Merger Monday for Banks and Biotech

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. We had an M &A trade. We had a few M &A trades hit the tape here this morning, one including the regional bank business, maybe a super regional bank to be. Herman Chen, Bloomer Intelligence Senior Analyst for U.S. Regional Banks, Huntington Bank shares, buying Cadence. Herman, talk to us about this deal. What's going on here?

1:39So Huntington's fresh off of a deal in Texas. They just closed the Veritex deal, which added to it. That's right. I forgot about that. Basically entered Texas through the Veritex merger. And they're doubling down in Texas, adding Cadence, which is in the Houston market primarily, and also some slower gross southeast markets like Birmingham, Tupelo. They have some exposure to Arkansas and Missouri, but Texas is really the prize. Texas is really the prize. And Cadence, I believe, has two headquarters, one in Houston and one in Tupelo. So Huntington now has presence in 21 states, and it becomes a super regional.

2:19I love that term, super regional. What does that mean in terms of regulation and what kind of capital it needs to hold on its bounce rate? Yeah, so that's a good question. It will clear the$250 billion asset mark, which is a step up in regulation. Really, all that means is there's more regulatory reporting, there's tougher regulation in regards to liquidity, but overall, should it mean too much for Huntington? Huntington and we are expecting some deregulatory efforts from the Fed later down in the next few months. So that should actually work out in Huntington's favor. And I think what we're seeing is that just the regulatory efforts of increasing M &A transactions as a result of the Trump administration being very more open to deal making.

3:09And you're seeing that play out not only in this deal, but also with Fifth Third buying Comerica and also PNC buying a bank in Denver, First Bank. So more transactions to come. Wow. What's the upside for Huntington bank shares here in getting bigger? Yeah. So they are doubling down in higher gross markets, right? So Huntington is based mostly in the Midwest, upper Midwest, slower growth demographics. They've focused on not only hiring folks in national businesses, but also expanding in areas like the Carolinas. They were doing an organic push in Texas before the Veritex deal. So the management team is being much more aggressive.

3:55And they talked about improving their return profile, increasing their return on tangible equity by 200 basis points over the medium term. So the higher, the greater scale, the better growth demographics really will fall to the bottom line. So what I found interesting in this, Herman, is that earlier this year, Cadence bought another bank, Industry Bank Shares. Who's a buyer? Who's a seller in this great regional bank M &A thing that we're seeing? Yeah, I think what you're seeing today is, and I'm just looking at the KRE Index and all these Texas-based institutions that are part of that are getting bid up.

4:32like banks like Prosperity, First Financial, Origin. We've seen a number of bank deals in Texas, both larger and smaller. Remember, Comerica is a Texas-based bank as well. So that seems to be the area of choice for these regionals, and we're seeing that activity really pick up. Stay with us. More from Bloomberg Intelligence coming up after this. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day.

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6:55You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Novartis agrees to buy Avidity in a$12 billion biotech deal. Sam Fazelli, you became an analyst. You should have become a banker. I don't know what you're thinking back in the day. Sam Vizzelli, Director of Research for Global Industries and a senior pharma analyst. Folks, he's one of the best out there on the street or in the city of London, as they say, for Bloomberg Intelligence.

7:29Is this just another deal kind of right out of central casting, Sam Pharma buying biotech? Yeah, well, so, Paul, before we do that, can I just make sure that when we come back in our next life, can I work with you? There we go. We can both do this together and just, you know, go and know. But look, pharma companies, the story is similar. here. We have a company here, Novartis, that's doing okay. They have a patent expiry that they're dealing with now. Remember that phrase? It's always the one that rears its ugly head eventually, which is good for consumers and drug budgets. But obviously, in the end, bad for the top and bottom line of pharma companies.

8:09They have another drug that's really big, expected to hit about$7.4 billion of sales by 2029, 2030, called Cosentix. That's going to go off patent. So what do they need they need assets and products to feed it they do their own r &d but here they also have an opportunity to go and get really exciting stuff from biotech companies which is exactly what novartis is doing 12 billion dollars uh for um avidity biosciences and then what they're getting here is three products that are at different stages of development but very soon to get to hit the market all rare diseases so it's one that's harder for people to argue against in terms of price, et cetera.

8:48And it will help them with that post-2029, 2030 revenue growth and earnings growth. So pretty much fits perfectly in this sweet spot of what they need and what this company and for their growth and also their technology platforms. Sam, you laid out beautifully strategically why Novartis is buying Avidity. The CEO of Novartis, Vasenara Simhan, has been making some deals, but mostly they've been focused on deals under$5 billion. Regulus Therapeutics, he bought for$1.7 billion. Anthos Therapeutics, also in that neighborhood. Is this purchase, this$12 billion purchase, a shift in strategy? Yeah, I mean, it's so hard.

9:31Us analysts, we love asking pharma companies, so what kind of deals are you going to be doing? And if you go back and look at the Q2 results, oh, we like tuck-ins, et cetera, right? And here we go. I mean, in my world, a tuck-in is$3 to$5 billion,$2 to$4 billion, that sort of size. But they all give you this caveat, we will be opportunistic. And I think here there was an opportunity that came up to access some very novel technology, I have to say. It's really interesting what these guys are doing. And it's late stage enough for it to make a difference to the bottom line of the company. And it's not after you get that mix.

10:09So I think Novartis decided this takes so many boxes that it was worth doing. Particularly, it fits also with their internal assets and their approach to some of the other diseases. So it's really a pretty good fit. Sam, is the patent runoff or expiration for this industry, is it abnormally high these days? Or is this just kind of normal course of business? Because it seems like we hear about it more and more over the last several years. Well, the companies have got bigger. There's broader pipelines. And, you know, I mean, there was a period where it was, you know, we had the patent cliff in the 2010, 11, 12 time period.

10:50I don't remember exactly. It was a while ago now. And now we have another. It's not quite a cliff. It's a hill that is. But this is how it should be. These companies get rewarded with reasonable pricing for the 10 to 12 years. And then it becomes generic so that it creates more space in the drug budgets for the governments to pay for the next good drug. So I don't think there's anything new here. It varies by company by company. Sam, we know that Novartis is going to be reporting earnings tomorrow, I believe. And it's already raised its profit outlook, I believe, two times. What are you anticipating?

11:26How much is it going to tell us in terms of whether this deal, this Avidity deal, will add to earnings in the near term? Yeah, but they already told us that they think that it's going to be clearly dilutive next year. And of course, as soon as you do these deals, a large amount of the value goes into what's called IPR &D, which you have to charge to your P &L. You can't just put it onto Goodwill anymore and just live with that as an intangible. So here, there will be dilution next year, but I think they could start seeing some, at least a positive contribution, maybe from 27, 28 onwards, definitely 29, 30 as these drugs hit the market.

12:06Of course, they have to still get to the market and they have to be successful, but the drugs are looking really interesting and the data is looking very powerful. Stay with us. More from Bloomberg Intelligence coming up after this. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations.

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13:34All right, let's talk about what's happening in the Caribbean. Hurricane Melissa plowing towards Jamaica. It's a powerful Category 5 storm, the third Category 5 storm this Atlantic season. And Melissa threatens to bring widespread destruction to the island. Matthew Palazzola has been monitoring this development. He is the senior analyst of PNC Insurance for Bloomberg Intelligence, and he joins us now with more. Matt, good to speak with you. When you try to figure out what kind of economic damage this storm could wreak, what historical analogs are you using? Yeah, so it's a lot easier for the U.S.

14:10We have a lot more data, a lot more storms. For this one, the method we use is the same. We look at older storms, older hurricanes, and we try to see what they did. We adjust for property values, inflation, and try to come up with something. The issue has been there haven't been a lot of major hurricanes that have made landfall on Jamaica. There's really only two since 1980 actually hit the island. A bunch have passed. The one that we're looking at is 1988 Hurricane Gilbert. And that one, there's not great insurance data. There's not great damage data. The best we can find was 100 ,000 homes, wiped out power and communication, killed 45 people.

14:51The economic damage, inflation adjusted maybe in the mid-single-digit billions. The way Melissa is shaping up could be a lot worse than that, actually. So in your note, you're saying that Jamaica has a low insurance penetration, but what coverage is written there is heavily ceded. What does that mean? So that means that it's your favorite business, Paul. It's heavily ceded to reinsurance. companies. So we know it's talking about the hundred thousand homes destroyed in Gilbert. That's where the low insurance penetration comes in. So people's homes there, they just they don't have insurance on them.

15:24So there'll be a wide gap between the economic losses and the insured losses. So that's kind of a real unfortunate aspect of this, like the resorts and things like that will have insurance on them. That'll be the majority of the insured losses. But so that's what we're saying with the low penetration. And even all any of the business there is heavily ceded to the reinsurance market. So which reinsurers then are exposed, do you think? So I don't I don't have specific names to be a little remiss. I hear about Lloyd's of London kind of does, you know, one off or special risks like this. So you might have a big a big resort that might, you know, have a policy with them.

16:03So a lot of the business might not be written by the domestic companies. We cover the Bermuda reinsurance companies. I wouldn't be surprised if they had some, the big European companies like Swiss Re and Munich Re. So those are kind of the usual suspects, but I wouldn't ascribe losses to any of them just yet. When I owned a home in California, it got to the point where the only place we could get home insurance was Lloyd's of London. Really? I mean, the same people who insure, you know, tankers going through the Strait of Hormuz, that's who I had to go to. Well, no one's even doing that now. You only have the state insurer as the lender of last resort at this point.

16:36I think mine is like Joe's Insurance of South Jersey. Only one. Exactly. Talk to us about the hurricane season form from your perspective. It doesn't seem like it's been that bad. No, it's been it's been quite good for for, you know, people who suffer from hurricane losses and for insurance companies. So very mild, I think, minimal U.S. activity. We look at catastrophe loss estimates for for our companies. We started off the year with the wildfires and I said, oh, no, like this is going to be bad. We're going to have, another major hurricane, it was going to be pretty significant. Third quarter was very mild.

17:14We've only seen a couple of companies report earnings so far. Those have been good. The catastrophe lows have been very low. So hurricane season mild. This is pretty rare to have a major hurricane this late. We did have Hurricane Sandy. It was around this time when it hit. But the hurricane season technically runs through November, but it's pretty rare for major storms to to hit that late. Yeah, hurricane season officially ends November 30th, so we just have to get through the next month or so. Matt, if you have a mild hurricane season, does that mean people's insurance premiums won't go up, that that stays static?

17:49Probably not. Asking for rent. I could answer that. Yeah, no baloney on that one either. But yeah, the issues behind home insurance haven't necessarily been the large losses. It's been inflation and building materials. It has been kind of poor regulation in certain markets like Florida and California and causing reinsurance rates to go up. So the things that are driving that hasn't necessarily been these large losses. When is the next wildfire season? Or is there even a wildfire season or is it kind of year round now? Yeah, so in California, there are times where the Santa Ana winds are stronger.

18:33I don't have the exact dates off the top of my head. There kind of are seasons to it, but they could break out kind of at any time. How are the property and casualty stocks doing this year? Yeah, not great. So despite the mild hurricane season, good jumps in book value, good ROEs, the fundamentals are, I think, probably past the peak. So the valuations of these stocks on a price-to-book basis usually peak before their ROEs. The ROEs have probably peaked. It's tough to see. I keep saying it, and they keep kind of incrementally being a little bit better. But it's tough to see their underwriting get better next year.

19:15Interest rates clearly are at least going slightly down step by step. So the fundamentals are not great. Valuations were high. So going into the year, it was not great for performance. Does that mean there's going to be M &A in this sector? Probably not. So the issue there is these companies have reserves, right? So we write liability business for things that happen and it could impact me many years in the future. What has been happening is those losses from the past have been higher than companies expected. So you'd be remiss to want to buy another company and have this book of business that could be worse than you expected.

19:51It's usually the biggest obstacle to M &A for PNC insurance. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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