Ep. 392 - Biotech markets: Pause before the storm?

Steven, thanks for joining late in your evening.

Sure thing.

Well, maybe not too late, but, uh, late enough to interrupt your dinner to talk 4Q preview.

You spoke to, uh, about a dozen buysiders and bankers.

What did you learn?

Yeah, thanks, Jeff.

So, um, yeah, you know, as, as you mentioned, first half of the year was a great, great start to the year for biotech, uh, you know, really strongly outperformed.

That was largely supported by, you know, a cadence of M&A where there was almost about one billion plus dollar deal per week, kind of from the beginning of March into July.

I think we started jokingly kind of calling it M&A Monday, uh, because of how regular kind of those deals, those deals were happening.

So that was really sort of driving a lot of returns and, and interest in biotech, and we were seeing, you know, even incremental sort of generalist money coming into the sector then.

But, you know, the last really big public therapeutics company acquisition was mid-July.

It's been almost three months since then.

So it's not been a total dry spell.

There's been a couple other sort of smaller private takeouts since then, but largely for a lot of these specialist investors in the public space, it's been a bit of a, a, a quiet period.

And, and so, you know, the XBI's kind of, kind of followed suit, trailed the broader markets last quarter, much of the underperformance coming in September.

Now, as you mentioned, I think Selena's gonna be talking about some of these, but there were a few sort of unexpected, kind of highly followed negative readouts in the past quarter, whether that was the ATTR cardiomyopathy data from Ionis and AstraZeneca, Novo's Zeus data for the IL-6 inhibitor, or the, uh, Lp little a setback for Novartis.

Sort of all of those obviously, you know, didn't help, but, you know, I think what was, I don't know if ironic maybe is the right word to use here, but sort of the bigger damper on biotech was actually that there was a big surprise win that probably did more damage than some of those other ones did.

That was the, um, the Moderna positive, uh, phase three cancer data in adjuvant melanoma.

Now, the reason it was [chuckles] a downer was not because-- I mean, it was great for Moderna, great for melanoma patients, great for them, but what I heard from a bunch of investors and bankers was that there were a lot of long short biotech specialist hedge funds that were pretty heavily short Moderna ahead of that data.

And obviously since, you know, these funds don't tend to hold a lot of dry powder available, you know, they're typically close to being fully invested, you know, the, the, the theory was that these investors essentially had to sell down their positions in a lot of other biotechs, a lot of them, you know, quite broadly owned, and that that was really what pushed down biotech, uh, in the third quarter, in particular in September.

So they were basically having to sell off in some of the bigger names like Argenx or Insmed or some of these other ones.

And so, you know, these pretty liquid names had pretty poor performance.

Which are not the same names you just brought up with respect to the clinical failures, right?

Exactly, yes.

Yeah.

Steven, thanks for joining late in your evening.

Sure thing.

Well, maybe not too late, but, uh, late enough to interrupt your dinner to talk 4Q preview.

You spoke to, uh, about a dozen buysiders and bankers.

What did you learn?

Yeah, thanks, Jeff.

So, um, yeah, you know, as, as you mentioned, first half of the year was a great, great start to the year for biotech, uh, you know, really strongly outperformed.

That was largely supported by, you know, a cadence of M&A where there was almost about one billion plus dollar deal per week, kind of from the beginning of March into July.

I think we started jokingly kind of calling it M&A Monday, uh, because of how regular kind of those deals, those deals were happening.

So that was really sort of driving a lot of returns and, and interest in biotech, and we were seeing, you know, even incremental sort of generalist money coming into the sector then.

But, you know, the last really big public therapeutics company acquisition was mid-July.

It's been almost three months since then.

So it's not been a total dry spell.

There's been a couple other sort of smaller private takeouts since then, but largely for a lot of these specialist investors in the public space, it's been a bit of a, a, a quiet period.

And, and so, you know, the XBI's kind of, kind of followed suit, trailed the broader markets last quarter, much of the underperformance coming in September.

Now, as you mentioned, I think Selena's gonna be talking about some of these, but there were a few sort of unexpected, kind of highly followed negative readouts in the past quarter, whether that was the ATTR cardiomyopathy data from Ionis and AstraZeneca, Novo's Zeus data for the IL-6 inhibitor, or the, uh, Lp little a setback for Novartis.

Sort of all of those obviously, you know, didn't help, but, you know, I think what was, I don't know if ironic maybe is the right word to use here, but sort of the bigger damper on biotech was actually that there was a big surprise win that probably did more damage than some of those other ones did.

That was the, um, the Moderna positive, uh, phase three cancer data in adjuvant melanoma.

Now, the reason it was [chuckles] a downer was not because-- I mean, it was great for Moderna, great for melanoma patients, great for them, but what I heard from a bunch of investors and bankers was that there were a lot of long short biotech specialist hedge funds that were pretty heavily short Moderna ahead of that data.

And obviously since, you know, these funds don't tend to hold a lot of dry powder available, you know, they're typically close to being fully invested, you know, the, the, the theory was that these investors essentially had to sell down their positions in a lot of other biotechs, a lot of them, you know, quite broadly owned, and that that was really what pushed down biotech, uh, in the third quarter, in particular in September.

So they were basically having to sell off in some of the bigger names like Argenx or Insmed or some of these other ones.

And so, you know, these pretty liquid names had pretty poor performance.

Which are not the same names you just brought up with respect to the clinical failures, right?

Exactly, yes.

Yeah.