The inherent extreme volatility in biotech stocks was evident when the group peaked just before the AACR meeting kicked off on Friday, August 8. The XBI had rallied in March from a low of 81 to a move up to 96 on April 4, a strong move of almost 20%. The move also coincided with the end of the quarter, which may have included some portfolio window dressing. Once the abstracts were posted online Friday morning and by the time the conference concluded around Monday, the index dropped to 87 – a drop of over 9% in two days. With the continued increase in inflation, interest rates and no progress in the Ukraine crisis, biotech’s risk profile remains high and traders are still in command and steering the ship. With the market entering another 3-day weekend for Easter/Passover, stocks remain under pressure.
The Russia/Ukraine is so sad and painful and no ending in sight. The economic impact keeps inflation out of control. As such, the market expects at least 6 more Fed hikes and further tapering – recently signaling multiple half-point rate hikes. That is not good for bios overall, but we think most of that is discounted into the XBI already. Hard to see how Powell can navigate a soft landing, especially with oil prices flying so high, but only time and the end of the invasion will tell. This weekend also coincides with income tax due date – and some selling is added by those needing to raise cash to pay taxes. The XBI chart to us is still constructive, with the RSI sitting at neutral (46) down from 50 last Issue The daily MACD has been on the way down from positive for a few weeks now but seems to be leveling off. Ongoing skepticism and now increased M&A action, in our view, will drive the sector higher over time.
The weekly XBI remains a bit above oversold with the RSI at 36, the same as the last Issue. The 200-week MA at 104 is the resistance number and the downside support is around 80-81. A bit of a lull in conferences will give way to first quarter earnings calls as we head into May/June when other science meetings kick in and the big ASCO meeting takes place.
M&A Is Back
- GSK Acquires SRRA – 40% premium to closing price
- HALO/ATRS – 50% premium to closing price
- VERU – positive COVID data for sabizabulin
- AGLE – With updated positive data, Aglea submitted its BLA for pegzilarginase in Arginase I Deficiency (ARG1-D) to the FDA. This comes following a negative FDA meeting in February.
- IONS/AZN – PCSK9 Antisense data for ION449 (AZD8233) in LDL reduction looks good at the ACC (see IONS below)
- Traders Are Quick To Change Course – Technical analysts we have spoken are still on the long side on the biotech trade as the charts say continue to say to.
- AACR – Selloff with after the pre-conference XBI rally as usual
- FDA Woes – MYOV, CRIS – The agency says it found faults in the PFE/MYOV applications but did not disclose details. The FDA also placed a partial clinical hold on CRIS’ TakeAim lymphoma study evaluating its IRAK4 kinase inhibitor, emavusertib (CA-4948).
- Financing/More Dilution – More firms keep diluting daily.
- Lock-Up Expirations Coming – As many of the IPOs from the Class of 2020-2021 reach lock-up periods, some VCs, early investors and even management may use the liquidity to sell some stock.
In our 30-year history, the MTSL has made several recommendations that comprised companies with revolutionary platform technologies. New technologies are the backbone of innovation and in many cases it is where next-generation therapies are developed that treat previously difficult to treat diseases. Certain investors – especially venture capitalists – love breakthrough science and a risky stock market will accept many early stage firms to going public despite the expectations of future losses and the insatiable need for cash until payday hits – an FDA approved drug with commercial success (or a takeover). This is not the biotech stock market that welcomes early-stage companies, granted investors want virtually perfection in data before stepping up before making the stock a long term investment. We understand that at MTSL, but we also like the mix of our BioInvest portfolio of profitable large caps, mid and small caps stocks. Remember Top Tier Rec INCY was bet against for years by Wall Street before Jakafi’s multi-billion success and others copied their JAK platform. We have fought the bears and shorts for a very long time. We are not always right but when we are stocks like PCYC and MDCO get bought for huge bucks. Does anyone remember our call on Agouron back in 1999? AGPH created one of the early and successful HIV protease drugs, Viracept, back in 1997 and was subsequently bought by Warner-Lambert (now it self part of PFE) for over $2 billion (which was a lot back then.)
A classic example is IONS — a pioneer of antisense technology that went through a decade or two of the trials and tribulations of novel science and clinical trials before eventually figuring it out. The blockbuster drug Spinraza for SMA came out of IONS and in 2021 global sales exceeded $2 billion with marketing partner Biogen. In fact, IONS owns the majority of antisense patents and even receives royalties from ALNY – another antisense leader. Over the years, IONS has licensed its technology and compounds to a long list of global biopharmaceutical players and now sits on over $2 billion in cash with no debt. Another winner of ours — INCY — pioneered the small molecule JAK inhibitors platform that so many big and small firms have copied over the years. In the 1990s and early 2000s, Incyte was a target of short-sellers many times before establishing itself as a Top Tier biotech (INCY, $18 billion market cap today).
Another MTSL recommended stock, SGMO has pioneered the use of zinc finger nucleases to create one of the broadest gene therapy and editing R&D portfolios. Top-tier Big Pharma/Bios have invested multi-billions in Sangamo’s platform including Pfizer, Novartis, Biogen, Gilead (KITE) and Takeda. On top of that, the Company has a long list of wholly-owned compounds and the cash to fund their own stuff. While the Company awaits it first FDA approval that we expect will come from hemophilia A gene therapy with partner Pfizer, investors are mostly negative on SGMO, as it has taken them a long time to get across the FDA finish line. However, based upon the progress across multiple programs we continue to recommend SGMO although it has been disappointing for investors so far, as we continue to believe the company is undervalued and that investors will eventually be rewarded.
FYI, the MTSL "model portfolio" indicates their SGMO position as long and holding 19,456 shares. At last Thursday's close it reflects a 60% paper loss against their total cost basis. Misery loves company.