Big Pharma Heads Toward a Deals Spree

 Big Pharma Heads Toward a Deals Spree

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Biogen trades at a sharp discount to the overall market, which could present a buying opportunity for industry behemoths.

Biogen trades at a sharp discount to the overall market, which could present a buying opportunity for industry behemoths.

Photo: brian snyder/Reuters

In the year ahead, investors should expect Big Pharma to have its wallet open. Investors hunting for buyouts should think big.

Total deal volume for the drug industry has reached $253 billion globally so far this year, according to Dealogic. That is down from a record $432 billion in 2019. The onset of the coronavirus pandemic, coupled with election-related uncertainty over future industry regulations meant fewer large deals were agreed upon.

Investors are expecting that to change, and for good reason. For starters, the regulatory outlook seems far brighter than some had feared. President-elect
Joe Biden

did vow to implement tough new drug-pricing measures during the campaign. But with the pandemic still unfolding, it is unlikely to be a priority for the administration.

The ultimate balance of power in the Senate is still uncertain, but the blue wave that investors feared ahead of the election didn’t materialize. Even with a narrow Democratic majority, getting broad legislation through the Senate will be a challenge. And while Big Pharma is always a popular target for politicians, the industry might get some political capital from having developed safe and effective Covid-19 vaccines in record time.

As such, deal activity has picked up lately. This month,
AstraZeneca
agreed to purchase
Alexion Pharmaceuticals
for $39 billion in cash and stock, and
Eli Lilly
agreed to buy gene-therapy startup
Prevail Therapeutics
for $880 million in upfront cash and more than $1 billion if certain development milestones are reached.

The industry’s hard realities mean that the biggest companies are constantly shopping. Most drug candidates never reach the market, and those that do face patent expirations and the possibility of a superior product being developed.

Drugmakers have also been less willing to raise prices on existing medicines in recent years. Retail prescription-drug prices fell 0.4% in 2019 and 1% in 2018, according to data from the Centers for Medicare and Medicaid Services. List-price increases for bigger-ticket drugs still occur, but much of that extra money winds up in the hands of middlemen instead of as revenue for the manufacturer. That reduces the chances of unwanted attention in Washington, but also stymies an easy way to please Wall Street. And with ultralow interest rates and strong balance sheets across the industry, the consequences of overpaying on a deal are fairly minimal.

Indeed, deals won’t come cheaply. A broad index of small and midsize biotech stocks has rallied about 50% so far this year. Of course, the majority of biotech companies won’t be acquired, and even the most exciting stocks are highly risky and volatile.

Bigger biotechs lack as much potential upside, but should be a safer bet. For example,
Gilead Sciences
and
Biogen
are down more than 50% each since 2015 as investor concerns about their pipelines of new drugs have grown. But each company generates significant cash flow and trades at a sharp discount to the overall market, which could present a buying opportunity for industry behemoths.

That strategy has paid off previously. Bristol-Myers Squibb purchased Celgene for $74 billion in cash and stock last year, a 54% premium. Despite investor skepticism at the time, Bristol shares have rallied about 30% since the deal was announced in January 2019.
AbbVie
has also performed well after acquiring Botox-maker Allergan last year.

Investors holding some unpopular stocks might see a turn in their fortunes in the new year.

Write to Charley Grant at charles.grant@wsj.com