In August 2017, we wrote a piece about pricing pressure in the US generic drugs market. We focused on the acceleration in generic drug approvals, which is only one of the factors in today's deflationary environment. At the time, we did not believe we would see pricing equilibrium in the near-term under the current regulatory and business conditions, and predicted that prices for generic drugs would continue to decline until manufacturers gained negotiating leverage.
If you haven't heard, designer babies may be on the horizon. Thanks to CRISPR-Cas9 technology ("Clustered Regularly Interspaced Short Palindromic Repeats"), some scientists believe they can edit human genes for the purposes of treating diseases.
In October, we wrote about the market opportunity in biosimilars, which are generic versions of biologic drugs, also known as biologics. Biologics are molecules made by living organisms such as humans, animals, and microorganisms, which mean they typically have a more complex molecular structure compared to conventional drugs. These drugs can treat a wide variety of diseases and potentially see greater efficacy versus other therapies.
The market is paying close attention to a critical 3% level for U.S. 10-Year Treasury bonds, which has implications for both domestic and international securities. Excluding utilities, sectors traditionally seen as stable sources of yield have recently underperformed, including consumer staples, REITS, and telecom.
Imagine you have some great recipes for butterscotch cookies, and you want to start a cookie business. Yet, there are some issues. First, the price people are willing to pay for cookies is going down due to intense competition as well as scrutiny from regulators after a few greedy companies ("cookie monsters," if you will) charged exorbitantly high prices. Second, because of the competition, you'll have to spend more on research to keep your cookie line fresh (pun intended). Finally, building a cookie factory is expensive, takes years to build, and requires following many stringent regulatory standards. The thing is, cookies are still in demand and could even get more popular as better cookie recipes are developed! So what do you do?
On March 16th, Johnson & Johnson ("JNJ") received a $2.1b offer for its glucose monitoring business ("LifeScan") from private equity firm Platinum Equity. This isn't too surprising since JNJ announced last year it was thinking about selling the business in order to focus on its core segments. The $2.1b enterprise value for LifeScan reflects a 1.4x multiple on trailing 12-months revenue, which compares to the 1.1x multiple that Panasonic paid for Bayer Diabetes, another diabetes diagnostics business. At face value, this seems to suggest the appetite for medical devices continues to recover. Global M&A activity in healthcare products has stabilized and increased steadily since the financial crisis by all measures -- dollar volume, deal count, and average premium paid per target. See the charts below which show annual data; most recent data dips because those represent YTD figures through March 18, 2018.
The bond markets are seeing a sell-off. Yields on 10-year U.S. Treasuries rose as high as 2.90% in mid-February, compared to the September 2017 low of 2.04%.
Many hedge funds failed to outperform last year --including some of the most well-known investors-- as individual stock selection became exceptionally difficult in a low volatility environment. This article cites that some investors who struggled last year were those with deep sector knowledge. And yet, some successful investors in 2017 were also sector specialists, albeit experts in different industries (technology and biotech, in this case). With the obvious benefit of hindsight, this suggests that the volatility of a portfolio's returns can be reduced if an investor allocates by sector allocation. But how does this compare to allocation through other factors, like market cap size, style (value vs. growth), and region? Let's look at the numbers.
Despite valuations in several sectors appearing stretched, stock markets continue to fly and defy any negative news that one would expect to rattle investor sentiment. As a follow-up to our previous blog on stretched valuations in international equity markets, we look into the valuations of European banks and the potential downside risk if the market corrects. While record high valuations could imply poor future performance, the earnings yield of European banks might justify further upside. For RIAs and other international equity investors, our goal is to better understand this risk-reward set-up and the potential implications for future returns.
Topics: From the Desk of Daeil Cha
A couple months ago, our international equity team published a blog about generic drug prices and the downward pressure. In this blog, we will continue the generic drug theme by exploring the prospects of biosimilars—generic versions of biologic drugs, also known as biologics.
Biologics are molecules made by living organisms such as humans, animals, and microorganisms, which means they typically have a more complex molecular structure compared to conventional drugs. These drugs can treat a wide variety of diseases and potentially see greater efficacy versus other therapies.
Topics: From the Desk of Daeil Cha