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Biotech Market Eyes Deals With Drugmakers Sitting on Cash

Biotech Market Eyes More Deals With Drugmakers Sitting on Cash

The world’s top drugmakers are awash with cash and biotech investors are hoping more of that money finds its way to them.

The SPDR S&P Biotech ETF  (XBI) rose 0.8% on Monday after Pfizer Inc.’s $6.7 billion deal for Arena Pharmaceuticals Inc. at a 100% premium to Friday’s close. Also pushing the exchange traded fund higher is Eli Lilly & Co.’s $380 million cancer drug pact with Foghorn Therapeutics Inc.

The Pfizer-Arena deal is among the top 10 largest biotech takeovers in the U.S. in 2021 and is likely to raise investors confidence that more deals are coming after a slow year. JPMorgan Chase & Co.’s health-care conference in January is often another impetus to get deals done.

So far in 2021, a total value of $89.9 billion of M&A deals over $100 million have been announced, which is only 44% of the amount recorded in 2020. Deal activity in the sector declined since September, with 10 new deals put forward in the fourth quarter compared with 23 announced in the third quarter.

Arena, Foghorn and the XBI have all recently traded at 52-week lows as antitrust concerns and the potential for Congressional action to rein in the high cost of prescription drugs weighed on the sector. The recent slump may make biotechs ripe for takeovers.

Biotech Market Eyes Deals With Drugmakers Sitting on Cash

SVB Leerink recently put the biopharma industry’s cash and debt capacity at more than $1.6 trillion by the end of next year. Analyst Geoffrey Porges highlighted “the steady buildup of cash within large-cap biopharmas, especially those benefiting from an earnings windfall due to sales of Covid vaccines and treatments,” and called out vaccine stocks Pfizer Inc., BioNTech SE and Moderna Inc. as those particularly flush. Many large drugmakers are facing what he calls a “looming growth crisis” over the rest of the decade as patents run out on key drugs. 

Still, some analysts say one deal is not enough to signal a turnaround for the sector just yet. “Given the deal size, we do not think that this is enough in itself to improve sentiment in the sector,” said BMO analyst Evan Seigerman after the Arena deal. “We see it as a modest step in the right direction, and would like to see additional (higher-value) deals.” 

©2021 Bloomberg L.P.