As the year wraps up it might be time to go back through my predictions for 2022 as I get the 10 ready for 2023. It can be a little humbling as one is not always as right as one would have hoped but I will review 5 today and 5 tomorrow.
- The first prediction is that the XBI outperforms the IBB in the first half of the year and then the IBB outperforms in the second half and both end the year green with the XBI with the relative outperformance edge (I will say at least 5% better than the IBB). In addition both with outperform the broader markets (again both will do 5% better than the SPY). There has been too much underperformance of the XBI (and perhaps small caps in general) that it is time for some reversion to the mean. In addition, I think interest rates will increase but all of that has been priced into the sector already.
Well, one out of four is not bad if I was batter in baseball but this is a loser of a prediction. I was right that the IBB would outperform the XBI in the second half but I was too optimistic about the XBI overall and the sector overall. My thought process was that deal making would make the XBI hotter in the first half of the year and then the IBB catches up. I was very wrong that it would be the end of the bio bear that is for sure.
- MRK, GILD, and PFE will all spend more than $15B in deals. I am not sure it happens all in one deal but I see these companies spending big to restock their pipelines and will take advantage of the relatively cheaper valuations. MRK needs to diversify. GILD needs growth. PFE has a ton of cash and a relatively sparse pipeline. So need and cash makes these three big buyers in 2022.
I count MRK as a win as the XLRN deal plus some smaller ones gets it to about $15B. PFE is a clear one with BHVN, ARNA, and GBT. GILD is not even that close to $15B as they did some deal making but nothing to the scale of MRK and PFE. It does not diminish the fact that GILD needs to build the pipeline so perhaps they are the big buyers in 2023. All in all, I could this one as a win.
- INCY ends up being a buyer instead of being bought. INCY is typically thought of as a potential target but at this point jakafi is a known commercial asset and it is getting closer to its loss of patent that it does not add enough to a buyer. INCY has not really been able to internally develop the next big hit so I see 2022 being the year that INCY makes a transformative buy.
This is a mixed prediction. I was certainly right that INCY would not be bought. I was right that INCY would be a buyer but was wrong that it would be a transformational deal. INCY did a bolt on deal. I still put INCY in the same boat for 2023. They need a strong follow-on asset to spark some interest.
- VRTX, however, is bought. VRXT has a dominant position in the CF space and one that will not be threatened anytime soon. Its pipeline outside of CF is not great and so it is primed to be a megamerger target. Perhaps we can pair this with prediction number 2 but it does not have to be the case. The key here is that VRTX is unlikely to be more attractive to a strategic buyer than in 2022.
This is a loser, but I sort of thought it was going to be but wanted to take a big swing. Perhaps I should have gone with SGEN being bought as that almost happened. I do not think it was even close with VRTX. This is such a strong company, and I am sure that other would love to own it but the price that VRTX would want is probably still prohibitive to get a deal done. I am still glad I took a swing with this prediction.
- BIIB is not bought. This is another potential megamerger target but it looks almost like the opposite of VRTX. The base business is in what could be terminal decline. It has a weak pipeline with a lot of risks. In addition, I sort of see BIIB catching an early bid this year with the coverage decision coming this month probably not a worst case scenario triggering a relief rally. As such, it is probably not going to look particularly cheap.
This is a win. I was correct in that it would not be bought as there would be no interest in the base business and questions abounded about its pipeline. BIIB will look a little different in 2023 as I certainly did not prediction the success of lecanemab but I am still not sure it make them a buyout target in 2023, although I suspect it will be a popular prediction.
2 wins, 1 mixed, and 2 losers.
I will end it here as I hope we can get some rally into the end of the year.
Disclosure: Long SGEN and MRK