There’s long been talk of a new wave of biotech mergers and acquisitions activity coming to life. In modest amounts, there has been evidence of that playing out. But that’s not to the extent market participants are accustomed to. That could soon change.
Assuming more biotech consolidation activity arrives, it could benefit ETFs like the ALPS Medical Breakthroughs ETF (SBIO). The fund follows the S-Network Medical Breakthroughs Index. SBIO has long been mentioned as one of the prime ETF plays on biotech takeover activity. That’s because its index caps constituents at market values of $5 billion upon inclusion. And that’s fertile territory for prospective buyers.
Speaking of potential suitors for biotech companies, perhaps including some SBIO holdings, large-cap pharmaceuticals companies have the need and the resources to make biotech deals.
Need, Resources Could Boost Biotech M&A
A recent report by Morgan Stanley analysts led by Terence Flynn confirms the pair of aforementioned factors. Big pharma companies are facing upcoming patent cliffs that could risk as much as $180 billion in revenue. But those firms also have $380 billion in cash with which to go shopping. Morgan Stanley says blue-chip pharma companies face patent cliffs that risk $183.5 billion in sales. And those protections running through 2030.
Cash-rich pharma companies such as Biogen (BIIB), Bristol Meyers (BMY), and Merck (MRK) are among those that could be pinched by loss of exclusivity (LOE). But they are also among those with the capital to go shopping in the biotech arena.
“Given the magnitude of the upcoming LOEs and the strength of balance sheets across the industry, we continue to believe the conditions for M&A are favorable,” according to Morgan Stanley.
The analysts said Merck is facing LOE on cancer therapy Keytruda and that it has the balance sheet with which to consider acquisitions. Whether or not that results in Merck buying an SBIO member firm remains to be seen. But several of the ETF’s holdings have exposure to oncology and immunology.
Ripe Corners of Biotech Space
That’s relevant because those are two corners of the biotech space most ripe for deal-making. Morgan Stanley noted that of the 34 most examples of blue-chip pharma firms buying biotech companies, 20 of the targets were oncology and immunology companies.
SBIO could prove particularly pertinent because the ETF’s index mandates that components have at least one drug or therapy in Phase II or Phase III trials. Large pharma companies have significant financial resources. So they can pay up for biotech that is further along in the clinical trial process. And that reduces some of the risk associated speculative pre-trial or Phase I firms.
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VettaFi LLC (“VettaFi”) is the index provider for SBIO, for which it receives an index licensing fee. However, SBIO Is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SBIO.
