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Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And “Tighter For Longer” Fed

Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And "Tighter For Longer" Fed

Two days ago, when stocks were melting up even as oil was…

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Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And "Tighter For Longer" Fed

Two days ago, when stocks were melting up even as oil was storming higher and threatened to rerate inflation expectations sharply higher, we mused that algos were clearly ignoring this potentially ominously convergence.

And while yesterday we saw the first cracks developing in the meltup narrative as oil extended gains following OPEC's stark slap on the face of the dementia patient in the White House, it was only today that the "oil is about to push inflation sharply higher" discussion entered the broader financial sphere, with JPM writing this morning that "OPEC+ presents inflation risk", Bloomberg echoing JPM that "OPEC+ alliance’s plan to cut oil supply stoked inflation fears and as traders awaited labor-market data to gauge the risk of recession" and Saxo Bank also jumping on the bandwagon, warning that OPEC+ supply cut will worsen global inflation which "raises the risk of inflation staying higher for longer” and “sends the wrong signal to the US Federal Reserve... It could send a signal that they have to keep on their foot on the brake for longer.”

And sure enough, with oil rising above its 50DMA for the first time since Aug 30, futures have slumped overnight as oil kept its gains, with S&P and Nasdaq 100 futures both sliding 0.5% as of 730am, while Europe’s Stoxx 600 erased an advance and traded near session lows. US crude futures held on to weekly gains of about 11% after the oil cartel said it would cut daily output by 2 million barrels. Treasuries were steady, the 10Y trading around 3.77%, with the 2Y rate hovering about the 4.15% level.

In pre-market trading, Credit Suisse jumped as much as 5.2% after JPMorgan upgraded to neutral from underweight, saying it sees $15bn as a minimum value for the lender, in-line with the estimated value of the Swiss legal entity. Shares were 2% higher by 13:20pm CET in Zurich, after Bloomberg News reported that the lender is trying to bring in an outside investor to inject money into a spinoff of its advisory and investment banking businesses, citing people with knowledge of the deliberations. Other banks did not do as well, and slumped in premarket trading Thursday, putting them on track to fall for a second straight day. Twitter shares fell as much as 1.1% to $50.75, trading nearly 7% below Elon Musk’s offer price of $54.20 as investors await progress in the revived deal. Here are the other notable premarket movers:

  • Pinterest (PINS US) shares jump as much as 5.8% in US premarket trading after Goldman Sachs upgraded the social networking site to buy from neutral on improving user growth and better engagement trends, even as the backdrop for digital advertising remains uncertain.
  • Biohaven Ltd. (BHVN US) shares rise 9.7% in US premarket trading, set to extend a 75% gain over the past two days as regular trading in the newly constituted drug developer began following an unusual deal with Pfizer Inc.
  • SurgePays (SURG US) shares soar as much as 11% in premarket trading after the company gave an update on subscriber numbers for its subsidiary SurgePhone Wireless.
  • Flutter (FLTR LN) gained 3.3% in premarket trading as it was initiated at outperform at Exane as the best-placed online gambling name, while Entain also at outperform and DraftKings started at underperform.
  • Richardson Electronics (RELL US) rose 8.2% in extended trading after reporting year-over-year growth in net sales and earnings per share for the fiscal first quarter.

While higher energy prices could stoke inflation, some have speculated that this will also divert discretionary income from core items thus pushing core inflation lower and hit company earnings -- potentially encouraging the Federal Reserve to slow monetary tightening.

While such expectations fueled equity gains this week, several money managers are cautioning that the economic path to a less aggressive Fed could be painful: “If you want to preempt the Fed, you are playing a very high-stakes game,” said Kenneth Broux, a strategist at Societe Generale SA. “The Fed do not want financial conditions to loosen; they don’t want equity markets to take off and get too comfortable.”

That said, investors are wary of placing large-scale equity bets as they await a report on US initial jobless claims later Thursday and the official nonfarm payrolls data Friday. A Bloomberg survey shows the US economy will have added 260,000 jobs last month; a higher-than-anticipated number may spook markets.

In Europe, the Stoxx 50 dropped -0.3% to session lows. Stoxx 600 outperforms peers, adding 0.2%, FTSE MIB lags, dropping 0.5%. Energy and insurance underperform while real estate and travel lead gains. Here are all the notable European movers:

  • Imperial Brands shares rise as much as 4.7% after the tobacco company said it will buy back up to £1b worth of stock. The move was welcomed by analysts, with RBC calling it a “big deal” and Citigroup saying the announcement was earlier than expected.
  • Home24 SE gains as much as 126% to EU7.53 after XXXLutz offered to buy all outstanding shares in the German online furniture retailer for EU7.50 apiece. The bid is generous and the deal is straightforward from a regulatory perspective, according to Tradition.
  • Credit Suisse jumps as much as 5.2% after JPMorgan upgraded to neutral from underweight, saying it sees $15b as a minimum value for the lender, in-line with the estimated value of the Swiss legal entity.
  • CMC Markets climbs as much as 6.5% after the online trading firm said it sees first- half net operating income up 21% y/y, with market volatility in August and September boosting the results. Numis upgraded the stock to add from hold following the report.
  • Shell drops as much as 5% as analysts say the oil and gas major’s trading update looks “weak” and may mean that FY consensus proves too ambitious.
  • Kloeckner falls as much as 12% as the company faces a “high likelihood” of an imminent profit warning, Bankhaus Metzler says, double-downgrading the stock to sell from buy.
  • Swiss Re is among the weakest members of the Stoxx 600 insurance index on Thursday, declining as much as 4.0%, as Morgan Stanley lowers its price target ahead of third-quarter earnings.
  • Accor drops as much as 2.5% after the hotel chain owner was downgraded to underweight from equal-weight at Barclays, which sees short-term risks as bigger for the company compared with peers and feels investors are looking more at potential negative factors heading into FY23 than 2022 upgrades.

Earlier in the session, Asian stocks rose for a third day as hardware technology stocks in South Korea and Japan advanced on views they may have reached a bottom. The MSCI Asia Pacific Index climbed as much as 0.9%, lifted by TSMC, SoftBank and Sony. The benchmark trimmed gains later in the day, but remains on track to advance for the week, following a seven-week losing streak that was the longest since 2015.Korea’s Kospi Index was the region’s best-performing major benchmark, jumping about 1%. The advance was helped by chipmakers extending their gains amid Morgan Stanley’s bullish view on the sector. Hong Kong stocks retreated after Wednesday’s catch-up rally.

Trading volume in the region was light as mainland China remains closed for the Golden Week holiday. The MSCI’s Asian benchmark has rebounded this week from its lowest in more than two years. The move tracked a nascent revival in global equities on bets that the Federal Reserve may turn less aggressive in its tightening. In a potential harbinger of shifting market views, Morgan Stanley strategists upgraded emerging-market and Asia ex-Japan stocks to overweight from equal-weight.   Investors are also optimistic that monetary policies in China and Japan, which have bucked the global wave of tightening to remain loose, could provide further support to the nations’ equities.  “While the rest of the world is tightening, Japan and China are still easing, especially China where we are going to see more easing policies going forward,” Chi Lo, senior investment strategist for Asia Pacific at BNP Paribas Asset Management, said in an interview with Bloomberg TV. “That makes us more positive on EM Asia.”

Japanese equities gained for a fourth day as investors awaited domestic corporate earnings coming out later this month.  The Topix rose 0.5% to 1,922.47 as of the market close in Tokyo, while the Nikkei 225 advanced 0.7% to 27,311.30. Sony Group contributed the most to the Topix’s gain, increasing 1.7%. Out of 2,168 stocks in the index, 1,564 rose and 490 fell, while 114 were unchanged. “There is relatively little concern about corporate earnings for Japanese stocks with the economy restarting and the yen weakening,” said Shogo Maekawa, a strategist at JPMorgan Asset Management.

In FX, the Bloomberg Dollar Spot Index consolidated within the recent day’s ranges, while Britain’s pound slipped 0.4% and gilt yields rose after Fitch Ratings lowered its outlook on the nation to negative. The greenback advanced against most of its G-10 peers. The euro steadied just below $0.99. Euro hedging costs are on the rise again as traders position ahead of Friday’s payrolls print and next week’s US inflation report. Commodity currencies were the worst performers along with the pound. Australian and New Zealand dollars gave up an Asia-session advance. The yen traded in a narrow range.

In rates, Treasuries were slightly cheaper across the curve after paring declines led by gilts in London trading after a Bank of England survey found expectations for higher prices. Focal points of US session include several Fed speakers and potential for risk-reduction ahead of Friday’s September jobs report Friday. US yields cheaper by less than 2bp across the curve in bear- flattening move, 10-year by 2bp vs 17bp for UK 10-year, the downside leader in developed market sovereign bonds.  German and Italian bond curves flattened modestly as yields on shorter-dated notes rose, while those further out fell.

In commodities, West Texas Intermediate futures traded near $88 a barrel, while Brent crude held near $93.30. The output-cut plan drew a warning from the White House about negative effects on the global economy. Goldman Sachs Group Inc. increased its fourth-quarter price target for Brent to $110 a barrel.

To the day ahead now, and data releases include German factory orders for August, the German and UK construction PMIs for September, Euro Area retail sales for August, and the weekly initial jobless claims from the US. Meanwhile from central banks, we’ll get the ECB’s account of their September meeting, as well as remarks from the Fed’s Evans, Cook, Kashkari, Waller and Mester, and the BoE’s Haskel.

Market Snapshot

  • S&P 500 futures down 0.3% to 3,783.50
  • STOXX Europe 600 up 0.3% to 400.25
  • MXAP up 0.4% to 145.05
  • MXAPJ up 0.3% to 471.37
  • Nikkei up 0.7% to 27,311.30
  • Topix up 0.5% to 1,922.47
  • Hang Seng Index down 0.4% to 18,012.15
  • Shanghai Composite down 0.6% to 3,024.39
  • Sensex up 0.6% to 58,403.02
  • Australia S&P/ASX 200 little changed at 6,817.52
  • Kospi up 1.0% to 2,237.86
  • German 10Y yield little changed at 2.05%
  • Euro little changed at $0.9886
  • Brent Futures up 0.3% to $93.62/bbl
  • Gold spot up 0.0% to $1,716.69
  • U.S. Dollar Index little changed at 111.24

Top Overnight News from Bloomberg

  • UK bond markets face a potential “cliff edge” when the Bank of England exits the market at the end of next week, leaving traders to navigate a turbulent backdrop without the support of a buyer of last resort
  • Millions more Britons will be dragged into higher rates of income tax over the next three years, costing twice as much as Prime Minister Liz Truss’s personal tax cuts, according to calculations by the Institute for Fiscal Studies
  • Britain’s construction industry turned more pessimistic in September after rising interest rates and the risk of recession held back new orders
  • The European Union plans to examine whether Germany’s massive plan to shelter companies and households from surging energy costs respects the bloc’s rules on public subsidies, EU Commissioner Thierry Breton said
  • German factory orders dropped in August after the previous month was revised to show an increase, hinting at a lack of momentum as the economy stands on the brink of a recession
  • Societe Generale SA cut its exposure to counterparties on trades in China by about $80 million in the past few weeks as global banks seek to guard against any potential fallout from rising geopolitical risks in the world’s second-largest economy

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed as the region partially shrugged off the lacklustre lead from the US where the major indices snapped a firm two-day rally and finished the somewhat choppy session with mild losses amid higher yields and as Fed rhetoric essentially pushed back against a policy pivot. ASX 200 lacked direction amid underperformance in the Real Estate and the Consumer sectors, although the downside was also limited by strength in energy after oil prices were lifted by the OPEC+ output cut. Nikkei 225 was positive with notable gains in exporter names and with Rakuten leading the advances as Mizuho looks to acquire a 20% stake in Rakuten Securities for USD 555mln. Hang Seng was lacklustre and took a breather after the prior day’s more than 5% jump with the mood also not helped after Hong Kong PMI slipped into contraction territory for the first time in 6 months.

Top Asian News

  • Haikou city in China's Hainan imposed a COVID lockdown for Thursday, according to Bloomberg.
  • Malaysia PM May Propose Parliament Dissolution, Bernama Reports
  • Why Polio, Once Nearly Eradicated, Is Rebounding: QuickTake
  • Legoland Korea’s Default Flags Risks for Nation’s Developers
  • Paris Club Seeks China Collaboration in Sri Lanka Debt Talks
  • Yen Rout Is Over on Peak US Rate Hike Bets, Says Top Forecaster

European bourses are under modest pressure as sentiment broadly takes a slight turn for the worst amid limited newsflow as participants look to Friday's NFP. Currently, European benchmarks are lower by 0.1-0.3% while US futures are posting slightly larger losses of circa 0.7 ahead of Fed speak.

Top European News

  • Fitch affirmed the UK at AA-; Outlook revised to Negative from Stable, while it stated that the fiscal package announced as part of the new UK government's growth plan could lead to a significant increase in deficits over the medium-term, according to Reuters.
  • The UK Treasury is set to impose GBP 21bln of additional income taxes despite the "tax-cutting mini-budget", according to a study by the Institute for Fiscal Studies. (Times)
  • BoE Monthly Decision Maker Panel data - September 2022; looking ahead, DMP members expected CPI inflation to be 9.5% one-year ahead, up from 8.4% in the August survey, and 4.8% in three years’ time.
  • BoE's Cunliffe says the FPC will publish its next financial policy statement and record on October 12th, liquidity conditions in the run up to the BoE gilt intervention were "very poor", MPC will make a full assessment of recent developments at its November 3rd meeting.
  • UK government has proposed easing the fee cap for illiquid assets in pensions, according to a rule consultation publication by the government.
  • Swedish Economy Shrinks More Than Estimated on Weak Industry
  • UK Tech M&A Spree Pauses as Buyers Pull Out Amid Chaotic Markets

FX

  • USD benefits from the mentioned risk tone, with the DXY extending to a 111.35 peak to the modest detriment of peers.
  • However, EUR is relatively resilient and holding around 0.99 vs the USD as we await the ECB Minutes account for near-term guidance.
  • Cable faded sub-1.1400 and reversed through 1.1300 again amid the USD's move and prior to a letter exchange from the BoE to Treasury re. the Gilt Intervention.
  • Antipodeans under pressure given the USD move and associated action in metals, while the Yuan initially lent a helping hand but this has since dissipated.
  • Given the broader tone, the traditional havens are holding near unchanged levels though yield dynamics are a hinderance.

Fixed Income

  • Gilts are once again the standout laggard following rating agency action and the BoE DMP showing inflation pressures were already elevated MM before the fiscal update.
  • As such, the UK yield has extended back above 4.10%; in the US, yields are also bid though to a much lesser extent before Fed speak and Friday's jobs.
  • Back to Europe, Bunds are pressured though only modestly so vs UK counterparts awaiting the ECB's September account

Commodities

  • Crude benchmarks are modestly firmer at present, extending marginally above yesterday’s best levels with fresh newsflow limited as participants digest yesterday’s OPEC+ action.
  • WTI and Brent are towards the mid-point of circa. USD 1/bbl ranges, though Brent Dec’22 briefly surpassed the 200-DMA at USD 94.11/bbl before moving back below the figure.
  • Acting Kuwaiti Oil Minister said the OPEC+ decision to cut output will have positive ramifications for oil markets, while they understand consumers' concerns about prices increasing but added that the main motive in OPEC+ is balancing supply and demand, according to Reuters.
  • US National Security official stated the US sanctions policy on Venezuela remains unchanged and there are no plans to change the sanctions policy without constructive steps from Maduro, according to Reuters.
  • Norway's Budget proposes changing the temporary tax rules for the petroleum sector, entails that the uplift is reduced to 12.40% (prev. 17.69%), via Reuters.
  • Saudi sets the November Arab Light OSP to N.W Europe at Ice Brent +USD 0.90/bbl; to the US at ASCI +USD 6.35/bbl, via Reuters citing a document; to Asia at Oman/Dubai +USD 5.85 (Unch.), via Reuters sources.

Geopolitics

  • North Korea launched two short-range ballistic missiles which were fired from Pyongyang and landed outside of Japan's exclusive economic zone, according to the South Korean military cited by Yonhap. Furthermore, North Korea said that its missile launches are counteraction measures against the US and South Korean military drills.
  • North Korean jets and bombers have been seen flying in an exercise, according to Yonhap; South Korean jets take off in response, via Reuters.
  • US State Department condemned North Korea's ballistic missile launch and said North Korea's missile launches pose a threat to regional neighbours and the international community, while it added that the US remains committed to a diplomatic approach to North Korea and called on North Korea to engage in dialogue, according to Reuters.
  • The EU has approved the 8th round of Russian sanctions; as expected.

US Event Calendar

  • 08:30: Sept. Continuing Claims, est. 1.35m, prior 1.35m
  • 08:30: Oct. Initial Jobless Claims, est. 204,000, prior 193,000

Central bank Speakers

  • 08:50: Fed’s Mester Makes Opening Remarks
  • 09:15: Fed’s Kashkari Takes Part in Moderated Q&A
  • 13:00: Fed’s Evans Takes Part in Moderated Q&A
  • 13:00: Fed’s Cook Speaks on the Economic Outlook
  • 13:00: Fed’s Kashkari Discusses Cyber Risk and Financial Stability
  • 17:00: Fed’s Waller Discusses the Economic Outlook
  • 18:30: Fed’s Mester Discusses the Economic Outlook

DB's Henry Allen concludes the overnight wrap

After an astonishing rally at the beginning of Q4, markets reversed course yesterday as investors became much more sceptical that we’ll actually get a dovish pivot from central banks after all. The idea of a pivot has been a prominent theme over recent days, particularly after the financial turmoil during the last couple of weeks, thus sparking the biggest 2-day rally in the S&P 500 since April 2020 as the week began. But over the last 24 hours, solid US data releases have created a pushback against that narrative, since they were seen as giving the Fed more space to keep hiking rates over the coming months. And if markets had any further doubt about the Fed’s intentions, San Francisco Fed President Daly explicitly said yesterday that she didn’t expect there to be rate cuts next year, in direct contrast to futures that are still pricing in rate cuts from Q2. Indeed for a sense of just how volatile the reaction has been, 10yr bund yields were up by +16.3bps yesterday, which is their largest daily rise since March 2020 during the initial wave of the pandemic.

Looking at the details of those releases, it was evident that markets are still treating good news as bad news at the minute, since they sold off even as data pointed to a more resilient performance from the US economy than had been thought. For example, the ISM services index came in above expectations at 56.7 (vs. 56.0 expected), and the employment component moved up to a 6-month high of 53.0. So that’s a noticeably different picture to the manufacturing print on Monday, when there was a surprise contraction in the employment component. Furthermore, there was another sign of labour market strength from the ADP’s report of private payrolls, which came in at +208k in September (vs. +200k expected), and the previous month’s reading was also revised upwards. We’ll see if that picture is echoed in the US jobs report tomorrow, but there was a clear reaction to the ISM print in markets, as investors moved to upgrade the amount of Fed hikes they were expecting whilst the equity selloff accelerated.

Those expectations of a more hawkish Fed were given significant support by comments from Fed officials themselves. The most obvious came from San Francisco Fed President Daly, who was asked about the fact that futures were pricing in rate cuts, and said “I don’t see that happening at all”. In fact when it came to rates, she not only said that they were raising them into restrictive territory, but that they would be “holding it there” until inflation fell. Atlanta Fed President Bostic struck a similar tone, emphasising rate cuts in 2023 were not likely and that “I am not advocating a quick turn toward accommodation. On the contrary.” He said he wanted fed funds rates between 4% and 4.5% by the end of this year, “and then hold at that level and see how the economy and prices react.”

That backdrop led to a sizeable cross-asset selloff yesterday on both sides of the Atlantic. The effects on the rates side were particularly prominent, with 10yr US Treasury yields bouncing back +12.0bps to 3.75%. And that move was entirely driven by real yields, which rose +15.1bps as investors moved to price in a more hawkish Fed over the months ahead. You could see that taking place in Fed funds futures too, with the rate priced in for December 2023 up by +8.9bps to 4.19%, thus partially reversing the -22.2bps move lower over the previous two sessions. This morning, 10yr yields are only down -1.0 bps, so far from unwinding those moves.

The hawkish tones also proved bad news for equities, with the S&P 500 taking a breather following its blistering start to the week, retreating -0.20% after being as low as -1.80% in the New York morning. European equities did not enjoy the benefits of a New York afternoon rally, leading to a transatlantic divergence, and the STOXX 600 was down -1.02% on a broad-based decline. The energy sector outperformed in both the S&P 500 and STOXX 600 following a rally in crude oil which saw both Brent crude (+2.81%) and WTI (+2.53%) oil prices hit a 3-week high. That followed a decision from the OPEC+ group, who cut output by 2 million barrels per day. Those gains have continued in overnight trading as well, with Brent Crude now at $93.48/bbl.

In Europe, the performance of sovereign bonds echoed that for US Treasuries, as yields on 10yr bunds (+16.3bps), OATs (+17.6bps) and BTPs (+29.0bps) all saw their largest daily increases since March 2020. As in the US, that reflected growing scepticism about a dovish pivot from the ECB, but another factor not helping matters was the rebound in energy prices, with natural gas futures up +7.25% on the day to close at €174 per megawatt-hour, alongside the oil rebound mentioned above. That’s been reflected in inflation expectations too, with the 10yr German breakeven up another +8.0bps yesterday to 2.15%, after having closed beneath 2% on Monday for the first time since Russia’s invasion of Ukraine began.

Here in the UK, we also saw several key assets lose ground once again following their rally over the last week. For instance, sterling ended a run of 6 consecutive daily gains against the US Dollar to close -1.31% lower, closing back at $1.13. And that wasn’t simply a story of dollar strength, as the pound weakened against every other G10 currency as well. Gilts were another asset to struggle, with real yields in particular seeing significant daily rises of at least +30bps across most of the yield curve, including a +33.0bps rise for the 10yr real yield, and a +36.7bps rise for the 30yr real yield. That came as the Bank of England said they didn’t buy any gilts under their emergency operation for a second day running. In the meantime, there were fresh signs that the turmoil after the fiscal announcement was impacting the mortgage market, with Moneyfacts saying that the average 2yr fixed-rate mortgage had risen to 6.07%, which is the highest since November 2008. Last night that was then followed up by the news that Fitch had downgraded the UK’s outlook from stable to negative.

Overnight in Asia there’s been a mixed performance from the major equity indices. Both the Nikkei (+0.94%) and the Kospi (+1.25%) have recorded solid advances, which continues their run of having risen every day this week. In addition, futures in the US and Europe are both pointing higher, with those on the S&P 500 up +0.49%. However, the Hang Seng is down -0.43% and Australia’s S&P/ASX 200 is down -0.05%, whilst markets in mainland China remain closed for a holiday. The dollar index has also lost ground overnight, falling -0.25%, which comes in spite of those hawkish comments from Fed officials pushing back against rate cuts next year.

Looking at yesterday’s other data, the final services and composite PMIs mostly echoed the data from the flash readings. The composite PMI for the Euro Area was revised down a tenth to 48.1, and the US composite PMI was revised up two-tenths to 49.5. There was a bigger rise in the UK however, where the composite PMI was revised up seven-tenths to 49.1.

To the day ahead now, and data releases include German factory orders for August, the German and UK construction PMIs for September, Euro Area retail sales for August, and the weekly initial jobless claims from the US. Meanwhile from central banks, we’ll get the ECB’s account of their September meeting, as well as remarks from the Fed’s Evans, Cook, Kashkari, Waller and Mester, and the BoE’s Haskel.

Tyler Durden Thu, 10/06/2022 - 08:02

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EY Eyes Comeback for Biopharma M&A

EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…

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A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.

2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.

Biopharmas generated about $88 billion in M&A deals in 2022, down 15% from $104 billion in 2021. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. The number of biopharma deals fell 17%, to 75 deals from 90. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine. [EY]
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.

The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.

We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.

Baral is not alone in foreseeing a comeback for biopharma M&A.

John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.

“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)

Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”

Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”

Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.

The Right deals

Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.

Subin Baral, EY Global Life Sciences Deals Leader

“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.

The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.

“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”

Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.

“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”

Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.

Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.

“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.

$1.4 Trillion available

Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.

That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.

Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.

“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.

This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).

EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.

Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.

“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.

Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.

The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.

M&A headwinds

Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.

Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”

Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.

“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.

“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.

The post EY Eyes Comeback for Biopharma M&A appeared first on GEN - Genetic Engineering and Biotechnology News.

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Pfizer’s Albert Bourla spells out ‘transition year’ for Covid products, with sales expected to reach a low point

On the heels of a record sales year, Pfizer is bracing for impact as it expects Covid-19 revenue to bottom out in 2023.
That’s due to lower compliance…

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On the heels of a record sales year, Pfizer is bracing for impact as it expects Covid-19 revenue to bottom out in 2023.

That’s due to lower compliance with vaccine recommendations, fewer primary vaccines being administered, and a “significant” government supply that’s expected to last throughout early this year, execs said Tuesday on the company’s Q4 earnings call.

CEO Albert Bourla anticipates $13.5 billion in Comirnaty sales this year, down 64% from 2022, and just $8 billion in Paxlovid revenue, down 58% from 2022.

“We expect 2023 to be a transition year in the US,” he said on the call, adding that the company sold more vaccine and treatment doses this year than were actually used. “This resulted in a government inventory build that we expect to be absorbed sometime in 2023 — probably the second half of the year. Around that time, we expect to start selling Comirnaty through commercial channels at commercial prices.”

Just 15.5% of eligible Americans have received bivalent booster doses, compared to 69.2% who completed their primary series, according to the CDC’s latest data. Last week, the FDA’s vaccines advisory committee voted unanimously in favor of “harmonizing” Covid vaccine compositions, meaning all new vaccine recipients would receive a bivalent shot, regardless of whether they’ve received the primary series.

Even so, only 31% of people in the US received a Covid vaccine this year, and Pfizer expects that number to dip to about 24% in 2023.

David Denton

Bourla’s expecting a similar slump in Paxlovid sales, due to existing unused government supply. According to data from ASPR updated last week, states have about 4 million unused Paxlovid courses.

The antiviral significantly underperformed this year, missing Bourla’s prior full-year projections by just over $3 billion. Comirnaty seemed to pick up the slack, however, raking in roughly $37.8 billion in global sales, or about $3.8 billion more than Bourla predicted at the end of the third quarter.

“While patient demand for our Covid products is expected to remain strong throughout 2023, much of that demand is expected to be fulfilled by products that were delivered to governments in 2022 and recorded as revenues last year,” CFO David Denton said on the call.

Angela Hwang

Commercial pricing for both Comirnaty and Paxlovid will likely kick in around the second half of this year, according to Bourla. While the pharma giant previously said it expects to charge between $110 and $130 for the BioNTech-partnered shot (almost quadrupling the price), chief commercial officer Angela Hwang said the team is still “preparing what those pricing scenarios could look like” for Paxlovid and will “share more at the right time.”

The Pfizer team is expecting Covid sales to pick back up in the next couple years — and if all goes according to plan, a successful combination shot for flu and Covid-19 would “bring the percentage of Americans receiving the Covid-19 vaccine closer to the portion of people getting flu shots, which is currently about 50%,” Bourla said. The company launched a Phase I study for an mRNA-based combo vaccine back in November.

Lower projected Covid sales led Bourla to set his full-year sales expectations in 2023 at $67 billion to $71 billion, down roughly 30% from 2022, which let down some analysts.

“PFE guidance for 2023 provided with 4Q22 results was disappointing despite the company talking down financial prospects in recent weeks,” SVB Securities analysts wrote in a note to investors on Tuesday.

However, when it comes to R&D investment, Bourla’s keeping his foot on the gas. As the CEO said back in November, “It’s all about what’s next.”

That’s why he’s earmarking around $12.4 billion to $13.4 billion for R&D this year, up nearly 9% from last year. It’s all part of his effort to make up for an expected $17 billion loss due to patent expiries between 2025 and 2030.

Last quarter, he spelled out ambitious plans to bring 19 new products or indications to market over the next year and a half. The chief executive highlighted a few of those programs on Tuesday, including potential combo shots for flu, Covid-19 and RSV, an oral GLP-1 candidate for diabetes and obesity, and potential vaccines for Lyme disease and shingles.

Other programs, however, didn’t make the cut. Pfizer also disclosed on Tuesday that it cut eight programs, including recifercept, an achondroplasia drug that was the centerpiece of Pfizer’s Therachon buyout in 2019, and two Paxlovid indications that failed their respective Phase III trials.

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IMF Upgrades Global Growth Forecast As Inflation Cools

IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday,…

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IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday, painting a slightly less gloomy picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared.

But, as Statista's Felix Richter notes, that’s not to say the outlook is rosy, as the global economy still faces major headwinds.

However, the IMF predicts the slowdown to be less pronounced than previously anticipated.

Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024.

The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and does no longer anticipates a global downturn.

Infographic: IMF Upgrades Global Growth Forecast as Inflation Cools | Statista

You will find more infographics at Statista

One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022.

The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post released along with the report.

“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening.

In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”.

“This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”

However, just because the 'trend' has shifted doesn't mean it's mission accomplished...

That looks an awful lot like Central Bankers' nemesis remains - global stagflation curb stomps the dovish hopes.

Tyler Durden Tue, 01/31/2023 - 14:45

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