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2 Clear Signs That Biotechs and Pharmaceuticals Have Peaked

Be wary of the recent M&A buzz for pharmaceutical stocks, not to mention a slew of biotech IPOs

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While one could argue that Pfizer wanted AstraZeneca mostly for its cancer immunology programs, there are easier ways to refill a pipeline with cancer therapies than to buy an entire company that is known as dealing with patent cliff problems of its own.

And the Pfizer/AstraZeneca deal was probably the most speculative of this week’s biopharma acquisitions. Novartis is simply buying GlaxoSmithKline’s existing cancer unit, while Glaxo will be receiving Novartis’ existing vaccine portfolio. There are a few trials underway within both of the divisions that will be changing hands, but none of them are expected to be game-changing anytime soon. Allergan also is already a well-established enterprise, with little risk, but little additional upside ahead.

In other words, pharmaceutical companies are no longer playing offense but instead are playing defense, looking for acquisitions based on convenience and cost reductions more so than growth opportunities.

The next step in this evolution is a reluctance to acquire other companies for any reason at all.

#2: Biotech IPOs Are Running Rampant

As of March 20, 24 biotech companies have gone public this year. That’s a huge number. For perspective, there were only 37 biotech IPOs in all of 2013 (and that was a record-breaking year … the average has been about a dozen per year since 2000).

At the current pace, we could see a whopping 100 or so biotech IPOs in 2014, leaving any prior year’s biotech IPO headcount in the dust.

“But isn’t a wave of new biotech and bioharma stocks an indication of strong interest and confirmed opportunity?” Maybe, but more likely it’s a sign of exhaustion. Remember, homebuilders couldn’t build houses fast enough in 2007. There weren’t enough tech stocks to go around in 1999. The widely held euphoric assumptions then were dead wrong.

There’s another red flag stemming from the plethora of biopharma IPOs we’ve seen of late, though.

Truth be told, biopharma startups would prefer to be acquired or partnered with while they’re private entities. The valuations tend to be better, and the hassle of keeping investors satiated is sidestepped. The fact that these companies are being forced to enter the public-capital markets for funding actually implies there’s not a great deal of faith in their underlying science.

If there was, Big Pharma would be providing more funding for them.

Bottom Line for Pharmaceuticals

To be fair, it’s not a flawless theory. The pharmaceutical industry has not only continued to make new drugs, but the advent of genome mapping, immunology and other new sciences has given the industry new ways to develop even more therapies.

It’s conceivable that all these new publicly traded companies will eventually justify themselves. And it’s conceivable that Big Pharma will decide to once again view acquisitions as a means of garnering new drugs rather than as a means of improving logistics.

Conceivable, though not likely … at least not in the near-term.

Like any other industry’s stocks, pharmaceutical stocks and biopharma are cyclical. The ebbs and flows here are driven by a changing technologies and an ongoing flux between a risk-on and risk-off attitude. Risk was “on” in 2012 and 2013 after being “off” between 2008 and 2011. If the pattern repeats itself, the next couple of years aren’t going to be nearly as rewarding as the last couple have been.

And it looks as if the downside of the cycle might have already begun.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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