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Mergers & Acquisitions Take Center Stage in Biotech Industry

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The Zacks Biomedical And Genetics industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs. These biologically processed drugs, targeted toward virology, neuroscience, metabolism and rare diseases, are manufactured using live organisms. The main goal of biotech companies is to use technology to create breakthrough drugs. Given the dynamic and evolving nature of technology, the space is riskier than the more stable large-cap pharma or drug industry.

Here are the three major industry themes:

  • Just a handful of companies in this space have approved drugs and hence the focus is on product pipelines. Most companies spend millions to create a drug with pathbreaking technology, which increases R&D expenditure. Any unfavorable outcome from a key trial on a promising candidate can spell doomsday for that particular biotech player and vice versa. Moreover, it might take quite a few years for any newly approved drug to contribute significantly to the top line.
  • Consolidation has been an important trend in this dynamic sector as leading biotech companies look to diversify their revenue base. Attractively modest valuations following a disappointing run in 2018 sparked renewed interest in the ever-volatile biotech sector from the onset of this year. The spotlight is back on mergers & acquisitions. A slowdown in mature products due to increasing competition and rise of biosimilars forced most pharma/biotech behemoths to target lucrative buyouts in this space to bolster their pipelines. While oncology and immuno-oncology are the key areas of focus, treatments for non-alcoholic steatohepatitis and rare diseases also hold potential, thereby making them profitable areas of investment. In addition, in-licensing deals continue to increase with the bigwigs collaborating with smaller and mid-sized players that boast promising mid-to-late stage pipeline candidates or interesting technology.
  • Pipeline setbacks are a major deterrent given the huge cost of developing a drug using expensive technology. Most drugs take years to gain approval. Other headwinds faced by the industry include government scrutiny of high drug prices and decline in sales of high-profile drugs due to increasing competition.

Prominent names in the industry include Gilead Sciences (GILD - Free Report) , Regeneron Pharmaceuticals (REGN - Free Report) , Amgen (AMGN - Free Report) , Vertex Pharmaceuticals (VRTX - Free Report) , Celgene CELG among others.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Biomedical and Genetics industry currently carries a Zacks Industry Rank #83, which places it in the top 33% of more than 255 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few biotech stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock-market performance and current valuation.

Industry Lags Sector & S&P 500

The Zacks Biomedical and Genetics Industry, which is a 312-stock group within the broader Zacks Medical Sector, has underperformed both the S&P 500 and the sector it belongs to on a year-to-date basis.

While the stocks in this industry have collectively declined 2.1%, the Zacks S&P 500 composite and the Zacks Medical sector have risen 13.6% and 0.8%, respectively. The magnitude of decline in bigger companies has more than offset gains recorded by the small biotechnology companies.

                          Year-to-Date Price Performance


Industry’s Current Valuation

Since most companies in the biotech sector do not have approved drugs, valuing them becomes complex. On the basis of forward twelve months price-to-sales ratio (P/S F12M), which is commonly used for valuing biotech companies with approved drugs, the industry is currently trading at 2.50 compared with the S&P 500’s 3.09 and the Zacks Medical sector's 2.56.

Over the last five years, the industry has traded as high as 3.15X, as low as 2.21X and at a median of 2.52X, as the chart below shows.

                     Price-to-Sales Forward Twelve Months (F12M) Ratio




Bottom Line

The biotech industry is continuously evolving and is largely volatile. It has been in the spotlight in recent times as a slowdown in mature products of most pharma bigwigs has forced them to target smaller entities with impressive pipelines. This, in turn, has driven the share price of small biotech stocks, which are well-equipped with path-breaking technology. We expect the momentum to continue in the near term as well.

The industry currently has quite a few stocks, which sport either a Zacks Rank #1 (Strong Buy) or 2 (Buy). Here, we list a few such stocks that have also been witnessing positive earnings estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Amgen is one of the leading biotech companies of the world. The Zacks Consensus Estimate for current-year EPS has been revised 2.2% upward over the past 60 days. Amgen carries a Zacks Rank #2. The stock has gained 5.7% so far this year.

                                 Price and Consensus: AMGN

New Haven, CT based biopharmaceutical company Alexion Pharmaceuticals (ALXN - Free Report) has seen an 11.6% increase in its share price this year so far.  The Zacks Consensus Estimate for this Zacks #2 Ranked player’s current-year EPS has risen 4.2% over the past 30 days.

                               Price and Consensus: ALXN


Cambridge, MA, based Biogen (BIIB - Free Report) is one of the leading biotech companies in the world. The consensus estimate for this Zacks #2 Ranked player’s current-year EPS has risen 8% over the past 60 days. However, the stock has lost 23.3% this year so far. 

                               Price and Consensus: BIIB


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