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Will Patent Woes Boost Pharma Stock Megamergers Further?

Nilanjan Banerjee
Investors will primarily focus on Jakafi sales and pipeline updates, when Incyte (INCY) reports second-quarter 2019 results.

Generic competition can lower revenues of pharma stocks since blockbuster drugs are facing patent expirations. Moreover, President Trump’s issuance of an executive order to slash drug prices did not go down well with pharmaceutical stocks. Both these events could create appetites for further mergers and acquisitions among major pharma socks to combat the pricing pressure prevailing in the industry.

Notably, the fundamentals of most of the drug giants are highly favorable to carry on further acquisitions, since their balance sheets are investment graded and generating handsome cash flows. Thus, the majority of  pharma firms are in a favorable position to raise debt capital from the market, which could be favored by low interest rates, to further boost merger transactions. 

Major Pharma Deals in Recent Times

We have seen a spree of mergers among key pharmaceutical players, in hopes of better sustaining themselves in challenging business scenarios. The remarkable one is the planned acquisition of Allergan plc AGN by AbbVie Inc. ABBV that was announced in June 2019. This transaction was valued at $63 billion. Both Allergan and AbbVie carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Another notable deal is Bristol-Myers Squibb Company’s BMY $74-billion acquisition agreement, which was announced in January 2019, with rival Celgene Corporation CELG. Last year’s acquisition of Shire plc by leading Japanese drug manufacturer Takeda Pharmaceutical Co. for $58 billion is also noteworthy.

Patent expirations of top-selling drugs and pricing pressure are among the major challenges haunting pharma stocks. Although AbbVie’s Humira — which is prescribed for treating rheumatoid arthritis — is safe from biosimilar competition in the United States till 2023, the top-selling anti-inflammatory drug is losing sales in European market. Moreover, Restasis, prescribed for chronic dry eye problem, is losing exclusivity. Importantly, Restasis is the leading selling product of drug maker Allergan.  

Factors Driving Merger Spree to Continue in 2H

Patent expiry is probably increasing the appetite of pharma stocks for more megamergers in the second half of this year at bargain prices. This is because, via mergers and acquisitions, the companies will be able to boost product lines, thereby maximizing annual revenues. In other words, with blockbuster drugs losing exclusivity, key drug makers are poised to face deep trouble, thereby creating rooms for megamergers. This is because sales of many of the firms are significantly dependent on a single drug.

Another notable factor that could drive the merger spree is the prolonged period of no new blockbuster drug, which is limiting the growth potential of pharma stocks, according to The Wall Street Journal. The source added that many serious medical threats have already been encountered in the pharma space, thereby creating limited rooms for fresh shareholder wealth generations. Notably, the pharma sector is focusing on a few target areas that include certain liver diseases and Alzheimer’s disease. However, these targets are unlikely to generate revenues following failures in a series of clinical trials. 

Potential Acquisition Targets

Mizuho Securities has pinpointed three pharma stocks, namely Amgen Inc. AMGN, Biogen Inc. BIIB and Gilead Sciences Inc. GILD, which could be potential acquisition targets at bargain prices. The Japanese investment bank added that the stocks are not expected to witness massive revenue growth in the coming five years, which further encourages the firms to enter into merger deals.

Amgen, Biogen and Gilead Sciences are trading at 12.65X, 7.76X and 9.70X, respectively, significantly lower than the forward 12-month price to earnings of 55.74X for the Zacks Medical - Biomedical & Genetics industry. The valuation picture confirms that the stocks are significantly undervalued to invite potential acquirers.

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AbbVie Inc. (ABBV) : Free Stock Analysis Report
Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
Allergan plc (AGN) : Free Stock Analysis Report
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Biogen Inc. (BIIB) : Free Stock Analysis Report
Amgen Inc. (AMGN) : Free Stock Analysis Report
Celgene Corporation (CELG) : Free Stock Analysis Report
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