Biotech transaction activity continues to be sustained and well ahead of last year.
Recent industry survey indicates a strong expectation by industry insiders of future biotech M&A transactions.
A setback for Biogen will force it to become more active on acquisitions to strengthen pipeline prospects, and may also become a target itself.
Biotech exposure, particularly to small and midcap segment, can prove to be beneficial over the year.
The biotech sector has continued to participate in the market rally. One of the reasons is the strength in biopharma M&A activity, which provides unique support for valuations and particularly assists the small-and-midcap biotech companies. We briefly highlight some of the recent transactions and key events.
Mergers and Acquisition Theme
After the January 2019 blockbuster purchase of Celgene (CELG) by Bristol Myers Squibb (BMY), which remains pending, and Loxo Therapeutics acquisition by Eli Lilly (ELY), M&A transaction activity has sustained itself during the first quarter. Last month, Roche (RHHBY) acquired Spark Therapeutics (ONCE) for $4.3 billion for a gene therapy rare disease treatment, Merck (MRK) acquired cancer drug developer Immune Design (IMDZ) for $300 million, French drugmaker Ipsen purchased Clementia Pharmaceuticals (CMTA) for $1.3 billion, and Biogen (BIIB) acquired British firm Nightstar Therapeutics (NITE). This month Pacira Pharmaceuticals (PCRX) acquired privately-held, medical technology company MyoScience for $120 million upfront and milestones, while Pfizer (PFE) agreed to pay $51 million upfront and set aside over $600 million if it chooses to go ahead with the buyout of Paris based Vivet Therapeutics based on future data.
The M&A activity remains strong and that bodes well for the sector. In our earlier article, Biotech Bonanza: The Mergers And Acquisitions Theme, we had highlighted a few key reasons why merger activity can receive a sustained boost. Recently, a biotech news publication, Endpoints News, aggregated the results of a survey of 81 biotech companies. Nearly two-thirds of the survey respondents felt that M&A will be either “hot” or “sizzling.”
The survey respondents were mostly small and midsized companies. The upbeat expectation is an encouraging vote of confidence from industry insiders in the biotech M&A theme during 2019.
Biogen's Debacle - A Push Towards Aggressive M&A
Late last week, Biogen rocked the biopharma world by announcing the termination of both the Phase III trials of its pivotal Alzheimers drug Aducanumab after receiving verdict about its futility from the independent data monitoring team. It was a shot that was heard across the biotech world since it not only sets back Biogen’s business prospects dramatically after heavily investing into the drug which was expected to be its next flagship product but also calls into question the legitimacy of the amyloid beta theory. Biogen shares plummetted nearly 30%, a decline of close to $18 billion, more than was raised in all biotech IPOs over the past 3 years.
Perhaps the writing has been on the wall, after Johnson & Johnson, Merck and Roche, Eli Lilly and AstraZeneca, and Pfizer were all forced to retreat from their high-profile, even late-stage, beta-amyloid trials over the past two years, surrendering to the complexity of curing the pernicious Alzheimer disease. All these drugs have belonged to a class of drugs that aim to prevent the buildup of beta-amyloid plaque in the brain, and are referred to as BACE inhibitors. After spending over $700 billion on dementia-related treatments since 2000, as per a report from the industry association PhRMA, the biopharma industry doesn’t have a whole lot to show for the spend in terms of concrete results towards a path to cure Alzheimer. In 2018, Medicare was projected to spend over $140 billion on treatments and care for dementia-related diseases, equating to about $1 being spent on Alzheimer for every $5 that Medicare spends, or 20% of Medicare expenditures. The spending will rise inexorably and approaching nearly 50% by 2050 in the absence of a cure.
Rendering of Alzheimer Beta-Amyloid Plaque and Tau in Brain Disease ~ Source: NIH
The question from an M&A standpoint is that after the setback at Biogen, does the valuation of the ongoing programs at smaller biotech companies increases due to the scarcity premium or is the Biogen debacle and the steady erosion of the beta amyloid hypothesis going to significantly discount the valuations.
That may be a tough question to answer, but most likely the direct BACE associated trials will be considered riskier, while novel variants will become more valuable. There are over 90 drug programs for Alzheimer underway, including the recently terminated ones at Biogen, and most of these programs can be found on a 2018 list compiled by PhRMA.
What may be easier to project is that Biogen now finds itself at a crossroads where it needs to make some aggressive acquisitions this year to rejuvenate its product pipeline for the future topline growth or risk being acquired. Both situations will be positive for the biotech sector and the M&A theme.
Conclusion
Biotechs have unique valuation support this year as M&A activity is expected to sustain at a much higher level than last year, and contribute towards boosting sector valuations. This is helpful news as the biopharma sector also faces the unique risk of greater regulatory oversight on the drug pricing issue, and there will be near-term market volatility as concerns mount of an economic slowdown.The best way to participate in the M&A theme remains a portfolio approach. A mix of promising companies, particularly in the smallcap and the midcap segment can have an advantage of even being potential M&A targets. Portfolio exposure can also be gained through a variety of broad as well as targeted biotech ETFs.
A few promising biotech companies, some of which may be now or in the past be part of the Prudent Biotech model portfolios, include Incyte (INCY), Acadia Pharmaceuticals (ACAD), Alexion Therapeutics (ALXN), GW Pharmaceuticals (GWPH), Sage Therapeutics (SAGE), Amarin (AMRN), Denali Therapeutics (DNLI), Array BioPharma (ARRY), Ascendis Pharma (ASND), Blueprint Medicines (BPMC), Uniqure (QURE), Biohaven Pharmaceutical (BHVN), Ionis Pharmaceuticals (IONS), Mirati Therapeutics (MRTX), Ra Pharmaceuticals (RARX), Bluebird Bio (BLUE), Ultragenyx Pharmaceutical (RARE), Puma Biotechnology (PBYI), Portola Pharmaceuticals (PTLA), Catalyst Pharmaceuticals (CPRX), Axsome Therapeutics (AXSM), Macrogenics (MGNX), and Arrowhead Pharmaceuticals (ARWR). Sector exposure can also be acquired through diversified biotech ETFs like Nasdaq Biotech (IBB) and S&P Biotechnology Select (XBI) or targeted ones.
Once again, take a portfolio approach in biotechs to overcome inevitable mistakes.
Author’s note: As always, kindly do your own due diligence.
By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…
The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.
Temporary help services employment continues a steep decline after a sharp post-pandemic rise.
Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.
The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.
The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.
Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.
As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.
Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.
The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.
Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.
The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250
Below is an explanation of how we got here with the labor market, which all started during COVID-19.
1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.
2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.
Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.
3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too
Total employment data 4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels.
FromBLS:Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.
Here are the jobs that were created and lost in the previous month:
In this jobs report, the unemployment rate for education levels looks like this:
Less than a high school diploma:6.1%
High school graduate and no college: 4.2%
Some college or associate degree: 3.1%
Bachelor’s degree or higher:2.2%
Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.
Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month
Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush.
What happened?Let's take a closer look.
On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.
Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.
Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K, a 124K revision, which was the biggest one-month negative revision in two years!
Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.
In the past month the Biden department of goalseeking stuff higher before revising it lower, has revised the following data sharply lower:
- Jobs
- JOLTS
- New Home sales
- Housing Starts and Permits
- Industrial Production
- PCE and core PCE
To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).
And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...
... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...
... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.
While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.
But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).
This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.
There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).
Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!
But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!
The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!
Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...
... but there has been zero job-creation for native born workers since June 2018!
This is a huge issue - especially at a time of an illegal alien flood at the southwest border...
... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.
Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.
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