L.C.Graham & Ataraxia-Views my own · not Inv. Adv.

I hope (and think) we are likely to be entering a prime biotech deal-making spree over the next few months. Pharma valuations have been soaring (and seemingly will continue to do so today), all while quality biotechs that *could* be M&A targets have been relentlessly abused over the last several months. BTW, side note: If you're looking at the $XBI to determine that "Meh, it hasn't actually been that bad for SMID bios. Look at $XBI in the $150s!!!" - you are absolutely missing the true picture of what has been going on....badly. FORGET the $XBI you think you know - that index is long dead, filled with large cap stocks that DO NOT represent what $XBI used to represent. *And* consider the components that have driven *all* of the upside in the biotech indices of late...it has almost exclusively been GARBAGE that has rallied, leveling out the appearance of damage on the surface, all while under the hood the "quality" stuff has been absolutely demolished. Let's review the setup for an M&A frenzy here... ➡️Pharma revenues have been looking great. The cash is there, and the confidence in the business is there. ➡️Pharma stock prices are looking even better, despite what has actually been a pretty abysmal series of high-impact clinical trial failures from pharma since around the middle of this year. ➡️The patent cliffs are still there, largely unaddressed. The biggest in history. ➡️Not only that, but the cliffs are actively steepening, because the revenue streams that have (largely) been driving pharma valuations higher and higher are the very ones that are about to run out...making the need to act and fill those impending gaps even more dire (there is MUCH more for a pharma to defend going toward a patent cliff when their stock is +50% YoY - dire loss of revenue streams is simply not being priced in recently...they have to act the make that an actual reality) ➡️The elections are now out of the way and we basically have the guarantee of gridlock for at least 2 more years (healthcare's absolute favorite setup). ➡️Rates/cost of capital are almost certainly coming down as part of last night's election results ➡️The 2 biggest healthcare conferences of the year happen within the next 3 months, and (hopefully) pharma will be eager to keep their momentum going by having comprehensive plans for how they plan to manage their patent cliffs ready to go for investors by JPM... ➡️All the while, "quality" biotech M&A targets have actually been in a legitimate bear market over recent months (again, SPARE ME with references to $XBI - this is a borderline irrelevant datapoint today). This is perhaps the most interesting facet of the setup to me. It seems that absolutely everything points to a near-term resumption in biotech M&A after a several-month drought, yet the M&A targets continue to price in significant skepticism...This *further* incentives deals to happen, as valuations are quite palatable for pharma. Somehow, pharma's desperation can be fully evident WITHOUT the market eroding their bargaining power by bidding up their M&A targets. Really a wonderful setup for deals IMO. Pharma is flying as high as ever despite many recent clinical-stage setbacks. Gridlock grants them a political tailwind. Their patent cliffs not only draw closer with time, but also steeper with their ever-growing revenues and valuations, which have known expiration dates. All the while, the solution to their problem is no secret: M&A. Yet, the very obvious targets of all these aligning incentives have traded down relentlessly over recent months...Pharma gets the solution to their problems on sale right now despite the fact we all can see they are becoming increasingly mandatory buyers? Let's hope this is the perfect storm for some serious deal making over the next 3-4 months...the setup certainly looks ripe to me! I predict we will see rapid and *sharp* changes in biotech M&A target valuations as soon as we see a couple decent deals take place...Fingers crossed!