Biotech Investors Celebrating Deal Boom Can Thank Rough Quarter
(Bloomberg) -- Biotechnology investors popping corks at the slew of deals opening 2019 can thank a fourth-quarter slump for reigning in bloated valuations. And market watchers don’t see the volume of activity slowing down any time soon.
As the biotech sector tumbled more than 25 percent from its peak -- notably underperforming the broader market -- stock valuations began to look more palatable for large-cap companies looking to take a dip into cutting-edge technologies like gene therapies. That has helped push across a string of deals like Roche Holding AG’s $4.8 billion bid for Spark Therapeutics Inc. and Biogen Inc.’s $877 million offer for Nightstar Therapeutics Plc.
“When we saw the market correction it was like, okay, these large-cap companies should take advantage of it and I think it will continue,” BNP Paribas Asset Management portfolio manager Christian Fay said by telephone. “Management teams from larger companies are still talking about M&A as a huge part of their DNA going forward and they need to when you look at their pipelines.”
At the crux of those deals which have been announced as well as those anticipated is the need for drugmakers to diversify. For Biogen, that meant not relying on crucial Alzheimer’s data due next year. For Roche, it was about complementing its hemophilia franchise.
Audentes Therapeutics Inc., UniQure NV, Ultragenyx Pharmaceutical Inc., and Voyager Therapeutics Inc. are among gene therapy names that have seen shares rally after the deals as investors positioned for who may be next. The Nasdaq Biotechnology Index rose as much as 0.6 percent Monday, led by Axovant Sciences’ 64 percent gain after gene therapy results.
“The uptick in deals comes from the increasing desperation on the large-cap side to find innovation and potentially revenue driving,” Baird analyst Brian Skorney said in a telephone interview.
Investors and analysts are still looking for large companies to make a bigger splash. Many who follow the space have mentioned Alexion Pharmaceuticals Inc. as an attractive target with its blockbuster treatment for two very rare blood conditions. That medicine, Soliris, could have an immediate impact for a needy company, according to those on the Street. Vertex Pharmaceuticals Inc. and its cystic fibrosis drugs could also be a good option, Skorney said.
“Companies have to look to something the size of an Alexion to move the scale,” he said. “You want something like a Soliris or a company like a Vertex to move the needle.”
Some drugmakers facing heightened investor scrutiny have remained passive. AbbVie Inc., the worst-performing large-cap biopharma stock of 2019, is one of the companies feeling the heat. The shares have shed a third of their value in the last 12 months amid research woes and mounting concerns for top-selling Humira. Earlier this year, the company said it would take a $4 billion charge on its $5.8 billion takeover of Stemcentrx Inc., and that it could write down an additional $1 billion.
“As much as they have done a lot to diversify away from Humira, that’s still such a big part of their story given that the drug makes up close to two-thirds of their revenue,” Piper Jaffray analyst Chris Raymond said by telephone. “The problem is, not every deal works out and I think investors are not going to be assigning the benefit of the doubt for the next deal that they do.”
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