The failure of Obamacare repeal-and-replace legislation, while perhaps a disappointment to some, is igniting investor interest in a big way. Biotech and pharma stocks are surging after reform efforts stalled in Congress rendering President Trump's railings against high drug prices toothless. Activity in the private markets, especially in M&A, is sure to follow after enduring a recent lull.
When Trump attacked Merck CEO Kenneth Frazier on Twitter in August, Wall Street shrugged at first.
Now that Ken Frazier of Merck Pharma has resigned from President's Manufacturing Council,he will have more time to LOWER RIPOFF DRUG PRICES!
But then they started buying: The iShares Biotech ETF, with exposure to companies like Gilead Sciences and Celgene, is up nearly 9% from its close on August 18 compared to a 2.9% for the S&P 500 through September 14.
Biotech ETF performance vs. S&P 500
This performance represents a return to form for the sector. The IBB peaked at a bull market gain of 574% in the summer of 2015, compared with a 200% rise for the S&P 500 in the same period. Concerns over red-hot valuations, possible regulatory action and criticism of high drug prices during the presidential campaign sapped the enthusiasm. Biotech M&A activity cooled as well.
But there's good reason to think a turnaround is at hand.
Tailwinds are returning
Biotech stocks are once again pulling away from the rest of the market, thanks not only to the intense political dysfunction in Washington but also to an increasing tempo of FDA drug approvals (just compare
2016), the bringing to market of new gene therapy treatments (that happen to
cost a half a million dollars per treatment) and fresh dealmaking like the recent
Kite Pharma deal.
The fundamentals are also heating up: Bank of America Merrill Lynch recently highlighted the record pace of healthcare sector earnings per share and revenue beats for 2Q in a note to clients. Never has profitability exceeded analyst estimates at this rate.
All of this bolsters the case for an uptick in M&A activity and deal volume flowing into private biotech companies after a decline in 2016, per the PitchBook Platform. The trend of large drugmakers turning to acquisitions rather than homegrown drug development
has been well documented, as has the tendency for smaller drugmakers to turn to larger companies for access to their global distribution networks. It's symbiotic, as all good M&A deals should be.
M&A deal activity in biotech & pharma
The momentum looks set to continue
There are structural factors in play as well.Boomers are going to keep getting older until, well, they don't, beginning in increasing numbers around 2035,
according to the US Census Bureau.
Data from QuintilesIMS suggests the late-stage pharma R&D pipeline should yield an
average of 40 to 45 new drug launches per year through 2021. And this dynamic doesn't look to be going anywhere either: Most new therapies are treating fewer patients while securing faster FDA reviews and carrying higher prices—as Goldman Sachs has shown:
But the risks inherent in the business remain. Gilead's $12 billion purchase of Kite Pharma was motivated in part by a desire to get in on "CAR-T" technology—the same thing that's powering Novartis' new therapy to treat acute lymphoblastic leukemia. The treatment involves harvesting a patient's own T-cells (a type of white blood cell), which are then reprogrammed using an inactive virus and reinjected to conduct a seek-and-destroy mission on specific cancer cells.
As you can imagine, it's complicated stuff. Two clinical trials of CAR-T treatments developed by Cellectis were placed on hold after a patient suffered a severe toxic reaction and died. Juno Therapeutics stopped work on a CAR-T therapy for relapsed blood cancer patients after fatal brain swells.
State-of-the-art stuff, this. And it's not easy. Or cheap. The very definition of high risk, high reward. But that's why investors just can't get enough, with activity sure to follow on the private markets.