There has been a lot of merger and acquisition activity in the biopharma space recently—and the party isn’t over. That is great news for some smaller biotech stocks.
In the first quarter of this year, total healthcare and life sciences M&A in the U.S. was about $71 billion, more than double the $28 billion seen in the same quarter last year, according to KPMG. To be sure, that includes
Pfizer’s
(ticker: PFE) $43 billion purchase of
Seagen
(SGEN), but even without that, deals in the industry would have still been flat year over year.
That isn’t so terrible, considering total U.S. M&A in the first quarter dropped to nearly $300 billion from just over $400 billion in the same quarter last year. The culprit has been higher interest rates, which make financing a deal less attractive for buyers, especially since the profit outlook could dim in the wake of a slowing economy.
For pharma, deals haven’t exactly slowed down since the conclusion of the first quarter. This month Merck (MRK), which has a market capitalization of $288 billion, announced it would acquire
Prometheus Biosciences
(RXDX) for almost $11 billion, a roughly 75% premium over the pre-announcement price. The news sent Prometheus stock up almost as much.
Prometheus shareholders won big while Merck is trying to replace its just over $20 billion annual revenue stream from cancer treatment Keytruda. The drug’s patent could expire in 2028, which would enable competitors to take market share, making Merck’s acquisition important. Mizuho analysts see a roughly $30 billion total available market for Prometheus’ ulcerative colitis product.
That is likely just the beginning of new deals to come in the industry.
“We are entering a period of what I would call smart optimism in healthcare and life sciences,” wrote Kristin Pothier, healthcare and life sciences deal advisory and strategy leader at KPMG.
That makes sense for a few reasons.
From an acquires perspective, several larger pharma companies are looking to refresh their drug pipelines.
Bristol Myers Squibb
(BMY), which has a market cap of $146 billion, likely already saw peak sales of just over $12 billion in 2021 from its myeloma treatment, Revlimid. As its patent expires, it should lose market share, sending sales for the product into the low hundreds of millions, according to FactSet.
The company has several new drugs in the pipeline, but could acquire smaller companies to protect its future. Importantly, any large acquisitions it makes might require some debt, as Bristol has just over $9 billion in cash. That isn’t out of the question, as Pfizer financed about 70% of its Seagen deal with long-term debt.
Another potential buyer is
Biogen
(BIIB), according to RBC analyst Brian Abrahams. The company, which has a $42 billion market cap, is interested in the neuropsych and inflammatory space, and could make a deal as soon as the second half of this year, he wrote.
From a seller’s perspective, many of these companies are now much less valuable than they once were on the public market—and therefore easier for an acquirer to make a purchase. The
SPDR S&P Biotech ETF
(XBI) is down about 50% from its all-time high, hit in February 2021. That is because higher interest rates make future profits less valuable—and many of the small biotechs are valued on the basis they’ll produce the majority of their earnings well into the future.
With a market cap of $1.2 billion,
89bio
(ETNB) has seen its stock get more than cut in half from its all-time high, and is a takeout candidate, according to Abrahams. So is the $7.4 billion
Karuna Therapeutics
(KRTX) which is down almost 30% from its all-time high.
Others mentioned by another RBC biotech analyst, Gregory Renza, include $1.8 billion
Morphic Holding
(MORF), down more than 35% from its all-time high, and the $706 million
Ideaya Biosciences
(IDYA), which has lost almost half its value from its all-time high.
Consider some of these smaller biotechs. If it proves difficult to find buyers for their stocks, shareholders could see a big payday if a larger company comes in to make a purchase.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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