Pfizer Inc. (NYSE:PFE)
Recently, there has been a lot of activity in the biopharma field regarding mergers and acquisitions, and the good news is that the party is not over yet. This is fantastic news for a few of the more obscure biotech stocks.
According to KPMG’s estimates, mergers, and acquisitions activity in the healthcare and life sciences industries in the United States reached around $71 billion during the first quarter of this year. This figure is more than twice as high as the $28 billion recorded during the same period in 2017. It is true that this figure takes into account Pfizer PFE +0.90%’s (NYSE:PFE) purchase of Seagen SGEN –0.24% (NASDAQ:SGEN) for $43 billion, but even if we exclude that transaction, deal volume in the industry would have remained relatively unchanged year over year.
The overall amount of mergers and acquisitions in the United States during the first quarter declined to just under $300 billion from just over $400 billion in the same period of the previous year. This is not such a terrible development. The issue has been an increase in interest rates, which makes financing a sale less attractive for buyers. This is especially true when taking into account the potential for decreased profits as a result of a slowing economy.
Since the end of the first quarter, there has not precisely been a slowdown in the number of agreements in the pharmaceutical industry. Merck (NYSE:MRK), which has a market value of $288 billion, made the news earlier this month that it will purchase Prometheus Biosciences (RXDX) for over $11 billion. This represents a premium of approximately 75% over the price before the announcement was made. The announcement caused a nearly identical increase in Prometheus shares.
Merck is looking to replace its slightly over $20 billion in annual revenue from the cancer medicine Keytruda, which resulted in a significant windfall for the shareholders of Prometheus. It is possible that the drug’s patent would expire in 2028, which would allow other companies to acquire market share and highlight the significance of Merck’s acquisition. Analysts at Mizuho believe there is a total market opportunity for Prometheus’ ulcerative colitis treatment of approximately $30 billion.
That is most likely just the beginning of new business opportunities that will arise in the sector.
Kristin Pothier, the leader of KPMG’s healthcare and life sciences deal advising and strategy practice, recently stated in a written piece that “We are entering a period of what I would call smart optimism in healthcare and life sciences.”
For a couple of different reasons, that makes perfect sense.
When viewed from the perspective of making acquisitions, some of the larger pharmaceutical companies are eager to update their medication pipelines. Revlimid’s revenues are expected to have reached their peak of a little over $12 billion in 2021 for Bristol Myers Squibb BMY +1.38% (BMY), a pharmaceutical company whose market capitalization is $146 billion. Revlimid treats myeloma. According to FactSet’s estimates, the company’s market share will decrease as its patent nears its expiration date, which will result in sales of the product falling into the low hundreds of millions.
The corporation is working on developing a number of new pharmaceuticals, but in order to safeguard its future, it may decide to acquire some smaller companies. Because Bristol possesses somewhat more than $9 billion in cash at the moment, it is possible that any significant acquisitions it makes may need to take on some debt. Pfizer financed almost 70 percent of its acquisition of Seagen using long-term debt, so this scenario is not completely out of the question.
According to RBC analyst Brian Abrahams, another company that may be interested in purchasing the company is Biogen BIIB +1.28% (BIIB). According to what he said, the corporation, which has a market valuation of $42 billion, has an interest in the neuro psych and inflammatory domain, and it is possible that the company will make a deal as soon as the second half of this year.
The value of many of these enterprises on the public market is currently significantly lower than it was in the past; as a result, it is simpler for an acquirer to complete the transaction of purchasing one of these businesses. Since it reached its all-time high in February 2021, the SPDR S&P Biotech ETF (XBI) has experienced a decline of around fifty percent. This is due to the fact that increased interest rates reduce the value of future revenues, and the bulk of the tiny biotech companies’ valuations are based on the assumption that they would generate the majority of their earnings in the distant future.
Abrahams believes that 89bio, which now has a market valuation of $1.2 billion but has seen its shares drop by more than half from its all-time high, could be a good candidate for acquisition. Also falling is the $7.4 billion Karuna Therapeutics stock, which has lost nearly 30 percent of its value after reaching an all-time high.
Another RBC biotech analyst named Gregory Renza cited a few others, such as the $1.8 billion Morphic Holding company, which has seen its value decrease by more than 35% from its all-time high, and the $706 million Ideaya Biosciences company, which has seen its value decrease by almost 50% from its all-time high.
Think about some of these more modest biotech companies. If it turns out to be difficult to find purchasers for their equities, shareholders could receive a huge return on their investment if a larger firm decides to make an acquisition of the company.
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