Sector Top Pick: Celltrion Healthcare
The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. -- Ed.
In 2022, healthcare stocks have been performing sluggishly in the NY stock market, affected by drastic absorption of market liquidity since early-2022. Given that 10-yr discounted cash flow is the most commonly-adopted valuation method for bio sector shares, there should exist a strong negative correlation between US 10-year bond yields and biotech stock price movements. Believing that the biotech index rally over June~August this year is a result of a short-term correction of 10yr TB yield, we point out that 10yr US TB yield looks to have peaked as of late.
Despite liquidity recovery and macro uncertainties, existing mega bio trends remain intact. A look at share price performance, IPOs, and investments in unlisted firms shows new global trends for the biotech industry. The noteworthy fields are cell and gene therapy and AI-based new drug development. Over the past two years, large-cap stocks (eg, S&P500 healthcare stocks) have fared well, whereas pure biotech stocks have performed relatively poorly, but we believe that now is the time for biotech stocks to show relative strength.
We present Celltrion Healthcare as our pharma/bio sector top pick. In 2023, the firm needs to prove its capability for direct sales in the US. In Jul 2023, the firm plans to roll out the direct sales of Yuflyma, a biosimilar to replace Humira, in the US.
I. Biotech stocks to outshine large-cap healthcare stocks in 2023
After US 10-year bond yields fell on Nov 10, the S&P500 Healthcare Index and small/midsize biotech ETFs (ie, the XBI and ARKG) started to move in opposite directions. For the past two years, biotech firms have underperformed, while large-cap stocks in the S&P500 Healthcare Index have outperformed. However, we expect biotech players to outperform going forward. We point out that there exists a strong negative correlation between US 10-year TB yields and biotech stock price movement. Believing that the 10yr US TB yield has reached a peak, we forecast that biotech stocks will outshine large-cap healthcare shares next year.
II. What is to blooms from the ashes?
Rebounding after 2021, large biotech players have been the biggest contributors to NBI growth this year. The driving force behind such has been CNS therapy momentum, including Biogen’s phase III clinical trials for Lecanemab, Neurocrine’s healthy Ingrezza sales and likely expansion of applications, and Karuna Therapeutics’ release of phase III data for schizophrenia treatment. As for investment returns, firms that have released positive clinical data for obesity, eye, and NASH treatments have performed well, but cancer drug makers have lagged. The top-10 contributors for S&P500 healthcare growth are big pharmas, insurers, and retailers, all of which also serve as macro defensive plays. IPOs and VC investments indicate that future technology trends will center upon CDMO, cell and gene therapy, and AI-based drug development.
III. Funds of funds to shrink in 2023; polarization of funding favoring large VCs to continue
In 1H22, VC funds created in the US reached the second-largest level, following that seen in 2006. But, the number of and amount raised for small-sized funds (less than US$50mn) dropped to the lowest points seen in ten years. With funds of over US$500mn accounting for around 80% of total funds, investment money flocked to large VC players. In 2022, US bio VC funding and exit performances have remained tepid. In Korea, the size of funds of funds by the Ministry SMEs and Startups was cut in half in 2022 and is expected to shrink 39.8% to W313.5bn in 2023. Liquidity, the key to bio VC, is also decreasing.
IV. Top picks
At pharmas, cash cash equivalents started to decline from 2Q22. While domestic bio firms raised funds mostly via CB issuance, the number of CB deals has dropped sharply on: 1) worsening liquidity; and 2) changes made to the refixing system in 2021. As investors are increasingly looking to collect principal by exercising put options, bio firms now face increased repayment burden. We present Celltrion Healthcare as our pharma/bio sector top pick for 2023. Boasting both stability and growth prospects, the firm plans to roll out its key pipeline drug Yuflyma in Jul 2023.