The wild weekend was followed by an eventful Monday, especially for the biotech world. The SVB fiasco saw a solution that was a relief for bio companies that held deposits there. Additionally, Monday morning was full of big buyouts. The Seagen & Pfizer rumors that were swirling were made official after Pfizer decided to buy Seagen for $43B. Sanofi also announced the acquisition of Provention Bio for $2.9B for their type 1 diabetes treatment. The XBI has been pushed up on Monday by this news.
The US Government Steps in To Save SVB Deposits
Late Sunday night, the Fed, Treasury and FDIC stepped in to protect all deposits. Debt/equity holders will not receive any protection. The Treasury and Fed created a new lending program called Bank Term Funding Program (BTFP) to protect depositors.
This facility allows banks to take advances from the Fed for up to 1 year by pleading Treasuries, mortgage-back bonds, and other debt at collateral. By allowing banks to pledge their bonds, they can meet customer withdrawals without having to sell bonds at a loss. This will theoretically limit a run on banks, which happened to SVB last week.
Interestingly, the facility will allow banks to borrow funds equal to the par value of collateral they pledge (not MARKET value). This is important because banks were sitting on an estimated $620B in unrealized losses on securities by end of 2022, due to sudden interest rate hikes.
Getting the full amount of pledged assets will provide sufficient liquidity to handle deposit withdrawals. From an investment point of view, it kicks the can down the road for banks in bad positions like SVB. If banks hold their bonds until maturity, they will break even on the positions, however most have invested in longer-term instruments like 10-year treasuries. So investors of bonds/equities will see no relief.
If banks cannot repay all advances in 1 year, the Treasury department is providing up to $25B of credit protection to the Fed just in case.
What This Means?
Depositors will be made whole, so all bios that had deposit exposure to SVB will be alright. The worst-case scenario was avoided. Investors of SVB debt/equity are going to take losses. With SVB shuttered, biotech companies are going to lose a key player with access to capital which is not bullish for the future of the industry. Short-term there is relief in biotech. Long-term funding will be harder to come by.
Additionally, from a macroeconomics perspective, the weekend news will cause the Fed to reconsider ongoing rate hikes, at the very least. It is uncertain if a pivot is approaching, but chances of a pivot are higher today than they were even a few days ago. Turbulent times are likely to continue, especially in biotech.
Monday’s M&A: Price Tags Are Hefty
Seagen & Pfizer Acquisition
At a $43B price tag, Pfizer paid 20x current sales for Seagen. Pfizer is betting that growth and the pipeline will help SGEN expand revenues to $10B by 2030. SGEN is currently trading at a 13% discount to the $229/share deal price, showing there is doubt about the deal passing regulators, or a superior offer coming in from competitors like Merck. A deal of this size will likely take months, if not longer than a year to close. A lot can happen in the meantime.
Sanofi & Provention Bio $2.9B
Sanofi acquired Provention Bio (PRVB) at a 273% premium to their market price to get access to their approved type 1 diabetes treatment. Sanofi has a history of big acquisitions that come with expensive price tags and flop.
See: Synthorx for $2.5B for the IL-2 program that is now discontinued and written off for a $1.7B impairment. This deal was at a 172% premium to market. Similarly, Sanofi acquired mRNA vaccine player Translate Bio in the Covid rush for $3.2B, which was ultimately discontinued also.
The track record does not provide a vote of confidence for PRVB acquisition tag, but at least Sanofi is brining in a commercial asset in this deal. The deal also marks a partial return for Sanofi in diabetes & cardiovascular, two fields that the big pharma exited in 2019.
PRVB’s Tzield was approved in November to stall progression of type 1 diabetes. With Sanofi now taking over commercial launch, markets will have visibility on uptake. Optimistic peak sales for Tzield are $1.2B by 2030.
