It has been a long time since I wrote on this website. Things are getting busy!
A lot of things happened in biotech/pharma land – however, for ALL THAT NOISE, NOT MUCH HAS CHANGED.
As I prepare for the last quarter of the year, I remain bullish as ever on therapeutics (i.e. want to remain net long) – biotech investing is not for the faint of heart, but there is great reward for those with strong thesis-backed conviction.
I will write a series of posts over the next month – today, we are focused on pharma.
FIRST THINGS FIRST: MACRO ENVIRONMENT REMAINS UNCHANGED WHILE GENERALISTS REMAIN SIDELINES ON PHARMA STOCKS FOR ELECTION
What do I mean by that? Drug pricing was no where near as bad as it could have been or was feared! Sure, Biden administration has been talking about some BIG numbers (a lot of mentions of millions of patients and billions of dollars), but it ended up being nothing dramatic. Just look at Bristol Myer Squibb’s stock chart below.
BMY stock chart is telling because it is the company that was viewed to have the most exposure to Biden Administration’s drug pricing.
Eliquis, its flagship product, is a small molecule (very very high margin) drug that is driving ~+$13B of annual sales to be among the first drugs to face drug price negotiation. The product is still growing at a healthy clip of 7% Y/Y.
As you saw above, BMY stock went down into drug pricing announcement throughout the year and then has had an epic recovery with big pharma earnings (starting with JNJ) during which many pharma companies started to sound optimistic on drug price negotiation!
US Government is the absolute largest customer for all big pharma – this could have been bad. However, it didn’t turn out to be bad DESPITE ALL THE SCARE AND NOISE COMING FROM THE GOVERNMENT.
My read is that this is the best government could do.
this means Pharma business model remains intact.
Now we know the pharma biz model is intact and retains its attractive industry dynamic (steady growth) – which ones are the best? For me, I think it is the cheapest pharma (ex-LLY) because INNOVATION ACQUISITION COSTS ARE COMING DOWN AS RATES COME DOWN.
BIG PHARMA STILL REMAIN PRESTINE INVESTMENT GRADE -> THEY CAN USE CHEAP CHEAP CHEAP DEBT TO BUY INNOVATION TO CREATE STRONG EQUITY STORY
Smid cap valuation has come down over the past 52 wks while cost of financing has been coming down rapidly and is expected to come down.
Low multiple big pharma stocks are trading in the gutter because investors are worried about long-term growth -> this is perfect environment for big pharma for that sweet sweet classic WACC arbitrage. Pharma can borrow money at 4-5% using investment grade debt while biotechs are trading at +10% equity risk.
Does anyone remember when GILD market cap went up by +$12B when it acquired KITE for $12B?
Gilead market value increased by $12B from $96B to $108B! – DESPITE SPENDING $12B. Why? Because now investors could pain the picture of long-term growth!
At the time, investors were concerned about Gilead’s LOE profile and concentration of business in Hep C and HIV -> entering cell therapy space with acquisition of best in class product added a new leg to the equity story.
NOW, it has turned out to be a terrible M&A in retrospect, but still tells the value of strong embedded powerful optionality for these pharma companies that are trading at low multiple but still has very strong credit profile to fund large scale, transformative M&A.
Key player with still room to pull off Gild move is BMY in US and Sanofi in EU.
Imagine – both stocks are trading at or under 10x and they bring in obesity asset – which can add upto $5-10B of risk-adjusted revenue for 2030. Roche and Amgen have at least $50-100B of value from their obesity program. you hear that $VKTX?
WRAPPING UP..
It is very interesting time in pharma – there are so many opportunities. Just need to be patient. Dividend yield is now ~5% on some of these companies – which makes patience much easier than it was 2-3 years ago.
GO GET’EM!
*NOT INVESTMENT ADVICE
