We are now at the end of the tumultuous first half of the year. We still have a week remaining as of today, but as investors, we are always forward-looking.
2H23 will be just as exciting as the 1H23. Pharma/biotech space does tend to be severely impacted by the macroeconomic environment – which I do not have great insight on.
However, I do have some insight on fundamental direction of the industry – and I wanted to share my thoughts below. This is not in an order of importance – it is a flow of thought (as always, not investment advice!).
US / EU GENERIC MANUFACTURERS WILL MAKE A COMEBACK
Generics industry have been under significant stress since the heydays of 2015 with significant pricing headwind that has consistently been in mid-teens to high teens. Yes, that is right – they have been facing mid-to-high teens annual pricing erosion and have been making it up through significant volume increase (primarily through new product launch).
Industry is naturally set up to be highly competitive – ANDA investment is low and upfront. So many players have worked on ANDA in the past and continued to push out products – hence the race to the bottom.
Unfortunately, the race to the bottom has left the industry with very fragile supply chain as pricing erosion forced these companies to cut costs significantly.
Then we got news like this:
Indian manufacturers have been cutting corners during covid when FDA only conducted virtual inspections – with covid backlog largely done, FDA resumed on-site inspections and they are finding A LOT of issues.
This is driving shortage of generic drugs -> exit of a major supplier means more money for those manufacturers that have been inspected during covid because they were easy to visit for the FDA – these are US/EU generic manufacturers.
M&A WILL CONTINUE TO PICK UP
It has been a busy year for biotech M&A in 1H23 – there has been two multi-bn deals just in June 2023 (Chinook Therapeutics – acquired by Novartis and Dice Therapeutics – acquired by Lilly).
However, I expect M&A spree to continue in 2H23 – for following reasons:
- Big pharmas that really need big revenues in late 2020s have not pulled significant revenue deal and we are only getting closer to that dreaded 2025.
- Deal herd mentality – your friends in the block (large pharma) are picking up companies left and right – you probably should too!
- Rates are going up – later deal announcement only means your cost of financing goes up – it becomes more dilutive to your bottom line for next year.
But what about FTC? I generally see FTC to be more of a noise. M&A will continue to happen. Lilly’s acquisition of Dice is a classic biotech M&A that FTC would have really hated if they didn’t like AMGN/HZNP deal. Lilly went ahead anyway – tells me that legal diligence on FTC risk checked out.
DO YOU AGREE WITH MY VIEW?
Therapeutic landscape continues to evolve and it is really exciting to see so many developments in smid cap and large caps.
I generally remain constructive on smid cap biotech (taking a net long view here) as sustained M&A should provide some floor and generate demand for these stocks from speculative pockets of generalist investors.
I am less excited about large cap space – my view is highly idiosyncratic in that I generally think large caps are likely to be largely flat (my checks suggests large cap pharma has become largely neutral in generalist investors’ portfolio vs. being heavily overweight late 2022) – and it will be very catalyst-driven for individual names, such as MARIPOSA trial readout for JNJ.
Hope you enjoy reading about my 2H23 outlook – will continue in part 2.
Happy Investing!
*not investment advice. View reflects my own. Please do your own research.
