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Biotech's Next Boost? It Might Be M&A

17 January 2014 in Trading Ideas

Savvy investors may look at individual biotech stocks, or take a broader industry view, such as looking at a portfolio of biotech stocks such as the Biotech Breakthroughs motif (which has jumped 70.3% in the past 12 months, while the S&P 500 is up 27.5% during that same period) and think that the chance for a lot more upside has subsided.

On the other hand, what if we’re on the verge of the next leg up?

As Bloomberg recently noted, the next biotech boom may come from the sector’s companies getting snapped up in acquisitions from larger health-care companies, which have deep pockets — and not much in the way of a product pipeline.1

 

What’s more, the convergence of predator and target may have taken place this week in San Francisco, where the JPMorgan Chase annual health-care conference showcases about 300 companies who will present to investors about their expectations for the year ahead.

For some analysts, an expectation that valuations of attractive biotech firms will stabilize after last year’s run-up is the perfect M&A spark for larger companies that are facing patent expirations on top medicines and cuts in research as they refocus product development.

“We see M&A in the health-care sector being up materially in 2014 at all size levels and across all subsectors,” JPMorgan analyst Jeff Stute told Bloomberg. “Buyers and sellers will get comfortable with the new reality of where assets are priced.”

The new year has already seen a couple of big deals. General Electric spent $1.06 billion to acquire medical equipment businesses from Thermo Fisher Scientific, while Forest Labs said it will buy Aptalis Pharma for $2.9 billion.

According to Stute, this may be part of the New World Order among health-care companies. He explained that the strong positive stock reaction for companies making these deals has told companies that shareholders want more M&A. As a result, some companies are feeling more pressure to examine merger opportunities more aggressively because their stocks have underperformed those of peers who have made a material purchase.

Case in point: Gilead Sciences, which makes up 16.5% in the Biotech Breakthroughs motif. Since its deal for Pharmasset was announced at the end of 2011, the company’s stock has tripled and it has become the largest biotech company in the world. Meanwhile, the key drug it picked up in the deal, Sovaldi, was just approved by the Food and Drug Administration and is expected to generate $2.5 billion in revenue for Gilead this year.

Indications of M&A activity should be taken with a hefty dose of speculation. Still, the promise of recent deals could go a long way to drive more activity – which could trigger yet another boost to the industry’s valuations.

1Meg Tirrell and David Welch, “M&A Boom Seen in 2014 as Drug Hunt Spurs Biotech Deals,” Bloomberg.com, Jan. 9, 2014, http://www.bloomberg.com/news/2014-01-10/m-a-boom-seen-in-2014-as-drug-hunt-spurs-biotech-deals.html, (accessed Jan. 14, 2014).

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