Term Optimism
There are obviously more than a few biotech skeptics in the market today.
It never hurts to review the excellent reasons to own biotech for the long run.
These factors were detailed in a report we issued in November 2023.
We call this the “Biotech Catechism”. It’s worth pulling out and reviewing every once in a while.
Here are the three key points of the catechism.
First, biopharma performs.
The biopharma sector has outperformed the S&P 500 for more than 50 years. Further, biotech, the phrase we use for emerging biopharma, is up more than twenty-fold in the last 30 years.
Second, sector fundamentals are superb.
The factors that drove the surprisingly good historic performance are even more relevant for the future (a) Spend on pharma is going to rise rapidly over time in real terms. This is because pharma spend accelerates with rising incomes – and real global income keeps rising. This will be accentuated by the “longevity dividend” - the more longevity is created by pharmaceuticals; the more demand is created for pharmaceuticals because illness does not go away. To wit, the fraction of the social budget spent on pharmaceuticals has increased fivefold in the last century and is likely to continue increasing; (b) the pace of underlying scientific innovation and translatability of science to drugs is accelerating as the inevitable result of the Scientific Enlightenment that started in the early 1600s. The long-term buildup of knowledge upon knowledge is both irreversible and accelerating. That is, the more we learn, the more quickly we can learn. The revolution in genetics and molecular biology is making even easier to design appropriate therapeutics and (c) the extent of opportunities for high value, civilization-changing innovation in areas such as obesity, neuroscience and aging is rising over time.
Third, the macroeconomic outlook is favorable.
Bear in mind that the Administration is pursuing anti-inflationary policies and is highly incentivized to get inflation down – there is a mid-term election coming in twenty months.
This is why Trump is determined to manage down the long bond yield and to reduce spend.
You will not have missed that he is aggressively taking steps to reduce the federal employee count.
Tariffs, while inflationary, also send dollars directly into federal coffers.
Reduced deficits with concomitant lower inflation are hugely positive for long duration assets like biotech.
Further, the Federal Reserve has raised rates considerably starting in 2022 and has yet to bring them down in a meaningful way.
There is a substantial policy lag in monetary policy and historical timing would suggest that both 2025 and 2026 will very likely see the fruits of Fed actions in the form of lower inflation.
An important background theme is that the political process will ultimately reflect underlying free market forces.
We live in a capitalist society – where business interests ultimately drive politics.
That is, if our society can produce an accelerating innovation curve and long-term income growth then the political process will follow.
That is, if society has natural demand to spend more on its health, as it has for the last 100 years, it’s going to be hard to throttle that at the federal level.
This is the ultimate reason not to worry too much about today’s highly visible political theatrics. To be clear, we do not counsel indifference. The IRA, the FDA, and NIH are all highly relevant for our industry and we should all do what we can to help our industry succeed.
Where the Public Biotech Market Stands Today
The Stifel Global Biotech Value Tracker rose by 1.7% last week - much more than the XBI (up 0.3%).
Treasury yields fell.
The XBI is now up 2% for the year as is our Biotech Value Tracker.
Last week saw big pharma substantially outperform the S&P 500 amidst broad market uncertainty – visible in the rise in the VIX.
Nice to see this.
Big cap pharmas in the XBI rose 5.5% last week and are up 14% for the year.
This feels like a classic recovery where generalists buy into larger companies first.
The average EV of a preclinical biotech has gone from $162mm last September to $105mm at the start of 2025 to only $77mm last week.
One of the distinctive characteristics of the biotech downturn of 2022 to 2024 has been an extreme quality premium. Companies with “very good” data have traded at a value of five to ten times those with a “good” dataset.
We are seeing the value of the average company today with a “very good” little changed since the year began.
In contrast, companies with a poor dataset for their lead asset or no dataset have steadily lost value as 2025 has rolled on.
As a result, the value gap between those with very good data and the rest become ever wider.
The most valued sectors in biotech today are in obesity, vaccines and AI, respectively.
AI is the most important area that is trading up in 2025.
The average public AI biotech now has a valuation over $1 billion.
In sympathy with the tech sector, investors are looking to put money to work in AI stories in biotech.
This is quite the change from where AI was a few years ago.
As of last Friday, the average obesity biotech had an enterprise value of $1.4 billion. This is down $1.6 billion at the beginning of the year and $3 billion on March 30, 2024.
Obesity remains the most valued sector but is obviously not trading as strongly as before.
Fields that have lost substantial value in the last year include ADC’s, innate immunology, radiopharma and gene editing.
Last week was quite good for the life sciences sector with big gains in commercial pharma and pharma services. The HCIT and CDMO sectors have recovered nicely in the last month while life science tools stocks have not fared well as of late.
The life sciences sector gained $162 billion in total value for the week (1.7%).
The count of negative EV life sciences companies worldwide rose from 147 two weeks ago to 153 last Friday.
This measure of sector distress has been going in the wrong direction for several months now.
Echoing this phenomenon, last week saw Adam Feuerstein of Stat publish an article on “zombie” biotechs.
Entertaining and informative story.
He counts 200 companies with negative EV – far more than us and notes that these companies are sitting on $30 billion in cash.
There was a spirited conversation on what this all means on last Friday’s Biotech Hangout. Well worth a listen.
It’s going to take time for this to get sorted out.
Capital Markets Update
Last week saw no IPO’s for $50mm or more. The week before saw Aardark Therapeutics go public.
The pace of IPO activity has come down substantially since the start of February where we saw four issuers go out and price deals.
At this point three of this year’s five IPOs are trading above deal price.
Not a bad start.
The first seven and a half weeks of 2025 have seen $4.5 billion in follow-on biopharma offerings.
Thus far, we have seen $1.8 billion in equity offerings price in February (through Feb 21) – a pace of $600mm a week.
This is well below the $1bn a week pace that was seen in Q4 2024. While deals are getting done, investor sentiment has been a headwind on activity.
For all sectors, there have been 22 follow-on offerings year-to-date totaling $10.6B, as compared to 47 deals $12.2B at this same time last year.
It’s interesting to see that biotech follow-ons are 40% of the entire market.
The first six weeks of 2024 saw venture private raises of $900mm a week, on average. The pace of the last three weeks has been roughly half of that level ($450mm a week).
Last week was particularly slow with $285mm in venture deals getting done - although it was a holiday shortened week.
After a January hiatus, the private debt market strengthened in February with $950mm raised in the first three weeks of the month.
Last week saw Tempus raise $300 million in debt from Ares.
Deals Update
We have seen $28 billion in M&A volume so far in 2025.
This remains one of the strongest starts in a long time.
Last week saw a number of smaller and mid-size deals hit the tape including an offer by Concentra to acquire Acelyrin, Cosette’s acquisition of Mayne Pharma and AZ’s $160 million buy-in of FibroGen China.
Last week’s Cosette transaction was impressive, and it looks to us like they got an excellent deal.
Importantly, Cosette is now positioned as a meaningful specialty pharma in women’s health and dermatology.
Long suffering FibroGen sold their China sub for $160 million. FibroGen stock jumped 60% on the news.
The FibroGen China business has been doing well and it looks like AZ picked up a nice financial deal with this transaction.
It was interesting, although perhaps not surprising, to see Kevin Tang’s Concentra step in and make a cash offer for Acelyrin in the context of their merger with Alumis.
Concentra has been able to win out in takeover contests by offering a price close to the target’s cash level in recent years.
Shareholder support for the Alumis deal will need to be strong to win against the proposed cash offer from Concentra.
A study published last week in Drug Discovery Today by Alexander Schumacher looked at how M&A and licensing deals impact R&D productivity.
It’s not uncommon to hear pharma executives decry M&A as distracting or a detriment to in-house drug discovery and development.
Interestingly, R&D output was higher among pharmas doing M&A than the other way around.
On the other hand, companies with very high R&D intensity rates did not necessarily have higher output.
We worry a little bit, however, about interpretation here. The direction of causality between M&A activity and R&D output is not obvious with the study design.
Industry Update
The Trump Administration’s impact on three letter agencies like FDA, HHS, NIH and CDC continues unabated.
Last week saw more personnel flow out of FDA as Celia Witten, Deputy Director of CDER, announced her departure.
Losing senior CDER personnel is not a good thing for biotech.
Also, Science reported that the NIH has let go 5% of its workforce.
Not an inconsiderable cut at a time when the U.S. faces unprecedented competition from China in the biosciences.
Along this line, Drew Endy, Professor of Bioengineering at Stanford, penned an editorial in the Boston Globe last week that argued that the United States needs to increase spend on bioprocessing and biotechnology to compete.
He argues that blocking China with measures like the BioSecure Act is unlikely to improve our competitive position.
His message is an affirmative one:
“A new Congress and new administration must assess the trajectory of our investments, consider bold ideas, and act. China’s bioeconomy is burgeoning. China’s bio-infrastructure is becoming the envy of our best and brightest. America must turbocharge its own biotechnology century with the urgency that drove MIT’s Vannevar Bush to declare an endless frontier and emboldened Brookline-born former president John F. Kennedy to launch the Apollo program.”
Lilly CEO Dan Skovronsky spoke to CNBC last week and indicated that Lilly is spending its R&D budget on “Big Problems Hiding in Plain Sight” like pain, addiction, ALS and the like.
We love it!
A story in the Financial Times over the weekend focused on the short position taken by Citadel in GSK. Citadel is skeptical that GSK’s pipeline is going to bear fruit.
If we were betting types, we would take the other side of the trade. GSK is trading at 7X EBITDA, a low multiple and is likely to grow going forward - not shrink.
Let’s see how this plays out.
Last week saw semaglutide go off shortage at FDA. HIMs stock fell 26% on the news. We don’t have an opinion on HIMS valuation but can say that their position that compounding is still possible for patients in “clinical need” is an important one.
Our evaluation of the law supports the HIMs position and, further, almost all obesity patients have “clinical need” because few stay on semaglutide for long as it is prescribed now.
We would not be surprised to see litigation pop up on this matter in the months ahead.
We were impressed by news last week of Evo-2, an AI program that can write DNA on demand.
Last week’s story in Science on the opportunity with precision diagnostics to improve autoimmune treatments is fascinating and novel.
We were encouraged to a see a report in Nature Reviews Drug Discovery on new approaches to drugging MYC including the use of degraders and novel molecular glues.
We also very much enjoyed watching a talk by Doug Long of IQVIA on changes taking place in the U.S. retail pharma marketplace. We have reproduced some of his slides in the attachment. The comments on GLP-1 growth and their impact on food spend are well worth reviewing.
Best,
Tim Opler
Managing Director
Stifel Investment Banking
Direct Phone: +1 212-257-5802
oplert@stifel.com
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