The WSJ published a nice missive on the pharma industry and their quest for growth:
From the article:
Pharmaceutical executives are ready to make deals.
Executives at Pfizer Inc., PFE 0.10%increase; green up pointing triangle Merck MRK 0.72%increase; green up pointing triangle & Co. and Novartis AG NVS 1.08%increase; green up pointing triangle said they are looking for promising drugs to add to their pipelines and replenish sales as top-selling products lose patent protection in the coming years.
Meanwhile, AbbVie Inc. ABBV 1.06%increase; green up pointing triangle is lifting a self-imposed $2 billion limit on the size of deals it would do to add more products.
The acquisitions could help the companies add new sales to aging lineups and suggest this year could be a busy one for industry dealmaking.
We have been saying for a while now that we feel the M&A market is about to get hot. Coming out of the largest and deepest drawdown, not to mention the first back-to-back negative years, it seems like the sector is primed for some activity. Most especially, these larger companies are sitting on a lot of cash and have mandates to grow.
3 key points:
Many big pharma companies have record cash levels on their balance sheets.
At the same time, many small biotech firms are trading at less than the value of their cash.
As big pharma seeks to grow pipelines, these small firms become takeout targets.1
Things to keep in mind as it relates to investing in the space:
Unlike in FAANG or other market segments where the market leaders are obvious – it is hard to figure out who are the best companies in life sciences
Fundamentals matter in life sciences / healthcare as only products that provide clear value to patients, physicians, and payors will be used and generate meaningful revenue
Figuring out the fundamentals though is complex due to scientific / technical complexity, regulatory landscape, manufacturing, IP, etc.
Over the past 16 years, the XBI was up 11 of those years with an average return of 28.77%
As always, be careful and prudent. Past performance does not predict future results but this seems like a very interesting space.