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Here Comes Biotech's Buyout Boom

18 April 2013 in Trading Ideas

Expectations that 2013 will be a huge year for big-ticket mergers in the biotech sector crystallized a bit more this week with news that laboratory-equipment maker Thermo Fisher Scientific (TMO) was plunking down $13.6 billion for Life Technologies (LIFE).

The deal’s endgame was highlighted by the fact that Thermo Fisher ended up having to fend off two other rivals in the bidding – a private equity group and Sigma-Aldrich (SIAL), both of whom were enticed by Life Tech’s gene-sequencing efforts.

Ironically, Life Tech was itself formed by a series of mergers five years ago.

This deal dovetails neatly with projections that large pharmaceutical and biotech companies are ready to start acquiring again after spending the last several years digesting earlier mergers, refocusing their product development, and setting aside cash in anticipation of expiring patents.

However, as always, the question for any deal is – at what price? As Bloomberg reported in January, many merger-hungry Big Pharma companies are also interested in being careful buyers, looking to avoid purchases where valuations have risen too high.1

As Bloomberg said, some biotech companies that make a single product have seen their stocks triple or quadruple in the last couple of years, to market caps of $2 billion to $5 billion, as those products have found success. As a result, bigger firms may look elsewhere, such as to larger firms with more reasonable valuations and more established products.

Still, if organic growth at larger biotech and pharma firms is being threatened – and they are, due to reduced research and development budgets, says Bloomberg – then acquisitions may be necessary to drive revenue and hold up stock prices.

Biotech Breakthroughs MotifAll of this isn’t to say, however, that the performance of biotech stocks as a whole is reliant on M&A activity. Biotech stocks have been on a tear for about 18 months, while the number of M&A deals from 2010-2012 was little changed in each year (although the total dollar amount was down in 2012).2 The risk-on nature in overall market sentiment recently has, for now, treated the sector and its shareholders very well.

The Biotech Breakthroughs motif has gained 23.8% so far this year and 63.4% for the past 12 months.

1Meg Tirrell, Jeffrey McCracken & Drew Armstrong, “Pharma Deals North of $10 Billion Seen Returning in 2013,” Bloomberg.com, Jan. 6, 2013, http://www.bloomberg.com/news/2013-01-07/pharma-deals-north-of-10-billion-seen-returning-in-2013.html, (accessed April 16, 2013).

2Don Seifert, “Lots of biotech M&A expected in 2013, but it may be a seller’s market,” bizjournals.com, Feb. 5, 2013, http://www.bizjournals.com/boston/blog/bioflash/2013/02/lots-of-biotech-ma-expected-in-2013.html?page=all, (accessed April 16, 2013).