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Low Cost of Capital, Revenue Replacement for Drugs That Lost Patent Protection are Major Drivers of M&A in the Pharma Space

67 WALL STREET, New York - April 30, 2013 - The Wall Street Transcript has just published its Biotechnology and Pharmaceuticals Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs and Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Health Care - Biotechnology and Pharmaceuticals - Executive Officer Interviews - Biotechnology and Pharmaceutical Investing - Orphan Drug and Biologics Manufacturing - Biotechnology and Pharmaceutical Companies Valuation

Companies include: Celgene Corporation (CELG), Incyte Corporation (INCY), Eli Lilly & Co. (LLY), Neurocrine Biosciences Inc. (NBIX), AstraZeneca plc (AZN), Gilead Sciences Inc. (GILD), Theravance Inc. (THRX), GlaxoSmithKline plc (GSK), Biogen Idec Inc. (BIIB) and many more.

In the following excerpt from the Biotechnology and Pharmaceuticals Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Last time you spoke to us in late 2011, one of the big issues you were watching was the impact that health care reform would have on the sector. Now that we have some more clarity about how reform will be implemented, what do you expect the impact to be on your group? What issues remain unknown at this point?

Mr. Somaiya: Health care reform - higher discounts - had a modest impact on my coverage universe from a revenue perspective; about a 2% hit on the top line on average. The impact was negligible from an earnings perspective as most companies adjusted their spending and/or increased price. Obamacare was therefore a prevalent investor concern in 2010 and 2011, but the impact has been fairly minimal.

The principal concern that we have today relates to health of European economy and how that may manifest itself in terms of austerity measures. Individual countries can make decisions in terms of regulating health care and drug pricing at any given time point. And typically the rule is you should assume every year the pricing in Europe declines - pricing for drugs - so we model a 1% to 2% annual decline in price across the board for companies that sell overseas.

The other are of focus has been on M&A in the group. We saw some of it last year, but nowhere near what is possible given the clear need for major pharma companies to replace lost revenues for drugs that have lost patent protection. A company like AstraZeneca (AZN) would be a good example, given their decision recently to focus more on biologics. They are refocusing their R&D effort, and it has really been geared to spending more time developing biologic drugs, so that should also fuel M&A in the group.

Another driver of M&A is the low cost of capital, as companies are able to raise debt at 2% or 3%. So the cost of capital, typically, we assume is 10% or 11%, but it's just no longer true. The interest rates are low, and as a result, access to cash has...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.