Why the Sell-Off in Big Pharma Stocks Won’t Last

Health care stocks enjoyed a stellar five-year run…

The landmark Affordable Care Act increased demand for health care products and coverage. Innovative treatments paved the way for new health care applications and markets.

Then, COVID-19 struck. And while other industries faltered, many companies in the health care industry were able to scale even more rapidly than before.

Before the pandemic, the largest pharmaceutical firms tended to acquire emerging companies and roll up the competition to create health care behemoths. Traditionally, it has been easier for large pharma companies to buy startups developing new drugs than it would be to develop in-house.

And access to cheap debt in 2020 and 2021 kept the party going…

Since 2017, we’ve seen more than $50 billion in annual mergers and acquisitions (M&A) in just the pharma and biotech industries alone.

But late 2021 finally brought an end to this banner run. Today, I’ll show you what that means for these stocks…

There were about 30% fewer health care M&A deals in 2021 than in 2020… And it was the first year since 2017 without a major, $30 billion-plus deal.

How could the mighty fall so quickly?

After years of rapid growth in the space, some investors are worried by the sudden drop-off in M&A activity. Concerns rose about rising interest rates… which could be hampering debt-financing decisions.

Many point to President Joe Biden’s antitrust agenda as slowing down the fun. Last July, the president signed an executive order to promote competition within the U.S economy.

In his official memo, his administration highlighted the “excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony.”

As Big Tech has come to learn, regulators are no longer looking away from large companies that stifle competition. Now, they are taking a hard look at reducing concentration at the top.

Leaders and regulators from other regions are also tightening up their antitrust policies…

European regulators, for example, are looking at ways to promote more competition in the industry and keep drug prices reasonable.

All this has started putting breaks on M&A in the space. As a result, biotech stocks have massively underperformed the broader stock market in recent months.

Fortunately for biotech and pharma companies, M&A isn’t the only way to grow…

These companies can also invest in organic growth. That includes investments in physical infrastructure like labs and production facilities and the ever-important research and development (R&D) that powers future drugs and cash flows.

Wall Street analysts miss this important point. That’s why our team at Altimetry uses Uniform Accounting to get a clearer picture…

Under Uniform Accounting, pharma and biotech companies’ asset growth includes all forms of growth, including M&A, physical investments, and R&D.

When we look at the U.S. pharmaceutical and biotechnology aggregate growth, we can see if growth is slowing down… or if it’s just transitioning from “buying” to “building.”

Right now, Uniform Accounting shows that total investment within this industry isn’t slowing at all. Organic growth has actually improved from levels below 5% in 2017 and 2018 – during the M&A boom – to now decade-level highs of 13%. Take a look…

Greater regulatory pressure is clamping down on big M&A deals. But pharma companies have transitioned where and how they invest. And that’s a good sign for these stocks today…

With a robust pipeline of potential drugs in place, pharmaceutical companies will continue to grow their businesses if they make good investments in their product development.

In short, even though consolidation may be slowing, it’s not killing growth in the industry. The market’s recent sell-off is likely an overreaction… And that could lead to profit opportunities down the road.

Regards,

— Joel Litman

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Source: Daily Wealth