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As entrepreneurs who aspire to either become a publicly traded company or be bought by one, understanding the dynamics of the public markets is fundamental to achieving your ultimate liquidity goal. It is one bookend of valuation.
It was open mic week on the US stock market last week. Must be the Spring Break effect. There was nothing particularly coherent about the trading theme. We rolled with one story and another. A few of the routines this week included:
Ok. You get the idea. With no dominant theme and no real news except crashing a container ship in the Suez Canal, we were all over the map where we sold down three sessions, a reversal on Thursday and a drop the mic moment on Friday. In the end it was somewhat entertaining. Big stocks gained. Small stocks continued a two-week correction.
Uncertainty drives. We probably more or less have the macro direction pegged correctly as the post-vaccine Covid market takes shape. But pace of change, timing of changes and the detail around changes is pretty much the Rorschach of the moment. If Dow Theory still applies economic growth is in our future as are earnings growth and stock price growth. Dow industrials (DIA), transports (IYT) and even utilities (XLU) showing a short-term spark are all headed north. Sleep well Charlie.
For an up-to-date analysis, see this week’s Healthcare Segment Scorecard below.
Healthcare industry segments are becoming bifurcated. Providers ($DJUSHP) and at least for one week equipment ($DJUSAM) had good performances with providers now outpacing the S&P 500 YTD. Large cap, non-tech stocks in general are large-cap leaders this year so far. Micro-cap and small cap stocks have had a two-week correction of sorts after a 4-month recovery and massive outperformance.
Biotechs ($DJUSBT) got pummeled again last week and pharma ($DJUSPR) did its usual underperforming plod. In Barron’s this week Josh Nathan-Kazis wrote a nice column on this phenomenon and the worry in markets of a geopolitical nature. With a change in management there are concerns the FDA is slowing approvals or may change the rules of engagement. Also speed of approvals could be impacted by the number of Covid related emergency approvals pending. The FDA denies any change of this sort. But anecdotes abound.
A second factor may also be changes at FTC and FDA regarding mergers and consolidation. For quite a while now a primary exit for pre or early revenue or clinical stage biotechs has been through acquisition or merger. Making it harder would make exits longer and more difficult and likely result in more failures at the earlier stages. Big pharma uses this mechanism to reduce risk. So, they may be worth less in the future as well.
One more factor may be mergers through SPACs (special purpose acquisition companies). There is risk when a SPAC merges with a pre-revenue biopharma company. In my experience the key to success of this sort of going-public activity is revenue growth. If the biotech has no revenue good operators have a plan to use capital for acquisition of revenue or growth companies to add to the pipeline company. If there is no revenue from actual products then the only product to sell is the stock. You don’t want to be an investor when this happens. There may be some rough roads to travel as this bloom fades.
As I See It: We navigate a period of time without much firm guidance awaiting earnings and economic data. When you attend open mic sessions, consider the source. We traverse a major life, economic, and market transition. There are bound to be a lot of amateur performances.
March 29, 2021
Bob Teague, MD
Chief Medical Officer
Green Room Technologies
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