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DJoint relief among industry analysts, portfolio managers and specialist news journalists was felt when the US pharmaceutical company Pfizer announced the acquisition of Biohaven on Tuesday a week ago. Finally, a takeover – not so small, because $ 11.6 billion. Finally, a sign that the biotechnology sector not only has a wealth of content and innovation, but that commitment is also worthwhile for investors. Pfizer pays Biohaven shareholders $ 148.50 per share, representing an almost 80 percent premium over the last price prior to announcement of the deal.
Many investors hope this is the beginning of a period of much more M&A activity that will change prices. As the growing risk aversion in the markets, war news and, above all, the change in the monetary policy environment, had a negative impact on the sector in recent months. The American industry barometer, SPDR S&P Biotech ETF (XBI for short) has lost almost 50 percent since the beginning of the year. About 200 companies are listed on the stock exchange below the value of their cash reserves.
At the same time, big pharmaceutical companies are swimming in money, not least because of the revenues from vaccines and anti-Covid drugs. The top 20 pharmaceutical companies can buy all small and medium-sized businesses with a market value of less than five billion dollars in one fell swoop.
This, of course, is purely theoretical. In practice, however, some acquisitions and cooperations are likely to be agreed in the coming weeks and months and will hopefully ensure a rise in prices. It has not been so cheap for years, and many large companies are under pressure. Of the top ten selling drugs in the past year, two are Covid vaccines, and sales are likely to have peaked. Six other products will lose patent protection in the coming years. Since then, cheaper generics have tended to enter the market, manufacturers of just these six drugs have to fill the sales gap totaling € 87 billion. Our innovations are not sufficient for this. This includes, but is not limited to, AbbVie, Bristol-Myers, Merck & Co. or Bayer.
“Big companies are playing on time while stock market valuations are falling,” says Kristoffer Unterbruner, analyst and portfolio manager at Medical Strategy, which is behind the Medical BioHealth fund, among others. “The pressure to act increases at the latest when signs of a trend reversal appear in the market.” The acquisition of Biohaven should increase the willingness to act in the company’s headquarters. But opinions differ on who or what the focus of financially strong corporations is.
According to the industry portal Statnews, in 2013-2018, mainly smaller companies were purchased, whose product candidates were still at an early stage of development. M&A activity has fallen significantly recently, but more collaboration has been concluded.
Daniel Koller from BB Biotech’s management team believes that this time around, we will focus more on companies that already have or are expected to have approved products and who often have good funding of their own. Biohaven fits this category, Americans have been selling migraine pills for two years, and the nasal spray for acute treatment of migraine attacks is in the final stages of development. “For small businesses, after the price has fallen, there is now too much discrepancy between the price they are asking as a possible takeover price and the price the buyer is willing to pay,” explains Koller.
Big Pharma’s expertise
If he’s right, drug companies could, for example, hit the two RNA companies, Ionis or Alnylam. They don’t study mRNAs like BioNTech or Moderna, but rather antisense RNA and RNA interference, two technologies that can be used to “turn off” genes. Both have established themselves in the market with products for the treatment of rare diseases and are currently working on indications that affect a much larger number of patients. This, in turn, is the basic knowledge of large corporations.
For investors, stocks such as Ionis, Alnylam and the neuroscientist Neurocrine Biosciences offer more benefits than just takeover fantasies: they are also successful companies on their own. The risk of failure is much higher for companies with less advanced projects that need to raise capital along the way. In the event of success, there is much more leverage in the share price.
Growing market share
For example, new technologies are often the reason for partnerships, and acquisitions are always the next step. Big corporations cannot afford not to have iron on fire when it comes to promising methods. “The market share of new product technologies in the pharmaceutical market has grown significantly in the last ten years,” says Daniel Koller of BB Biotech.
Companies dealing with the so-called NK cells have caused a stir in recent months. NK stands for NK cells which are part of the innate immune system. Unlike T-cell cancer therapies, they do not have to be manufactured individually for each patient. This point alone is very attractive for the application as it means significantly lower production costs and shorter waiting times for patients. In addition, NK cell therapies also have less dangerous side effects and may prove effective in solid tumors as well.
Strong clinical data have recently emerged from, for example, California-based Nkarta and Affimed, Heidelberg. The Germans produce so-called engagers, molecules that bring NK cells into contact with cancer cells. Both companies do not yet have partners for their most advanced projects.
INFORMATION FOR INVESTORS
The difference between larger companies with approved and ready-to-market products and those researching new technologies is now clearly visible in terms of prices. The big disadvantage of the NK cell specialists Affimed and Nkarta reflects the much higher risk for investors. On the other hand, Alnylam, Ionis and Neurocrine already have approved products but can still attract potential buyers.
In order to spread the risk, it is advisable that biotechnology investments are based on the selection of professionals with appropriate specialist knowledge. BB Biotech shares are backed by a concentrated portfolio of medium and small companies, with the former having more weight. The dividend yield of almost seven percent is attractive. The 165 positions in Medical BioHealth’s fund focus more on small capitalizations.
The number of acquisitions over the past few years has been relatively low, as has the volume – 2019 seems to be an exceptional year, mainly due to the purchase of the EUR 74 billion biotechnology group Celgene by pharmaceutical giant Bristol Myers Squibb.
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