Biotech sector braces for more deals as cash-rich pharma companies hunt for targets

The Pfizer-Arena deal is likely to raise investors confidence that more deals are coming after a slow year

The Pfizer-Arena deal is among the top 10 largest biotech takeovers in the US in 2021. Reuters

The world’s leading drugmakers are awash with cash, and investors hope more of that money finds its way to them.

The SPDR S&P Biotech fund (XBI) rose as much as two per cent on Monday after Pfizer’s $6.7 billion deal for Arena Pharmaceuticals at a 100 per cent premium to Friday’s close.

Also pushing the exchange traded fund higher is Eli Lilly & Co’s $380 million cancer drug pact with Foghorn Therapeutics.

The Pfizer-Arena deal is among the top 10 largest biotech takeovers in the US in 2021 and is likely to raise investor confidence that more deals are on the way after a slow year.

JPMorgan Chase & Co’s health care conference in January is often another impetus for getting deals done.

In 2021, a total value of $89.9bn of M&A deals of more than $100m have been announced, which is 44 per cent of the amount recorded in 2020.

Deal activity in the sector declined since September, with 10 put forward in the fourth quarter compared with 23 announced in the third.

Arena, Foghorn and the XBI have all recently traded at 52-week lows as antitrust concerns and the potential for Congressional action to rein in the high cost of prescription drugs weighed on the sector.

The recent slump may make biotechs ripe for takeovers.

SVB Leerink recently put the biopharma industry’s cash and debt capacity at more than $1.6 trillion by the end of next year.

Analyst Geoffrey Porges highlighted “the steady build-up of cash within large-cap biopharmas, especially those benefiting from an earnings windfall due to sales of Covid vaccines and treatments”, and called out vaccine stocks Pfizer, BioNTech and Moderna as those that are particularly flush.

Many large drugs companies are facing what he calls a “looming growth crisis” over the rest of the decade as patents run out on key drugs.