Post by stcks on Nov 20, 2016 4:31:00 GMT
10 biotech companies ripe for a buyout, courtesy of Donald Trump
“We should see an explosion of deal activity” in biotech, says Jefferies analyst Steven DeSanctis.
www.marketwatch.com/story/10-biotech-companies-ripe-for-a-buyout-courtesy-of-donald-trump-2016-11-17?link=sfmw_tw
MichaelBrush
The Republican sweep of Washington has generated a ton of enthusiasm for biotech stocks. They’re up 10% to 15% since the elections. As a result, biotech analysts’ phones are ringing off the hook again after a depressingly bleak October.
“I feel like a rejuvenated man,” says RBC Capital Markets biotech analyst Michael Yee. “Once again, people are coming back to talk about biotech. We are back in gear.”
But can the Donald Trump biotech rally really last?
In short, yes.
Republican control of the White House and both branches of Congress brings such a fundamental shift for the sector that more gains inevitably lie ahead, with the normal volatility that always comes with biotech stocks, of course.
“My sense is stay long,” says Yee. “Stay the course. The path of least resistance is higher.”
Here are seven reasons why.
Reason 1: The government drug-price-control threat is gone for now
With Bernie Sanders and Hillary Clinton relegated to the sidelines, the days when they could shave billions in market value off the group with a single tweet against “high” drug prices are over.
Also, California rejected a key initiative, Proposition 61, that would have benchmarked the state’s drug prices to those that the U.S. Department of Veterans Affairs gets, essentially the lowest prices in the U.S.
“If the most liberal state in the country voted against Prop 61, a model for what extreme government drug-pricing controls could look like, it certainly seems to us like Bernie Sanders’ pipe dream isn’t going to materialize,” says Baird biotech analyst Brian Skorney.
He thinks the biggest beneficiaries of this shift will be companies with unique products that face minimal competition, but were hit the most by concerns about price controls.
He cites Vertex Pharmaceuticals VRTX, -1.93% Sarepta Therapeutics SRPT, +0.03% BioMarin Pharmaceutical BMRN, -1.92% Celgene CELG, -0.09% and Alexion Pharmaceuticals ALXN, -2.54%
To be sure, state pushback on drug pricing is not over. A measure similar to Proposition 61 is on the ballot in Ohio next year. But so far, only Vermont has passed a law pushing back on drug prices. In contrast, Prop 61-like legislation has failed in five states, points out Jefferies analyst Brian Abrahams.
Reason 2: An “explosion” of mid-cap biotech buyouts is on the way
“For a year and a half, people have recognized that the big pharmaceutical companies need to replenish their pipelines,” says Brad Loncar, of Loncar Investments, which specializes in biotech companies, particularly those looking for cancer cures.
The toxic political environment and uncertainly about drug-price controls have probably held them back. Now those threats are diminished.
And another huge mergers-and-acquisitions catalyst lies around the corner: Trump wants to change tax laws to make it easier for U.S. companies to repatriate foreign earnings stashed abroad.
Jefferies analyst Steven DeSanctis estimates that $112 billion could flow back to U.S.-based pharma and biotech companies like Johnson & Johnson JNJ, -0.35% Pfizer PFE, -0.79% and Merck MRK, -1.32% as a result. The upshot is that any of them could engage in “large-scale” M&A in 2017.
“We should see an explosion of deal activity,” says DeSanctis. “With Trump being more business-friendly, we feel that deal activity will persist for a long time.”
Companies don’t actually have to wait for the money to arrive to arrange deals, as long as they see that tax-law changes are in the works to clear the way. “We believe these companies only need to have visibility into tax reform to begin to execute, as low-interest debt could be raised in the near term and paid down once the new legislation is passed,” says Skorney.
Jay Silverman, who writes the Medical Technology Stock Letter, expects at least one deal before year-end. But that could be a modest estimate. The reason: November and December are historically the two biggest months for biotech M&A, says Jefferies’ Abrahams.
Who will get bought out? No one really knows. But here are some educated guesses from the experts.
* Yee, at RBC Capital Markets, puts Biogen BIIB, -0.72% Incyte INCY, -1.82% and BioMarin high on his list of potential buyout candidates.
* Skorney, at Baird, cites Neurocrine Biosciences NBIX, -2.41% Axovant Sciences AXON, -2.33% Sarepta, BioMarin and Tesaro TSRO, -1.60% from his coverage universe.
* Silverman, at the Medical Technology Stock Letter, cites Ionis Pharmaceuticals IONS, -2.76% Incyte and The Medicines Co. MDCO, -0.05% from among the names his publication covers.
From my stock newsletter, Brush Up on Stocks, and my own personal holdings, I’ll cite Acadia Pharmaceuticals ACAD, +1.48% which has been frequently rumored as a buyout candidate in the press.
Reason 3: The glass is half full again
For too long, biotech investors have been damned if their companies do, and damned if they don’t. In other words, they got hammered if their companies’ drug candidates disappointed in study results. But biotech has been so widely hated, there were few buyers to reward companies for positive results.
Biotech investing was a lose-lose.
But now, with a lot of the political rhetoric against biotech companies off the table because Trump pushed Sanders and Clinton to the sidelines, biotech stocks can react to fundamentals again, points out Yee.
“There is more positive risk-reward on clinical events,” he says. “Now fundamentals matter. It’s a glass-half-full market.”
Positive clinical results can come from any company at any moment. Biomarin, Incyte and AstraZeneca AZN, -0.84% all have potentially good news coming out over the next several months, for example.
But the big one everyone is watching is Eli Lilly LLY, -1.34% Between now and year-end, Lilly is expected to announce results in its studies on the use of a drug called solanezumab against Alzheimer’s disease. There’s no cure for this disease. So this could be a big catalyst for the group.
Reason 4: Market-moving conferences are around the bend
Market-moving study results also pop out at industry conferences. A few key meetings lie just around the corner. The American Society of Hematology (ASH) meeting will take place in early December. That will be followed by the San Antonio Breast Cancer Symposium. Then there’s the Super Bowl of biotech, the J.P. Morgan 35th Annual Healthcare Conference 2017, in early January.
Reason 5: Food & Drug Administration reform may help
Trump has promised FDA reform “to put greater focus on the need of patients for new and innovative medical products.” It’s not entirely clear what he has in mind. But most likely this means less-stringent standards for drug approval. If this goes through, it could be a positive for biotech companies, though the timing is uncertain.
Reason 6: A medical-device tax repeal is likely
The Affordable Care Act (ACA), or Obamacare, imposed a 2.3% tax on medical-device manufacturers.
That tax is now likely to be repealed next year, says Cowen analyst Eric Assaraf. This would benefit medical-device makers like Medtronic MDT, -1.06% Baxter International BAX, -0.25% Abbott Laboratories ABT, -1.36% and Johnson & Johnson.
Hillary Clinton tells supporters to 'never, ever give up'
Reason 7: Mutual fund managers play catch-up in biotech
Biotech was so despised for so much of 2016, thanks to Clinton’s and Sanders’ rhetoric against drug prices, that many fund managers were underweight. So they got burned badly by the recent biotech rally.
That means they are more likely to underperform indices and benchmarks, which contain a lot of biotech. So now they have to play catch-up.
“There’s a real sense that investors were completely caught offside with the election,” says Yee at RBC. “People have to start scurrying to get back on side. Generalists are still trying to figure it all out. That’s going to drive a lot of money to biotech.”
In short, any pullbacks could be shallow as fund managers use retreats to increase exposure to the group.
Biotech risks
Of course, biotech being biotech, there are always risks. You can expect the typical roller-coaster ride with these stocks as a result, and you should not invest in this group unless you can deal with that, psychologically.
* One of the key risks is that Trump has vowed to repeal and replace Obamacare. Since Obamacare has extended health insurance to over 20 million people, a repeal would cause a noticeable cutback in health-care spending.
However, as I’ve argued, it’s pretty unlikely that Trump will be able to change Obamacare in a way that takes health insurance away from 20 million people.
* There can be surprise headlines at any moment, like the recent news that the Department of Justice is investigating possible collusion on generic drug prices.
* Biotech is a “high beta” group, another way of saying that if falls more than a lot of other groups in any broad market pullback, which can happen at any moment.
* Finally, while Sanders and Clinton have been neutralized in their capacity to tank the sector with tweets, the drug-price issue has not gone away. Insurance companies will continue to resist high prices and demand follow-up studies from drug companies to prove that their products help patients.
“The election does not mean the sector’s problems are going away, by any means,” says Loncar. “The government is only part of this story.”
At the time of publication, Michael Brush held INCY and ACAD. Brush has suggested INCY, ACAD, BIIB, CELG. BMRN, SRPT, PFE and JNJ in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
More from MarketWatch
“We should see an explosion of deal activity” in biotech, says Jefferies analyst Steven DeSanctis.
www.marketwatch.com/story/10-biotech-companies-ripe-for-a-buyout-courtesy-of-donald-trump-2016-11-17?link=sfmw_tw
MichaelBrush
The Republican sweep of Washington has generated a ton of enthusiasm for biotech stocks. They’re up 10% to 15% since the elections. As a result, biotech analysts’ phones are ringing off the hook again after a depressingly bleak October.
“I feel like a rejuvenated man,” says RBC Capital Markets biotech analyst Michael Yee. “Once again, people are coming back to talk about biotech. We are back in gear.”
But can the Donald Trump biotech rally really last?
In short, yes.
Republican control of the White House and both branches of Congress brings such a fundamental shift for the sector that more gains inevitably lie ahead, with the normal volatility that always comes with biotech stocks, of course.
“My sense is stay long,” says Yee. “Stay the course. The path of least resistance is higher.”
Here are seven reasons why.
Reason 1: The government drug-price-control threat is gone for now
With Bernie Sanders and Hillary Clinton relegated to the sidelines, the days when they could shave billions in market value off the group with a single tweet against “high” drug prices are over.
Also, California rejected a key initiative, Proposition 61, that would have benchmarked the state’s drug prices to those that the U.S. Department of Veterans Affairs gets, essentially the lowest prices in the U.S.
“If the most liberal state in the country voted against Prop 61, a model for what extreme government drug-pricing controls could look like, it certainly seems to us like Bernie Sanders’ pipe dream isn’t going to materialize,” says Baird biotech analyst Brian Skorney.
He thinks the biggest beneficiaries of this shift will be companies with unique products that face minimal competition, but were hit the most by concerns about price controls.
He cites Vertex Pharmaceuticals VRTX, -1.93% Sarepta Therapeutics SRPT, +0.03% BioMarin Pharmaceutical BMRN, -1.92% Celgene CELG, -0.09% and Alexion Pharmaceuticals ALXN, -2.54%
To be sure, state pushback on drug pricing is not over. A measure similar to Proposition 61 is on the ballot in Ohio next year. But so far, only Vermont has passed a law pushing back on drug prices. In contrast, Prop 61-like legislation has failed in five states, points out Jefferies analyst Brian Abrahams.
Reason 2: An “explosion” of mid-cap biotech buyouts is on the way
“For a year and a half, people have recognized that the big pharmaceutical companies need to replenish their pipelines,” says Brad Loncar, of Loncar Investments, which specializes in biotech companies, particularly those looking for cancer cures.
The toxic political environment and uncertainly about drug-price controls have probably held them back. Now those threats are diminished.
And another huge mergers-and-acquisitions catalyst lies around the corner: Trump wants to change tax laws to make it easier for U.S. companies to repatriate foreign earnings stashed abroad.
Jefferies analyst Steven DeSanctis estimates that $112 billion could flow back to U.S.-based pharma and biotech companies like Johnson & Johnson JNJ, -0.35% Pfizer PFE, -0.79% and Merck MRK, -1.32% as a result. The upshot is that any of them could engage in “large-scale” M&A in 2017.
“We should see an explosion of deal activity,” says DeSanctis. “With Trump being more business-friendly, we feel that deal activity will persist for a long time.”
Companies don’t actually have to wait for the money to arrive to arrange deals, as long as they see that tax-law changes are in the works to clear the way. “We believe these companies only need to have visibility into tax reform to begin to execute, as low-interest debt could be raised in the near term and paid down once the new legislation is passed,” says Skorney.
Jay Silverman, who writes the Medical Technology Stock Letter, expects at least one deal before year-end. But that could be a modest estimate. The reason: November and December are historically the two biggest months for biotech M&A, says Jefferies’ Abrahams.
Who will get bought out? No one really knows. But here are some educated guesses from the experts.
* Yee, at RBC Capital Markets, puts Biogen BIIB, -0.72% Incyte INCY, -1.82% and BioMarin high on his list of potential buyout candidates.
* Skorney, at Baird, cites Neurocrine Biosciences NBIX, -2.41% Axovant Sciences AXON, -2.33% Sarepta, BioMarin and Tesaro TSRO, -1.60% from his coverage universe.
* Silverman, at the Medical Technology Stock Letter, cites Ionis Pharmaceuticals IONS, -2.76% Incyte and The Medicines Co. MDCO, -0.05% from among the names his publication covers.
From my stock newsletter, Brush Up on Stocks, and my own personal holdings, I’ll cite Acadia Pharmaceuticals ACAD, +1.48% which has been frequently rumored as a buyout candidate in the press.
Reason 3: The glass is half full again
For too long, biotech investors have been damned if their companies do, and damned if they don’t. In other words, they got hammered if their companies’ drug candidates disappointed in study results. But biotech has been so widely hated, there were few buyers to reward companies for positive results.
Biotech investing was a lose-lose.
But now, with a lot of the political rhetoric against biotech companies off the table because Trump pushed Sanders and Clinton to the sidelines, biotech stocks can react to fundamentals again, points out Yee.
“There is more positive risk-reward on clinical events,” he says. “Now fundamentals matter. It’s a glass-half-full market.”
Positive clinical results can come from any company at any moment. Biomarin, Incyte and AstraZeneca AZN, -0.84% all have potentially good news coming out over the next several months, for example.
But the big one everyone is watching is Eli Lilly LLY, -1.34% Between now and year-end, Lilly is expected to announce results in its studies on the use of a drug called solanezumab against Alzheimer’s disease. There’s no cure for this disease. So this could be a big catalyst for the group.
Reason 4: Market-moving conferences are around the bend
Market-moving study results also pop out at industry conferences. A few key meetings lie just around the corner. The American Society of Hematology (ASH) meeting will take place in early December. That will be followed by the San Antonio Breast Cancer Symposium. Then there’s the Super Bowl of biotech, the J.P. Morgan 35th Annual Healthcare Conference 2017, in early January.
Reason 5: Food & Drug Administration reform may help
Trump has promised FDA reform “to put greater focus on the need of patients for new and innovative medical products.” It’s not entirely clear what he has in mind. But most likely this means less-stringent standards for drug approval. If this goes through, it could be a positive for biotech companies, though the timing is uncertain.
Reason 6: A medical-device tax repeal is likely
The Affordable Care Act (ACA), or Obamacare, imposed a 2.3% tax on medical-device manufacturers.
That tax is now likely to be repealed next year, says Cowen analyst Eric Assaraf. This would benefit medical-device makers like Medtronic MDT, -1.06% Baxter International BAX, -0.25% Abbott Laboratories ABT, -1.36% and Johnson & Johnson.
Hillary Clinton tells supporters to 'never, ever give up'
Reason 7: Mutual fund managers play catch-up in biotech
Biotech was so despised for so much of 2016, thanks to Clinton’s and Sanders’ rhetoric against drug prices, that many fund managers were underweight. So they got burned badly by the recent biotech rally.
That means they are more likely to underperform indices and benchmarks, which contain a lot of biotech. So now they have to play catch-up.
“There’s a real sense that investors were completely caught offside with the election,” says Yee at RBC. “People have to start scurrying to get back on side. Generalists are still trying to figure it all out. That’s going to drive a lot of money to biotech.”
In short, any pullbacks could be shallow as fund managers use retreats to increase exposure to the group.
Biotech risks
Of course, biotech being biotech, there are always risks. You can expect the typical roller-coaster ride with these stocks as a result, and you should not invest in this group unless you can deal with that, psychologically.
* One of the key risks is that Trump has vowed to repeal and replace Obamacare. Since Obamacare has extended health insurance to over 20 million people, a repeal would cause a noticeable cutback in health-care spending.
However, as I’ve argued, it’s pretty unlikely that Trump will be able to change Obamacare in a way that takes health insurance away from 20 million people.
* There can be surprise headlines at any moment, like the recent news that the Department of Justice is investigating possible collusion on generic drug prices.
* Biotech is a “high beta” group, another way of saying that if falls more than a lot of other groups in any broad market pullback, which can happen at any moment.
* Finally, while Sanders and Clinton have been neutralized in their capacity to tank the sector with tweets, the drug-price issue has not gone away. Insurance companies will continue to resist high prices and demand follow-up studies from drug companies to prove that their products help patients.
“The election does not mean the sector’s problems are going away, by any means,” says Loncar. “The government is only part of this story.”
At the time of publication, Michael Brush held INCY and ACAD. Brush has suggested INCY, ACAD, BIIB, CELG. BMRN, SRPT, PFE and JNJ in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
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