July 31, 2020
Hello! This week: Big Tech's earnings have Apple and Amazon racing to $2 trillion; what biotech investors think of drug pricing caps; and your outlook for next week. Want Index in your inbox each week? Subscribe here.
Two years ago this week, Apple's market capitalization hit $1 trillion. Back then, that was a momentous event: the culmination of a 42-year slog to reshape the economy with personal computers. But it looks like it'll take considerably less time to hit the second trillion.
After blowout earnings Thursday, analysts at Wedbush have raised their 12-month price target to $475 per share, valuing Apple at $2.01 trillion. Citi analysts aren't too far behind, with a $1.95 trillion expectation. But Apple has tough competition in the race to $2 trillion: Deutsche Bank and JMP Securities both have $2 trillion price targets for Amazon. I'm sure that won't bother Congress at all.
The eye-watering numbers are testament to just how good the past quarter was for the tech industry. Apple, Amazon, Facebook and Alphabet all smashed earnings expectations, and not even the latter's first year-on-year revenue drop could dampen the mood. Wedbush's Dan Ives summed it up best: "It's Big Tech's world and everyone else is paying rent."
That should add some caution to the general tech optimism. Travel was the sector most immediately and severely hit by the pandemic, but it's far from the only one to face the consequences. Today, millions of Americans will see their benefits cut by $600 — an event that will almost certainly have knock-on impacts across the economy. Whether Big Tech can stay immune is yet to be seen. As Alphabet CFO Ruth Porat said Thursday: "It's premature to say that we're out of the woods."
Last week, President Trump announced a new executive order that would cap U.S. drug prices based on how much other countries pay. And while the actual order is unlikely to change anything itself, it's reigniting a debate about drug prices that could have a big impact on biotech companies and investors.
The argument is this: "People will invest less if they think they are going to be making less money," as VC and health entrepreneur Alexis Borisy told me. That means fewer drugs will be developed, making us all worse off.
Almost everyone I spoke to agreed, saying that there was an inevitable trade-off here. Peter Kolchinsky, managing partner of RA Capital Management and author of "The Great America Drug Deal," said the impact is immediate, too. "The administration could just look at what happens to the biotech markets valuations when they say something," he told me. "If it goes down, you just made it incrementally harder for companies to raise money — instantaneously." The National Venture Capital Association's Jeff Farrah said that was his particular concern with the executive order: "We're very sensitive to the types of signals that are being sent to the larger biotech innovation space," he explained.
But everyone also agreed that something was wrong with the current state of affairs — they just had different ideas about how to fix it.
Borisy said he thinks we just need to let competition loose. His company EQRx aims to make "equally innovative or better new medicines at radically lower prices," he said, "by leveraging the efficiency, knowledge, technology and know-how that's possible today." He, along with a few others I spoke to, said there is room to drastically cut the costs of drug development — and that the market opportunity in undercutting others is incentivizing companies to do just that.
Not everyone was so optimistic, though. "You can't just judge how efficient the whole industry could be by holding up a few cherry-picked projects that retrospectively turned out to go smoothly and cost less than average," Kolchinsky said. "Anything can be improved, but there are a lot of good reasons that the productivity of the industry as a whole is as seemingly 'inefficient' as it is."
Regardless of who's right, it's clear that this issue isn't going away. Biotech investors ought to buckle up.
Clarification: This article was updated to clarify Peter Kolchinsky's comments on how cash flow discounting incentivizes innovation. Updated August 3.