Citi Says Biotech Tide May Turn as Large Deals Are Shunned
Biotech Tide May Turn as Large Deals Are Shunned, Citi Says
(Bloomberg) -- Investors should take a closer look at some long-suffering large-cap biotech companies as the sector continues to hold back from big transformative deals, according to one Citigroup analyst.
Unlike other sell-side analysts who are calling for a return of large-scale mergers and acquisitions, Citi analyst Mohit Bansal said he doesn’t like big late-stage deals as their ability to stimulate biotech growth “is debatable.”
Instead, large-cap biotechs should stick to a disciplined approach to deals and keep snapping up drug developers still in the early stages of research and development, Bansal advised in a note assuming coverage of the sector.
For investors, “avoiding large-cap may have gone a little too far now – this may be the time to look again,” Bansal said. With large-cap valuations at historic lows “biotechs are going back to basics by investing in internal pipeline or filling their pipeline with early stage assets,” which should spur on growth, he said.
A proposal to tie Medicare drug prices to their cost in other countries is “a major challenge for investors,” but Bansal doubts a U.S. program will pass in its current state.
While the drug pricing debate is not going away anytime soon, that’s already reflected in the sector’s lower valuations after Biogen Inc.’s failure in Alzheimer’s and an “unprecedented” decline in hepatitis C drug sales.
Citi upgraded both Amgen Inc. -- which has shaved off 12% of value from its shares this year -- and Gilead Sciences Inc. to buy from neutral because of the “stabilization and predictability” of the companies’ base business. Alexion Pharmaceuticals Inc. and Vertex Pharmaceuticals Inc. were assumed as buys. Bansal also recommended buying BioMarin Pharmaceutical Inc. on its “transformational pipeline.”
Two companies Citi didn’t recommend were neutral-rated Biogen and Regeneron Pharmaceuticals Inc., both the stocks have shaved off double digit values so far in 2019. For Biogen, more share buybacks may be in store though “they rarely work for biotech” Bansal said. Both Biogen, with its spinal muscular atrophy drug Spinraza, and Regeneron, with its best-selling Eylea, face mounting competitive risks.
To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net
To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper
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