Monday Musings: December 14, 2020

Dec 14, 2020

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Public Trust Credit Team
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A new milestone in the fight against COVID-19 - the Pfizer and BioNTech vaccine cleared for emergency use

On December 11, 2020, the vaccine candidate from Pfizer and BioNTech, BNT162b2, received the first emergency use authorization (EUA) from the U.S. Food and Drug Administration (FDA) for a vaccine intended to prevent COVID-19. The authorization represents a monumental shift in the battle against COVID-19, with global cases exceeding 72 million and worldwide deaths exceeding 1.6 million including approximately 300,000 deaths in the United States. Federal officials are already fast at work, mobilizing efforts through Operation Warp Speed to distribute the initial shipment of almost 3 million doses with the first 145 sites across the country expected to receive the vaccine on Monday, an additional 425 sites on Tuesday, and another 66 sites on Wednesday. 
 
Combined, Pfizer and BioNTech can supply approximately 50 million vaccine doses globally in 2020 and up to 1.3 billion doses by the end of 2021. The U.S. Centers for Disease Control and Prevention (CDC) will manage the vaccine distribution in the U.S. with priority going to those identified by the CDC’s Advisory Committee on Immunization Practices guidelines. The U.S. is now the sixth country to approve the two-dose vaccine along with the U.K., Canada, Bahrain, Saudi Arabia, and Mexico with additional authorizations across the globe expected to be approved in the coming weeks. Moderna’s vaccine candidate, with a reported efficacy rate of 94%, is expected to receive EUA from the FDA possibly before year-end. Other vaccine candidates by AstraZeneca and Johnson & Johnson are still in late-stage trials, as world health professionals anticipate supplementary vaccines will be needed to contain the global epidemic.

U.S. credit primed for a net upgrade year in 2021

According to research from Bank of America, the U.S. credit market is expected to experience a net upgrade year in 2021. In 2020, the recession resulting from the COVID-19 pandemic led companies to issue record amounts of debt to bolster their cash coffers in fear of a liquidity crisis. Luckily, this crisis never materialized and most companies kept that extra cash on their balance sheets, leading to essentially flat levels of net debt compared to the year prior. It could also be argued that 2020 financial performance estimates were far too pessimistic based on the sizable earnings beats across the board in Q2 and Q3. This will help stave off downgrades in 2021, but the promise of Fed backing during periods of crisis will make companies attempt to move to investment grade. The Fed lending programs to IG companies in 2020 may be enough to convince high-yield companies on the cusp of an upgrade to invest in their rating and make the move since the value of a potential bailout is quite high. Because of this, Bank of America is forecasting $80 billion of “rising stars” (companies that move from HY to IG) and only $10 billion of “fallen angels” (companies that move from IG to HY) in 2020. 

The E.U and the U.K. are going the “extra mile” in an attempt to secure a last-minute Brexit trade deal

On Sunday, British prime minister Boris Johnson and the president of the European Commission Ursula von der Leyen indicated that both sides are still trying to come to a trade agreement despite having already missed multiple deadlines. The main sticking point remains fair competition (aka the level playing field) with neither side seeming ready to make material concessions. The topic of fishing rights has yet to be sorted out, but there are rumors that a compromise might be found down the road that would involve considerable concessions on the European side. Details around governance and sanctions are still being worked out, as well. It remains highly uncertain that a deal will be reached before December 31, 2020, so investors need to stay prepared for the no-deal Brexit scenario where trade between the U.K. and the E.U. reverts to World Trade Organization terms starting on January 1, 2021.

AstraZeneca announces the largest acquisition in the pharmaceutical industry for 2020

Over the weekend, AstraZeneca PLC announced they had reached an agreement with Alexion Pharmaceuticals, Inc. to acquire the biopharmaceutical company for $39 billion in cash and stock. Alexion will further expand AstraZeneca’s portfolio in rare diseases, providing treatments for rare blood and immunological disorders utilizing monoclonal antibodies. Alexion shareholders will receive $60 in cash in addition to 2.1243 American Depository Shares (ADS) of AstraZeneca. Given AstraZeneca’s average American Depository Receipt (ADR) price of $54.14, the implied total consideration for Alexion shareholders is approximately $39 billion or $175 per share. The proposed offer represents a premium of roughly 45% to the closing price of Alexion as of December 11, 2020. According to M&A data by Bloomberg, this is both the fourth-largest transaction across all sectors and the largest announced acquisition in the pharmaceutical industry this year. 
 
Overall, the pharmaceutical and biotech industry has experienced a fresh surge in M&A this year. Recent deals include the $21 billion acquisition of Immunomedics, Inc. by Gilead Sciences, Inc.; the $13.1 billion acquisition of MyoKardia, Inc. by Bristol-Myers Squibb; and the $6.5 billion acquisition of Momenta Pharmaceuticals by Johnson & Johnson, all completed in the fourth quarter of 2020. Over the summer, rumors emerged that AstraZeneca had approached Gilead regarding an acquisition deal, but nothing material developed. However, it appears AstraZeneca has found another avenue to broaden its portfolio for long-term growth. The company remains focused on its COVID-19 vaccine candidate, AZD1222, that showed strong interim results from its Phase 3 study and produced an efficacy rate of as much as 90%.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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