Biotech stocks are in the midst of a multi-year bear market. Speaking to this point, the SPDR S&P Biotech ETF is presently down by over 60% from its 5-year high. This extreme bearishness stems from a variety of factors, but the most oft-cited cause is the sharp rise in borrowing costs over the past two years.
During the last bull market in biotech, investors, more often than not, overvalued clinical-stage assets and largely ignored present-day company fundamentals. In this bear market, investors are suddenly viewing developmental compounds as liabilities, because of the enormous amount of capital and time required to bring them to market -- not to mention the high failure rates of phase 1 and 2 candidates.
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An underappreciated deal
This unfavorable dynamic has created a rather interesting situation for Roivant Sciences (ROIV 1.38%), a commercial-stage biopharma with a broad pipeline geared toward inflammation and immunology. Yesterday, Roivant landed a $7.25 billion (total aggregate value) buyout deal from Roche for its Pfizer (PFE 0.55%) co-owned subsidiary Telavant.
The deal centers around the mid-stage inflammatory bowel disease drug RVT-3101, as well as an early stage bispecific antibody developed by Pfizer. Roivant expects to book $5.2 billion upon deal close, along with another $110 million milestone payment once RVT-3101 enters Phase 3 development for ulcerative colitis. The transaction ought to close in either Q4 of 2023 or Q1 of 2024, according to the press release.
Yet, Roivant's stock failed to launch on this enormous windfall. In fact, the company's shares were down by 5% Monday afternoon at the time of this writing. To be fair, most biotech stocks were under heavy pressure Monday, so Roivant was simply following its peer group lower in the first half of yesterday's trading session. But this sell-off is nonetheless questionable for a few solid reasons.
A contrarian buy
Why should smart investors ignore the noise? First up, Roivant has seven ongoing registrational trials for drugs targeting multi-billion dollar markets. This $5.2 billion windfall should fully fund their development and provide ample capital for additional business development activities.
On this last point, Roivant definitely deserves the benefit of the doubt from investors. The company generated an astonishing 11,700% return on its initial investment of approximately $45 million in 11 months with this RVT-3101 deal. That is a highly unusual return in investment in biopharma, especially in less than a full year's time.
The market, though, seems to think Roivant's management team will ultimately squander this windfall and create no additional value for shareholders – at least based on its pessimistic reaction to this news. Based on the company's impressive operating history, this extreme bearishness is simply unwarranted. At one point this year, Roivant's stock was up by over 50% for the year, which is a testament to management's deal-making ability.
The bottom line is that Roivant has been a value-creation machine for shareholders of late, and there's little reason to believe this trend is about to come to an abrupt end. So while I'm definitely biased as a shareholder of the company, I think this bewildering reaction by the market represents a stellar buying opportunity for investors with a long-term horizon.
