May’s 0.5% Rate Hike

The Federal Reserve made a widely-expected 50 basis point hike today at its Federal Open Market Commitee meeting. Such a hike was long-seen as a dramatic one, but markets have responded well to the hike today. 💚

The S&P 500 closed just south of +3% on the day, while the Nasdaq-100 led the major market indexes, +3.4%.

This is relatively… weird behavior. Higher interest rates generally have a negative impact on equities and earnings outside of the financial sector, which we anticipated during the earnings season. While somebody could say that markets have already taken on a lot of downside, it’s hard to dismiss that investors were excited about today’s hike. 🤔

There could be a few factors carrying weight with investors here. The first is the Fed’s newfound “hawkish” stance on inflation. Raising rates and downsizing the assets on the Fed’s balance sheet will likely have an impact on inflation. Raising interest rates will slow the economy, and theoretically let some of that excess financial energy float away.

However, the second factor that has consumed the headlines is worries among investors about recession. Since raising rates will likely slow the economy, investors were feeling the time to exit the market was coming. Some things have watered down concerns among the investing community:

1) A “buy the dip mentality”: A UBS Group poll found that nearly a third of high net worth (HNW) individuals would rather add to investments than sell them. 💰

2) The latest on the labor market: Earlier this week, the U.S. Labor Department showed that there were more than 11.5 million job openings in March, which is a WILD amount of openings. Since July 2021, these openings have exceeded 10 million each month. 💡 Meanwhile, the amount of unemployed people has dropped pretty substantially. The unemployment rate is almost where it was before the pandemic. Additionally, average hourly earnings have remained up and to the right.

3) Earnings, y’all: Earnings data is still coming in strong. According to Refinitiv, of the 275 companies which had reported as of Apr. 29, 80.4% of them beat analyst estimates. That was lower than the four quarter average (probably because the pandemic was realllllllllly good for many of these names, for some reason), but much higher than the long-term average of 66%. Q1 2022 earnings are expected to be up 10.1% YoY.

Too early to say, but these are potential reasons explaining why investors are weirdly excited about rake hikes after the past couple of months. By the end of the year, the Fed target rate is expected to land just south of 3%.

Not all that long ago, biotech company Amarin was a Stocktwits user’s dream. The company increased by more than 500% in two weeks, from Sept. 21 to Oct. 5, 2018, after Amarin’s promising new drug trial showed that it was “effective in benefiting cardiovascular patients.”

The target market was a broad one — there’s no shortage of people with cholesterol problems and early stage heart disease. The drug’s results were unprecedented: Vascepa was shown to reduce risk of an adverse cardiovascular event by 25%. 💡

However, nearly 4 years later, Amarin is sitting 47% below where it was before its promising new treatment’s efficacy was shown to the public. The company’s latest earnings report, which came out earlier today, showed that Amarin’s Q1 sales were down 33% YoY to $94.6 million (vs. an expected income of $128 million.) 

These figures are scrappy compared to the company’s once-fantastic $598 million in revenue on the drug in FY 2020. ✨

How did this company fall so far from grace? It’s hard to credit any one factor in such a complicated industry, but the company’s FDA approval was shrouded by a patent lawsuit levied against the company by Hikma Pharmaceuticals and Dr. Reddy’s. The two generic drug makers suggested that Amarin’s fish oil-derived drug was “too obvious” to patent. In the end, they won — Hikma and Dr. Reddy’s launched their own “generic” versions of the drug in the U.S.

For the biotech and pharma readers who are aware, this story is a cringeworthy one. For our readers who are unaware, companies which bring a new product to market are granted a patent for a period of time on their new therapeutic. In the U.S., these patents generally last 20 years. During that period, the company who owns the drug and patent basically has a monopoly on it. 💉

Once that grace period ends, it’s open season in the marketplace. Companies can file to create their own “generic” (aka off-brand) versions of the drug. Generics are generally great for the consumer, since they create price competitiveness. They’re often really bad for the company which spent billions to bring that drug to market. That’s why the patent period is a motivator for taking on such great R&D and clinical trial costs.

Ultimately, Amarin was forced to cut its sales force after losing its patent defense. Without a patent, the company’s market exclusivity was compromised. Amarin’s revenue declined as the competitive generics ate away at the company’s top and bottom line. And the worst is yet to come. 😬 Analyst Leerink expects “Vascepa sales to erode between 6% and 22% by 2023” in spite of the company’s best efforts to more than double its sales base of general practitioners.

Why are we sharing this in our very news-centric newsletter? For one, it’s an interesting story. If you ever meet someone insane enough to invest in early-stage biotech, they’ll tell you 10 stories like this. However, it’s a reminder that even the most promising investment can turn into a nightmare. Certainty doesn’t exist in markets and comfort is an overrated expectation, especially in certain sectors and markets. 🤷

But don’t just take it from us… look at this chart!

All of this talk about EVs begs the question… what’s going to happen to the oil and gas industry?

A new article in Bloomberg titled “Shell, BP Face Obstacles to Gaining Wider Share of EV Charging Market” by Ryan Fisher explains that a variety of industries are competing for stake in the growing EV charging infrastructure — those industries include utilities, oil/gas, auto, telecommunications, and even retail. However, Fisher claims the the oil and gas industry doesn’t have the stronghold on EV charging that it needs to be competitive in the space. ⚡ ⚡

Nonetheless, the oil and gas industry is conducting M&A to stay relevant as electric cars gain prominence. Shell has acquired start-ups across the globe, like Ubitricity, New Motion, and Greenlots. Similarly, BP acquired the U.K.-based charging company Chargemaster and signed onto a software provider deal with China’s Didi. Shell hopes to own 500,000 international EV chargers by 2025; BP wants to operate 70,000 international chargers by 2030. 🌎 In other words, Shell and BP are making moves to position themselves in the EV world.

In his article, Fisher also explains that installing EV accommodations in gas stations could be a competitive play for the oil industry:

“There’s also a question about whether retrofitting gas stations with chargers is the right strategy for the oil and gas companies. The existing network might not offer the best locations for chargers going forward, especially as retail charging is expanding. Supermarkets have had success in this market. Many, including Walmart and German supermarket chain REWE, along with a bunch of other retailers and restaurants like McDonalds, are installing ultra-fast chargers.”

On the contrary, some sources say that oil and gas aren’t going away for a while. S&P Global remarks that the U.S. Energy Information Administration expects an a 9% increase in oil demand for transportation in 2050 from 2020. While some countries predict the downfall of oil demand over the next 30 years (Norway’s Equinor ASA expects a 47% decline in oil demand for transportation), some American companies and organizations seem skeptical. Additionally, some predict that demand for natural gas will increase linearly or exponentially with EV growth because natural gas may be used for powering EV charging grids.

At the end of the day, though, demand for fossil fuels will really only change “depending on how strong policies are to decarbonize,” according to S&P’s IHS head of research Jim Burkhard. Looks like this is just another instance of Time Will Tell… ⌛