By Amruta Khandekar and Leroy Leo
(Reuters) – Plunging valuations have made biotech companies tempting acquisition targets for cash-rich Big Pharma and a flurry of deals is just what the battered sector needs to turn a corner.
Pfizer’s $5.4 billion acquisition of Global Blood Therapeutics, which was announced on Monday, is the fourth deal in the sector since the pharma giant bought Biohaven for $11.6 billion in May, adding to optimism that large drugmakers are back in the market to pick up cheaper firms.
Industry experts predict biotech firms that are closer to getting their product to market or already have a drug approved are likely to become M&A targets for large drugmakers, some of whom are staring at patent expirations of their cash cow drugs.
“(There have been) acquisitions of companies that have late-stage assets and also the theme of large-cap companies keeping an eye on mid-caps approaching blockbusters,” RBC Capital Markets analyst Gregory Renza said. “So needing to replenish portfolios and finding companies like those are key.”
“Pfizer’s move put boards across big pharma on notice that if you’re not in the market buying these companies while they’re cheap, your competitors will,” Thomas Hayes, chairman and managing member of Great Hill Capital in New York, said.
Sentiment around the beaten-down sector has improved in the past month.
About $86 million was poured into iShares Biotechnology ETF in July, compared with $7 million in June, following outflows in the two preceding months, according to Refinitiv Lipper data.
The number of stocks in the biotech index that trade below their cash level has also reduced. One of four biotech stocks that are part of the index now trade below their cash level, from one of three in the last week of June, Refinitiv data showed.
“The fundamentals are strong as ever, the valuations have corrected and the acquirers have a boatload of money,” said Lee Brown, global healthcare leader for investment research firm Third Bridge. “So it’s sort of like – let’s party.”