The resurgence of deal activity in the drug-development industry is driving investors’ interest in biotech stocks and boosting values for potential takeover targets.
(Bloomberg) — The resurgence of deal activity in the drug-development industry is driving investors’ interest in biotech stocks and boosting values for potential takeover targets.
This week alone, large pharma companies logged two deals — Merck & Co.’s $10.8 billion takeout of Prometheus Biosciences Inc. and Bellus Health Inc’s $2 billion sale to GSK Plc. The transactions carried premiums of 75% and 103% respectively, yielding lucrative returns for investors in the pair which have no approved products yet.
“Sellers are more willing to sell because they know there is not a supportive capital markets environment for every single biotech going forward,” Jefferies strategist Will Sevush said in an interview. On the other side, buyers — aided by recent data readouts which help shape M&A decisions — have gained a better understanding of the competitive landscape for many targets after a flood of new companies formed over the past few years, he added.
The average US biotech deal premium was 96% in 2022, up from 67% in 2021, according to data compiled by Bloomberg. The figure was 49% for US transactions across all sectors last year.
The renewed M&A appetite is a shot in the arm for the biotech industry which has been dragged down in the past year by waning risk appetite driven by a higher interest-rate regime. The SPDR S&P Biotech ETF (XBI) is up more than 8% this month, outperforming a gain of around 1% in a similar fund tracking the S&P 500 index. However, the XBI is still down around 0.8% this year after losing 26% in 2022, and remains more than 50% below its February 2021 record.
With expectations rising that this M&A streak can keep running, brokerage firms are building out their lists of companies ripe for takeovers.
In Jefferies’ takeout basket, BioMarin Pharmaceutical Inc., Alnylam Pharmaceuticals Inc., Madrigal Pharmaceuticals Inc. and Cytokinetics Inc. are placed high on their potential deal probability. The list, which is based on a buyside survey by Sevush, previously featured Prometheus.
“There’s an increased amount of clarity on first-in-class, best-in-class assets” and buyers are willing to make rich offers for those with scarcity value, Sevush said. Pfizer Inc.’s acquisition of Seagen Inc. is a good example, he said.
For RBC Capital Markets analysts, top takeover targets range from Intra-Cellular Therapies Inc., Karuna Therapeutics Inc. to Morphic Holding Inc. and Ideaya Biosciences Inc.
“Takeouts should once again be on investors’ minds and help (small- and mid-cap) shares appreciate,” RBC’s Brian Abrahams wrote in a note to clients on Tuesday.
–With assistance from Bre Bradham.
(Updated with share moves and chart at close)
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