Rayane Achich, Pharmaceuticals Sector Leader 2015-16

Pharmaceuticals companies manage a risky business. Drugs in the development pipeline might not come out (e.g. Alkermes (NASDAQ:ALKS) depression drug unsuccessful trials leading to a $4bn market value day-loss on January 21st) or regulators might not approve them. After this long and costly production process, the success of the drug on the market is not even certain. This is the main reason why pharmaceutical companies live from their patents and why M&A has a significant influence on the industry to keep revenues growing as fast as investors’ expectations.

2015 was a frenetic explosion of M&A activity for pharmaceuticals (over $350bn vs. $250bn in 2014) but not only for companies acquiring each other but for companies to divest slower-growth businesses and restructure their businesses (Allergan (NYSE:AGN) selling its $40.5bn generics business to Israel’s Teva Pharmaceutical Industries (NYSE:TEVA) and negotiating at the same time a $160bn takeover of Pfizer for tax inversion purposes and other synergies). Most of the activity was a result of earnings’ losses due to patent expiries, declining R&D productivity and low interest rates.

Late in the M&A cycle, purchase prices escalate as more bidders enter the takeover market, leading many buyers to overpay. According to the annual report from PwC’s Health Research Institute, in 2016, “high-profile” mergers and acquisitions are likely to continue with “drug companies looking beyond traditional M&A by acquiring “beyond-the-pill” products and services to bolster their portfolios and pipelines of drugs”. This should provide significant returns for investors monitoring and anticipating these mergers while avoiding already-inflated stocks (e.g. Baxalta’s stock (NYSE:BXLT) increasing by 24% in 2 months at $41.62 after announce of a potential $32bn takeover by Shire (NASDAQ:SHPG), or $46.50-$48 offering per share).

To watch:

  • Prominences in pharmaceutical awareness and share price momentum were previously observed during the outbreak of the Ebola crisis. Currently, Zika Virus seems to be at the forefront of world medical attention. Inovio Pharmaceuticals Inc. (NASDAQ:INO) is trying to capitalize on this by patenting advanced DNA-based vaccines. The stock currently trades at 6.04 up 12% for the day and climbing (28/01/16). The share has a 52 week high of 10.83. Whilst it may have a negative long-term trend, this may be an investment to watch, as patenting a vaccine for Zika Virus, currently affecting over 2 million people and slowly becoming a global issue, may result in significant profits for the firm.
  • Johnson & Johnson (NYSE:JNJ) has announced a $10bn share buyback program financed by debt (cheap with current interest rates) that could lead in profits for investors