Experienced investors know that talk of mergers and acquisitions activity is a near constant in the healthcare industry.
Due to the sluggish pace of deal-making last year owing to the onset of the coronavirus pandemic, as well as a bright post-pandemic outlook for some pharmaceuticals companies, the back half of 2021 has the potential to be brisk on the biotech consolidation front. The ALPS Medical Breakthroughs ETF (SBIO) is one of the exchange traded funds most levered to that theme.
Several factors augur well for more biotech mergers and acquisitions activity.
“Within the life sciences ecosystem, the development of biotechnologies and the shift in drug pipelines from small to large molecule have been picking up speed for a decade. The pandemic has also served as a catalyst to propel the sector and its capabilities into the mainstream of investor interest and public understanding,” writes Adam Lohr of RSM US LLP.
Playing to SBIO Strengths
There are a couple of positives on the SBIO-specific front. First, as has been widely noted, when SBIO components are added to the fund, they have market values of $200 million to $5 billion. Many SBIO holdings are easily digestible for suitors.
Second, SBIO member firms must have at least one treatment in Phase II or Phase III U.S. Food and Drug Administration (FDA) clinical trials. That removes some the speculative elements of smaller biotech companies for investors.
That requirement should not be underestimated. According to RSM data, there are over 15,000 drugs, vaccines, therapies in treatments around the world that are anywhere from the filing stage to fully marketed.
Of that group of 15,000 treatments, just about 20% are in the equivalent of Phase II or Phase III trials. That could create a scarcity premium suitors have to acknowledge.
Fortunately, SBIO’s market cap range isn’t too big as to not take advantage of rising M&A activity.
“More than 90% of life sciences M&A is for deals of less than $500 million, and they usually consist of pharmaceutical companies making acquisitions of pre-commercial middle market companies,” adds Lohr.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.