Yes, the S&P 500 (SNPINDEX:^GSPC) suffered its largest daily loss in 14 months yesterday. Yes, the CBOE Volatility Index (VOLATILITYINDICES:^VIX), or VIX, which reflects the market's forecast for short-term volatility in the S&P 500, shot up 34% to a five-month high. However, these are not hallmarks of disorderly action or panic selling. They simply reflect the fact that stock market volatility (both realized and implied by the VIX) has collapsed this year -- the culmination of a multiyear trend driven by the Federal Reserve's monetary munificence.
Indeed, even as we have no more certainty regarding the situation in Greece, stocks are retracing part of Monday's losses, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the broader S&P 500 up 0.1% and 0.2%, respectively, at 12:20 p.m. EDT. The technology-heavy Nasdaq Composite was up 0.5%.
The biotech sector rolls on
Shares of Juno Therapeutics Inc. (NASDAQ:JUNO) were up nearly 19 % at 12:20 p.m. EDT, following yesterday's post-market close announcement from biotech heavyweight Celgene Corp. (NASDAQ:CELG) that the two companies will collaborate on developing and marketing advanced immunotherapies targeting cancer and autoimmune diseases. As part of the $1 billion-plus agreement, Celgene will acquire a 10% stake in Juno Therapeutics.
The deal is structured such that Juno will receive approximately $1 billion at the closing, broken down into a $150 million payment and Celgene's purchase of roughly 9.14 million shares at $93 per share. That price equates to a very substantial 101% premium over Juno's closing share price on Monday. In addition, during the 10-year term of the agreement, Celgene will have the opportunity to increase its stake up to a maximum of 30%, according to specific guidelines (timing, premium over market price, and other conditions binding one or the other party).
Here we have a knowledgeable buyer acquiring a minority interest in Juno at double the price at which its shares were valued yesterday. In response, the market has adjusted the stock price upward by just a fifth of that premium. Why? I can think of at least two reasons:
Celgene's investment is speculative. Even though a billion-dollar deal sounds impressive, Celgene's market value exceeds $90 billion; the company can well afford to make risky investments on this scale.
Not only is Celgene a knowledgeable acquirer, but, in structuring this transaction, it was privy to confidential information regarding Juno's research and development activities, commercial activities, projections, etc. Investors don't have access to this information and cannot, therefore, assess it independently. In order to account for that lacuna, the market will quite naturally apply a margin of safety.
The Nasdaq Biotechnology Index is up 21% year to date and 43% over the past 12 months, far outpacing the Nasdaq Composite (not to mention the S&P 500). So investors clearly remain enthusiastic regarding the sector. Nevertheless, perhaps the pricing gap observed in this instance between a private market transaction and the public market reaction indicates that it is industry executives and board members whose animal spirits have the greatest appetite.