Henrik Ekman BioTech Equity Analyst
Christmas wish list for BioTech and Life Science investors
Below are five wishes for Christmas for the BioTech and Life Science investors to hope for as we enter 2023. The five wishes are not prioritized, and they only represent some of the things that investors would consider to be important, so there could be other things to wish or hope for, depending on your investment horizon and your investment approach or style. But here is what we think investors and management teams in BioTech and Life Science companies should wish for going into 2023:
Risk appetite to rise
For many investors in sectors outside of BioTech and Life Science, changes in risk appetite would be considered a short-term issue with little or no relevance from a fundamental perspective. As BioTech and Life Science investors are very much aware, the opposite is true for BioTech companies. As these companies typically need to refinance themselves on an ongoing basis every 12 to 18 months, it is vital that risk appetite is accommodative – also on a short-term basis. There has been a growing perception throughout 2022 that a low-risk appetite makes it difficult to raise capital. As the period with low-risk appetite continues, the risk is that perception becomes a reality in a self-fulfillingprophecy, making it very difficult to raise sufficient capital without too much dilution.
Lower interest rates as external factors become less important
War in Ukraine, energy crises, higher inflation, and attempts to interpret FED policy have become an almost integral part of the agenda in many BioTech and Life Science companies as they struggle to cope with the consequences of higher interest rates. There is no doubt that most management teams in BioTech and Life Science companies are looking forward to talk more about medical advancements rather than worry about higher interest rates, as these will negatively affect the discounted value of the potential future cash flow from the pipeline projects. And if the rise happens very fast, it can create a shock effect that makes it more difficult to refinance the pipeline development on a short-term basis.
Many BioTech and Life Science stocks are down 25-50% this year while the companies are – all things being equal – getting one year closer to their potential success in bringing a new product to the market. That combination is, in theory, very supportive from a valuation perspective. As mentioned, many stocks are being hurt by higher interest rates, but using conservative assumptions and discounts rates, the current implied valuation of many BioTech and Life Science suggests upside potential – under the assumptions that US interest rate has peaked, that companies are able to refinance on an ongoing basis, and that the probability of successful product development or commercialization from a medical advancement and operational perspective is unchanged.
Big pharmaceutical companies becoming more active
As we have written in previous BioSnack editions, Big-Pharma is a major factor in financing the development cost of new products in the BioTech and Life Science sector, either through the outright acquisition of the company or through partnership deals. Big-Pharma has plenty of cash to spend, but the timing of acquisitions or partnership deals varies. This is dependent on operational,commercialization, and business strategy-related interest within the Big-Pharma company, rather than the merits of the scientific development process in the individual BioTech or Life Science company.
Less political interference
There is little risk that politicians or regulatory bodies will stand in the way of a breakthroughmedical discovery of a product, treatment, or diagnostic tool. That being said, it is of great importance from a financial perspective for you as an investor at what price and under which regulatory, reimbursement, or health care insurance legislation framework the potential new product will be governed. This is especially true in the biggest and most profitable market of the US, which means that the political balance between Republicans and Democrats in the Senate and Congress can be very important. From a financial perspective, a Democratic majority in both the Senate and the Congress would typically increase the likelihood of more regulation and lower prices for pharmaceutical products, according to most expert analysts. The fact that there is a split majority in the Senate and Congress is considered supportive of a less regulated and better pricing environment.
If you should make only one wish…
As many have learned when asking kids for their wish list before Christmas, there are things on awish list they would like to receive, and then there is THE Christmas wish that can save the day (or year if you are an investor) if it is being fulfilled. Looking at the list above, if you are a long-term fundamental investor in BioTech and Life Science stocks, one thing stands out. There must always be a potential investment value in a stock based on company fundamentals from a medical advancement, operational, and financial perspective. In other words, valuation must be supportive. Second guessing when sentiment shifts, e.g., how interest rates will develop, if FED policy will be accommodative, how the political landscape in US unfolds or when Big Pharma will be more acquisitive, is risky.
The bigger the potential investment value (or the lower the valuation), the better. Looking at the current implied valuation of most BioTech and Life Science stocks as we enter 2023, this important wish seems to have been fulfilled already.
Merry Christmas, Happy New Year – and good luck!