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Analyst Blog

2016 has not been a great year for mergers and acquisitions (M&As) in the pharma and biotech sector although some headline deals like the Pfizer (PFE - Free Report) -Medivation and the Teva-Actavis Generics acquisitions were completed this year. While expectations were high that this year too, the pharma and biotech sector would see lots of M&A activity that did not happen, with the focus being mostly on small bolt-on acquisitions and licensing deals and agreements.

Will a Trump Presidency Trigger More M&A Deals for Biotechs?

Although it may be too early to speculate, there is a lot of chatter about a possible increase in M&As in the pharma and biotech sector now that Donald Trump is President-elect.  

Basically, the Trump victory is being viewed as a positive for the biotech and pharma sector. There are several reasons for this, the foremost being the drug pricing issue. The general view is that a Hillary Clinton win would have been a negative for pharma and biotech stocks given her stand on rising drug prices and her plans to address the excessive price hikes of treatments that have been available for years and to lower drug prices for all Americans. With Clinton’s frequent rhetoric regarding drug prices, biotech and pharma stocks have been under intense pressure for more than a year.

Trump, on the other hand, has not been so vocal about drug pricing though he did call for price transparency from all healthcare providers and drug re-importation. Not just that, his pro-business stand is also expected to benefit the sector. Major biotech and pharma companies should gain from Trump’s proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate of 10%.

With focus on drug pricing expected to subside and given the possibility of repatriation of funds, hopes are up that M&A activity will pick up with companies like Pfizer, Merck, Johnson & Johnson expected to take the lead. Big companies with deep pockets often look to replenish and boost their pipelines as well as portfolios by acquiring companies with innovative pipelines and technology. 

Stock Picks

Here we highlight 3 companies that have often been considered attractive take-over targets and have a Zacks Rank of #1 (Strong Buy) or #2 (Buy).

ARIAD Pharmaceuticals Inc. (ARIA - Free Report) : Cambridge, MA-based ARIAD focuses on bringing innovative treatments for rare cancers to market. ARIAD, which already has a marketed product (Iclusig) in its portfolio, could well become a two-product firm as early as 2017 if it gains FDA approval for brigatinib in April. Meanwhile, Iclusig's growth should be driven by new patient starts, extended treatment duration and label expansion. ARIAD’s product portfolio, potential brigatinib approval and its next wave of discovery and development programs such as AP32788 and the immuno-oncology program make it an attractive acquisition target. The Zacks Rank #2 stock has a solid earnings track record having surpassed expectations in each of the last three quarters.

ARIAD PHARMA Price and Consensus

Incyte Corporation (INCY - Free Report) : Wilmington, DE-based Incyte has two marketed products in its portfolio and a strong pipeline. Flagship product, Jakafi – a JAK1/JAK2 inhibitor – looks well-positioned for growth and is expected to bring in sales of $850 - $855 million in 2016. Moreover, with Gilead presenting mixed results on its experimental JAK inhibitor, momelotinib, the competitive threat for Jakafi seems to have gone down considerably. Incyte, a Zacks Rank #2 stock, has a robust pipeline as well with a focus on the highly sought after immuno-oncology space. Jakafi’s strong performance along with the company’s pipeline makes Incyte an attractive acquisition target.

INCYTE CORP Price and Consensus

Exelixis, Inc. (EXEL - Free Report) : South San Francisco, CA-based Exelixis is also focused on bringing cancer treatments to market. Approved products include Cabometyx (advanced kidney cancer), Cometriq (certain forms of thyroid cancer) and Cotellic (advanced melanoma). Exelixis’ earnings track record is good having surpassed expectations in three of the last four quarters. Cabometyx is experiencing rapid and broad uptake in the market with label expansion opportunities leaving room for upside. The Zacks Rank #2 stock has quite a few pipeline catalysts lined up for the coming quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EXELIXIS INC Price and Consensus

The three companies discussed above are not the only ones with acquisition potential. Several other companies like Sarepta (SRPT - Free Report) , TESARO (TSRO - Free Report) , and AveXis (AVXS - Free Report) are often viewed as acquisition targets. The bottom-line is that companies with innovative technologies and pipelines are highly sought after with niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology, multiple sclerosis and hepatitis C virus (HCV) in demand. Treatments for orphan diseases are also in demand.

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