As I have previously written, the Class of 2021 IPOs demonstrated that investors were overpaying for preclinical data, and that a significant correction would ensue. By April, I felt that valuations in smaller capitalization biopharmaceutical stocks had become attractive. Furthermore, larger cap drug stocks had performed relatively well, creating an enormous differential, which in turn made acquisition activity probable. Additionally, investors had yet to appreciate the durable recurring revenue stream that would accrue to many companies involved with COVID-19 vaccines, therapeutics and diagnostics. The stage was well set for a rally.
Over the past three months there have been several announced mergers, and the premiums paid have been impressive, including Pfizer’s (PFE) purchase of Biohaven Pharmaceutical (BHVN) and Global Blood Therapeutics (GBT). I would expect this trend to continue, as larger companies have ample cash and they must replenish their pipelines in light of the upcoming patent expiration cycle. Furthermore, over the past fifteen years, there has been a tremendous advance in higher priced biologics, and a disproportionate percent of the expertise in this area is found in smaller companies.
Another investment theme I have promulgated is the long tail to the COVID-19 revenue stream. The emergence of the highly transmissible BA.5 subvariant, which now accounts for 90% of new cases in the US, has resulted in an increase in cases and hospitalizations. Pfizer/BioNTech (BNTX) and Moderna (MRNA) are both developing BA.5 specific vaccines that I believe will be well received later this year. Some people argue that a new variant may dominate by that time, but I do not believe this will be the case. From the virus’s standpoint, its goal is to reproduce, which makes high transmissibility and low virulence an ideal combination. I continue to find the outlook favorable for Pfizer, BioNTech, Moderna, Eli Lilly (LLY), ThermoFisher (TMO) and Danaher (DHR). I also note that Eiger BioPharmaceuticals (EIGR) has recently presented positive Phase 3 data on its single subcutaneous dosing of PEGinterferon Lambda for COVID-19 treatment as part of the TOGETHER study. It is worth noting that Lambda stimulates immune responses critical to innate defenses with a mechanism of action potentially agnostic to variants of SARS-CoV-2 and resistance concerns with other treatments.
I have always focused on companies that are revolutionizing medical practice, and I have previously recommended ShockWave Medical (SWAV). It is the pioneer in the use of intravascular lithotripsy to treat calcified peripheral and coronary vessels. Management continues to report spectacular results while continuing to innovate to broaden the application of the technology. The stock is expensive, but it should remain so.
As the correction in biopharmaceutical and life science stocks unfolded, money managers did not discriminate in their selling, and short sellers took advantage of the generous valuations being accorded early stage companies. I believe that short sellers have been covering over the past month, but that the “long buyers” are largely still on the sidelines. There are now many attractively priced small and microcap stocks with promising prospects and appropriate cash reserves. As investors return to this subsector, these stocks should attract interest. I am impressed with the pipelines of SQZ Biotechnologies (SQZ), IDEAYA Biosciences (IDYA), Twist Bioscience (TWST), Graphite Bio (GRPH), Beam Therapeutics (BEAM), Akoya Biosciences (AKYA), Arbutus Biopharma (ABUS) and Kronos Bio (KRON).
The opportunity to purchase life science stocks at these attractive levels occurs periodically during stock market cycles. Sometimes this results from general conditions, as in 2009 and 1987, and it also happens due to corrections following pronounced enthusiasm for the sector, as in 2022 and 1991. There are significant tailwinds that will support ongoing innovation in the sector. These include the average annual 6% increase in US healthcare spending that I forecast for the next eight years, the progress in oncology that should result in many cancers becoming chronic diseases (watch developments with bi-specific antibodies) and the advances in gene therapies that could cure difficult to treat illnesses. I feel that the rally in biopharmaceutical stocks has just gotten underway, and one should not be dissuaded from having missed the bottom. Over the next six months, there will be data presented on several important clinical trials that could spark investor interest, as well as continued merger activity.
Image and article originally from seekingalpha.com. Read the original article here.