FDA's shift... here's what it means

Your Daily KnowHow

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In today’s KnowHow…

• FDA's shift... here's what it means

• When security fails

• A $34 Billion LBO is a Gift to Blackstone and Pals

• Apple in talks with CATL, BYD over battery supplies for its electric car

What happened overnight…

Web outages are the name of the game today with some poor individual at Fastly likely under a lot of pressure to fix this glitch. Outside that and treasuries rose alongside the US dollar while US futures initially dropped off the back of the web outage but will likely recover given this is not the hack that many may have feared. Outside all this and volumes are very low for a June week with many investors eagerly waiting Thursday’s CPI print that we spoke about on Monday. Finally, over in oil land and the commodity has extended loses amid concerns that the recent rally may have gone too far. 

Chart of the Day

Europe, the UK and US have made excellent progress now in vaccinations. Cases as a % of peak are down significantly. But, there is a worrying trend of rises weekly cases which will inevitably keep governments on their toes.

Analysis

FDA's shift... here's what it means

From a headline perspective, the FDA’s approval of Biogen’s Alzheimer’s disease drug aducanumab may seem like an overdue ruling given this was the first time in nearly 20 years such a drug for Alzheimers has been approved. The chart below is from the Alzheimers Association. Whilst other disease have seen significant progress in recent years, it has certainly not been the case for Alzheimer’s.

The controversial nature of this ruling is a step-change in the FDA’s approach to approving drugs and focus on Alzheimer’s that will have significant knock-on effects to the wider space. 

The Background:

If we wind back to March 2019, Biogen announced that the anti-amyloid antibody aducanumab failed futility analyses in two identically designed phase 3 Alzheimer's disease trials and discontinued its development. The company then shocked investors several months later by announcing it would seek regulatory approval for the drug after all having fully reviewed the data. 

Fast forward to November last year and shares of Biogen soared after it won backing from FDA staff, who said the company showed highly “persuasive” evidence aducanumab was effective and that it had “an acceptable safety profile that would support use in individuals with Alzheimer’s disease.” However, two days later a panel of outside experts that advises the U.S. agency, voted almost unanimously in declining to endorse the experimental drug, citing unconvincing data. With the FDA almost always siding to the panel of experts, many believed there was very little chance of approval yesterday. 

What Happened Yesterday?

The drug itself targets a “sticky” compound in the brain known as beta-amyloid, which scientists expect plays a role in the devastating disease. Yesterday, the FDA granted the antibody therapy an accelerated approval. The decision yesterday therefore shows a much more progressive regulatory framework from the FDA that we have not seen before in an attempt to give physicians and patients more options for areas of unmet diseases. 

Who else can benefit from this?

1.     Eli Lilly – The company has been working on a drug known as donanemab which is said to slow the symptoms of the disease in people with early Alzheimer’s. In its Phase 2 trial (which had its findings presented on March 13th), the test showed that significantly better results were found in the group that was given the real drug versus the placebo by significant percentages. The approval yesterday suggests Eli Lilly may be able to revisit its decision on the filing of donanemab, given its strong effects on brain amyloid levels

2.     Roche – following a number of previous failures, Roche has also published data showing that with a high dose of gantenerumab (their Alzheimer’s drug), patients received similar reductions in PET amyloid compared with Eli Lilly’s donanemab. Going into yesterday, while consensus peak sales were very mixed across the street, many analysts only had a c10% probability of success for the drug. This now needs to increase significantly and over the coming weeks we should see estimates going up as the street revises their forecasts for gantenerumab. 

a)     It is also worth noting that the Royal Pharma has recently purchased the rights to 60% of Morphosys’ future royalties of gantenerumab so again consensus estimates for success in this will also need to materially increase  

3.     Smaller Biotech Stocks – Perhaps a simpler way to play this is through the biotech sector itself. The space has underperformed significantly since March however yesterday’s news will come as a big relief to the space and for us is now the second support for the space in recent weeks. 

a)     First up, as Big Pharma anti-trust risks continue to rise, we believe Big Pharma companies will begin to focus more on smaller biotech deals as a way of funding their pipelines rather than the larger deals that we have seen over the last few years. 

b)     Secondly, the news yesterday also increases the likelihood of Biotech names getting approvals for both Alzheimer drugs but also drugs that meet unmet needs for physicians and patients. Cassava Scienes and Annovis Bio, both working on treatments for Alzheimers, were up over 5% yesterday while the whole sector rallied 3.6% in New York on more optimistic expectations. 

Conclusion: 

For us, this unexpected decision marks a step-change in the approach from the FDA and will refocus investors on a space that has underperformed over the last year. With the FDA changing its attitude to approvals of diseases with unmet needs, probability of success estimates across the board need to rise and with that we expect the sector and specific names to see support over the coming weeks and into specific FDA approval decisions. 

What else interests us

When security fails…

There are a lot of things to consider today when it comes to security. First off, a whole host of websites have gone down in the last couple of hours following a Fastly CDN outage. Fingers crossed, you are still getting your Daily KnowHow. Below is reported outages on Amazon in the last hour from DownDetector. But, the number of effected websites is much larger including many well known media channels.

For Fastly, it is hardly ideal. Then, there is the little issue of the attack on the Colonial Pipeline in early May. This morning, the Department of Justice has issued a statement saying it has seized 63.7 Bitcoin for a total value of $2.3m. And, they aren’t playing either…

Ransom payments are the fuel that propels the digital extortion engine, and today’s announcement demonstrates that the United States will use all available tools to make these attacks more costly and less profitable for criminal enterprises. We will continue to target the entire ransomware ecosystem to disrupt and deter these attacks.

A $34 Billion LBO is a Gift to Blackstone and Pals

This, perhaps unsurprisingly, caught our eye given the sheer size of the deal and once again highlights the power of private equity in the current climate when a giant health-care firm chooses a $34 billion leveraged buyout instead of a deal with a rival or an initial public offering. Blackstone Group Inc., Carlyle Group Inc. and Hellman & Friedman faced relatively sparse competition in their agreement to buy a majority stake in Medline Industries Inc. The transaction, the largest LBO since the financial crisis, therefore plays into the hands of big players that can write sizeable equity checks and are comfortable doing a so-called club deal. These dynamics make it less likely that the bidding group has overpaid. And with a lot funds sloshing around, mega-deals put a chunk of idle capital to work all in one swoop. Still, the investment needs to earn good returns too.

Apple in talks with CATL, BYD over battery supplies for its electric car

Apple has yet to make a public announcement about its car plans however with all the press in recent months, it will come as no surprise when they finally do. Today, we heard that Apple is in early-stage talks with China’s CATL and BYD about the supply of batteries for its planned electric vehicle, four people with knowledge of the matter said. What we find interesting about this is there have been previous suggestions that Apple itself could use their own breakthrough battery technology but this doesn’t seem to be the case. The discussions are subject to change and it is not clear if agreements with either CATL or BYD will be reached, said the people who declined to be named as the discussions are private. Shares in BYD extended gains on the news to be up 5.4% in Hong Kong in late afternoon trade and closing 6.5% higher in Shenzhen. CATL reversed earlier losses to finish 0.5% higher. What is interesting is that the discussions come at a time when the U.S. government is looking to attract more EV manufacturing. U.S. President Joe Biden’s proposed $1.7 trillion infrastructure plan includes a $174 billion budget to boost the domestic EV market with tax credits and grants for battery manufacturers, among other incentives.