Signs point to biotech M&A heating up, Wells Fargo says. Here’s where to look
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Mohit Bansal, a Wells Fargo analyst, stated that although the pace of deals in biotech is expected to increase, investors need to consider smaller targets. Bansal cited both the attractive valuations of small and mid-cap biotech firms, currently trading at about one to cash on average and tough regulatory environments. “Big BioPharma needs growth, and the 5 major US companies with the biggest need have $400B+ cash available from now to 2025, and revenue need of ˜$65B+,” Bansal wrote in a research note Thursday, referring to Amgen , Bristol-Myers Squibb, Gilead Sciences , Merck and Pfizer. An upcoming workshop being hosted by the Federal Trade Commission and Department of Justice on June 14-15 is likely to discourage big M & A deals, he said. This event will focus on antitrust enforcement in pharmaceutical industries. Bansal anticipates that transactions smaller than $20 billion may still occur. Pfizer bought Biohaven, the migraine drug maker in May. Bristol-Myers agreed last week to acquire Turning Point Therapeutics to increase its oncology business. He said that other transactions in this sector have been triggered by past recessions, such as Wyeth’s acquisition, Merck’s merger with Schering-Plough, and Roche’s acquisition Genentech. All of these were made in 2009. A lack of IPOs this year and subsequent equity offerings could add to the pressure as smaller biotechs may run out of cash in 2022. Although Bansal did not name potential targets in his research, CNBC Pro reported that analysts identified Vertex Pharmaceuticals, Seagen, Horizon Therapeutics, Incyte, Neurocrine Biosciences and Incyte as possible targets. Still it’s worth noting that M & A activity has been muted so far this year. Citigroup also reported that the dollar value of M & A deals is now 4.5% lower than last year. “The current economic environment is not highly supportive of M & A activity, which tends to be cyclical; earnings revisions which tend to follow a similar profile as M & A deal volumes are in negative territory, GDP forecasts are broadly on the lower side, and the market has generally faced more headwinds this year than was anticipated,” said Citi analysts in a research note. “Having said that, M & A events are all about finding opportunities that will always be available to those firms well-positioned to do so.”
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