Kieger Healthcare Monthly Commentary

Sell in May, says the FTC

May saw the end of the Q1 earnings season, and the continuation of the major trends and uncertainties seen in April in the healthcare sector. US Q1 earnings were better than expected across the market, particularly in the cyclical sectors. Nvidia’s strong results and broad enthusiasm around AI spurred a rotation into tech stocks. This happened in spite of rising yields accompanying tense debt ceiling negotiations in the US. Finally, antitrust action and concerns about demand were sector-specific headwinds for healthcare. Overall, these factors contributed to further unwinding of defensive healthcare positioning from last year. The year-to-date performance of the healthcare sector stands at -2.4%.

What mattered for healthcare:
Beyond the generally adverse macro setup, two themes mattered most this month: The FTC is suing to block the Amgen-Horizon merger. This sent shockwaves throughout the industries. While the consensus is that the legal challenge is unlikely to succeed, this is a headwind for M&A activity in the biotech space. Pharmaceuticals were down -3.1% and Biotechs down -6.7% in May. Demand for life science tools, bioprocessing is still below trend. Life Science Tools were down -5.7% this month. Demand for healthcare services and equipment is increasing, but with lower growth rates. Equipment and Supplies were down -5.6% this month. Debt ceiling overhang weighed heavily on Providers and Services, which were down -3.4%.

In detail

Antitrust action in biopharma:
The US Federal Trade Commission, which is responsible for enforcing antitrust law, took legal action to prevent the merger of Amgen and Horizon Therapeutics. The USD 28 bn deal announced in December 2022, accounted for roughly 40% of the total M&A volume of that year. Because Amgen and Horizon are not active in overlapping therapeutic areas, there are few arguments to support the FTC’s challenge. However, even if the merger eventually happens, the FTC’s action sets a precedent. Future deals will now have to consider a higher probability of FTC challenge, which is overall negative for the level of M&A activity and in turn performance, in the biotech space. However, we do not see this as a fatal blow to the industry; on the contrary, the FTC’s targeting of “bad actors (pricing, IP prolongation)” once again highlights the importance of differentiation amongst biopharma companies. This ultimately boils down to having a robust innovation engine. On the regulatory front, the FDA approved GSK’s RSV vaccines for adults aged 60 and an advisory committee voted unanimously to support approval of Pfizer’s RSV vaccine candidate for infants. This is a burgeoning therapeutic field, with many other companies close to the market with competing candidates.

Overall, this is a negative in the short term for M&A activity, as it increases the hurdle for larger deals. However, it is positive in the mid-to-long term, as it increases the importance of differentiation and innovation.

Demand, quo vadis?
Debate over the level and trend of healthcare demand drove much of the sector. Tools and Bioprocessing companies disappointed during earnings. The huge volume increases of the COVID-era have still not fully washed out and funding challenges of early biotech companies are finally pulling through. Many companies reporting this month lowered their guidance. Similarly, survey data of slowing growth from healthcare providers weighed on equipment manufacturers and facilities. However, this is partly attributable to a strong base effect. This did not help managed care organisations, who came under pressure due to debt ceiling tension.

Overall, demand for life science tools and bioprocessing remains muted. Demand for healthcare services and equipment is increasing, but growth rates are slowing down. Fundamentally, mid-term demand drivers remain intact.

Top 5 in May:

• Exact +27%
• Hoya +24%
• Grifols +16%
• Eisai +13%
• Otsuka +12%

Bottom 5 in May:

• Catalent -26%
• Teva -18%
• Incyte -17%
• Bio-Rad -17%
• Sonova -17%

Chart of the Month: 2023 M&A volume has already caught up with 2022

Over the past few months, there were several acquisitions in the biopharma space, most notably the USD 43bn Pfizer-Seagen deal. The level of M&A activity has already reached that of last year. While this is encouraging for the SMID biopharma space, the FTC’s action regarding the Amgen-Horizon deal once again highlights the importance of innovation. Biotech valuations are attractive and long-term prospects remain strong. Large pharma companies are sitting on USD 130bn in cash and need to boost their pipelines. A more difficult financing environment might push biotech executives to consider alternatives.

Check out our video on this subject here.

Kieger Healthcare Team

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