M&A in pharmaceuticals poised to pick up

  • Merger-and-acquisition activity in the biotechnology space is poised to reverse course and take off as more pharmaceutical companies look to enhance their drug pipeline after a slowdown in consolidation in 2022, according to Fidelity's Karim Suwwan de Felipe.
  • "The recent slowdown in M&A involving biotech firms has piqued the interest of several pharmaceutical companies that are now in a shopping mood," explains Suwwan de Felipe, portfolio manager of Fidelity® Select Pharmaceuticals Portfolio.
  • He notes that the slowdown followed a boom for the group in 2021, after the height of the COVID-19 pandemic in 2020, and partly because of the challenging macroeconomic backdrop.
  • Suwwan de Felipe classifies pharmaceutical firms into two categories. The first are those with a strong drug pipeline, long-term growth prospects and cash flow, and little exposure to drug exclusivity. The second consists of firms with key patent expiries looming in the coming years, as well as a hole to fill in their pipeline.
  • Companies in the first group, he says, view the recent sell-off in biotech as an opportunity. They are not looking to fill a revenue gap and can choose to acquire or initiate licensing deals to bring in biotech assets at a reasonable valuation that were once out of reach.
  • Meanwhile, firms in the second group are interested in acquiring biotechs to broaden their drug portfolios, according to Suwwan de Felipe. "These deals can come with a cost: Pharma firms can pay a high price to acquire revenue in the short term, without adding value in the long term," he says. "I expect M&A activity to exacerbate the differences between the two types of pharma companies."
  • The portfolio manager thinks Pfizer is a good example of a company in the second category. In early May, the company announced a plan to raise $31 billion to fund its proposed acquisition of oncology-focused biotech Seagen. Pfizer has a reported goal of acquiring $25 billion in revenue.
  • Similarly, he points to Johnson & Johnson, which in November acquired Abiomed, a maker of circulatory-support devices, at a high price to try to prop up its struggling medical-device business.
  • Suwwan de Felipe is most interested in the stocks of companies in his second bucket. "Drugmakers Eli Lilly and Merck have recently initiated strategic licensing deals with biotech firms developing drugs for lung cancer, hypertension, and more," he explains. In his view, these deals offer the firms promising opportunities without the relatively high price.
  • As of May 31, Eli Lilly and Merck were top portfolio holdings and overweights relative to the industry benchmark. Meanwhile, the fund did not own J&J or Pfizer, making them the largest underweights.
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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